Stock market integration of emerging Asian economies: Patterns and causes

In this study, we examine the patterns and causes of stock market integration of selected emerging Asian nations against the US, Australia, China, and India for the period 1 January 2001 to 31 March 2012. We compare patterns of market integration for countries on a daily, weekly, or monthly basis using the time-varying correlation technique, namely, GARCH-dynamic conditional correlations (DCCs). In doing so, we suggest that opportunities in cross border investment vary by frequencies. We also divide daily data into subsamples and find that correlations were strongest during the global financial crisis (GFC) of 2007–09. The time varying bilateral correlations are found to be highly volatile. We also investigate the causes of identified correlations and find that apart from the GFC, the underlying economic and financial conditions have also been responsible for the higher correlations between these stock markets.     

Foreign trade model of the centrally planned economies

This paper presents a linked econometric model of the foreign trade of seven European socialist countries grouped in the Council of Mutual Economic Assistance (CMEA). The model aims at analysing the role of the international and regional trade in the economies of the socialist countries. The central part of the model is formed by foreign trade equations which allow analysis of the economic processes of the CMEA countries in relationships with the intra-CMEA and international trade. The assumptions of the model structure and some empirical results are discussed.     

The Asian crisis and the shaping of 'proper' economies

The latter half of the 1990s saw a new international agendadevelop: the ‘strengthening of the international financialsystem’ through the globalisation of standards and codesof ‘best practice’. The author calls for criticalreflection on this normalisation of ‘free market’capitalism and its global enforcement through a comprehensivesystem of economic standardisation and surveillance. To thisend, Michel Foucault's analysis of liberalism is shown to behighly relevant.     

The term structure of interest rates,the expectations hypothesis and international financial integration: Evidence from Asian economies

The validity of the expectations hypothesis of the term structure is examined for a sample of Asian countries. A panel stationarity testing procedure is employed that addresses both structural breaks and cross-sectional dependence. Asian term structures are found to be stationary and supportive of the expectations hypothesis. Further analysis suggests that international financial integration is associated with interdependencies between domestic and foreign term structures insofar as cross-term structures based on differentials between domestic (foreign) short- and foreign (domestic) long-rates are also stationary.     

Consumption and stock markets in Asian economies

This paper investigates the causal links between stock market performance and consumption for five Asian economies by applying the bound tests of Pesaran et al. and lag augmented VAR of Toda and Yamamoto . We find two‐way causal relationships between stock market performance and consumption in the cases of Hong Kong and Taiwan in the long run. The existence of such two‐way causal links indicates that stock market performance and consumption mutually affect each other, implying that the previous studies may have overestimated the wealth effect of the stock markets without taking account of the reverse causation from consumption to the stock markets. The short‐run effect of the stock market on consumption is more visible than the long‐run effect in most of the sample economies, suggesting that changes in consumption directly reflect stock market fluctuations.     

Shadow prices and substitution in trade distorted economies

This paper derives simple and operational shadow pricing rules in a three-sector, three-factor general equilibrium model incorporating nontraded goods. Under the Little-Mirrlees method, if a single simple and empirically plausible condition is satisfied, the accounting ratio for land will exceed unity and those for capital and labor will lie below unity. If this condition is not satisfied or cannot be verified, it is still possible to fix some accounting ratios above or below unity just from knowledge of the signs of substitution patterns in consumption and factor intensity patterns in production. Guidelines are also derived for setting the shadow prices of nontraded goods or quota restricted imports. It is shown that the alternative, domestic price method generally yields less useful guidelines than the Little-Mirrlees method.     

The explanatory power of market-based trade theories for the trade between market economies and reform countries

We try to explain the bilateral trade structure between Austria and three of its former socialist neighbours by trade theories developed for market economies, specifically focussing on the Heckscher-Ohlin model in its commodity version. We use data on factor intensities in about 100 industries in the EC and in Austria and can explain a modest amount of the trade structure before and after the start of the transition process and to some degree also of the change in the trade structure. The restrictions given by the data, the absence of a price system in socialist countries and the disequilibria in the actual trade suggest why the explanatory power of the tested theory is not higher. The study however indicates that at least some part of the industry in the former Czechoslovakia and in Poland had been well endowed with capital and energy before the transition. In the first five years of the transition a balanced trade turned into a high deficit of the reform countries.The authors wish to thank the participants of the EMPIRICA ECONOMIC POLICY FORUM Consequences of Eastern European Reform in Vienna, October 18, 1993 for an intensive discussion. Thanks to Robert Holzmann, Michael Landesmann, Gabor Oblath, Sandor Richter, Gunther Tichy, Michael L. Wyzan for comments. We also thank Christa Magerl and Elisabeth Neppl-Oswald for the calculations and for reading various drafts of the paper.     

Foreign trade,concentration and profitability in open economies

In this article a model is developed which integrates the impact of international factors, such as the degree of foreign competition, exporting opportunities, and multi-national activity with the more traditional elements of market structure in explaining cross industry differentials in price-cost margins in the industrial sector of the European Economic Community. Utilizing a simultaneous estimation procedure we conclude that the foreign factors are an important addition to domestic structural variables in the structure-profitability relationship.     

Income effects on the trade balance in small open economies

The objective is to determine the causes of the countercyclicality of the trade balance in five small open economies, namely Austria, France, Italy, Spain, and Switzerland. In order to investigate the role of permanent and temporary changes in income in the determination of the trade balance, Blanchard-Quah variance decomposition procedure is applied. The results of analysis support the conclusion that transitory income shocks are major reasons for the change in the trade balance, and that negative correlation between the trade balance and income is primarily due to transitory shocks. Thus, these results are more consistent with intertemporal models with the dichotomous view in which the aggregate demand shocks are responsible for cyclical variations in the trade balance and income and aggregate supply is responsible for the long-run growth of the economy.     

Labour mobility and the redistributive effects of trade integration

This paper addresses the role of mobility costs in shaping the effects of trade integration on wage inequality and welfare. We present a three-factor, two-sector model in which the production technology exhibits capital-skill complementarity and the cost of moving across sectors differs between unskilled and skilled workers. Results show that trade integration increases aggregate welfare, but it also raises wage inequality, both within and across skill categories. We also model a public re-training program, financed by a proportional tax levied on skilled workers, which reduces the mobility cost of unskilled workers. We show that even if the re-training programme entails some welfare losses, it can reduce both within and between wage inequality, while still making free trade Pareto superior with respect to the no-trade regime.     

The impact of the Soviet trade shock on central and East European economies

The paper examines the significance of what is called the Soviet trade shock on central and East European economies. The analysis involves two steps: first, the terms-of-trade effect of replacing the CMEA trading rules by market rules is estimated, and second, the impact of the loss of export markets in the former Soviet Union is assessed. The results of estimating the terms-of-trade effect for Hungary and Poland show that the income losses in 1990–1991 have not been as substantial as commonly believed (3.5 percent of GDP and 1.0 percent of GDP, respectively). The decomposition of the fall of total Soviet imports in 1991 into three categories, reflecting the impact of domestic recession, reduction of trade with ex-CMEA, and diversion of imports from ex-CMEA to western countries allowed us to estimate the CMEA-induced part of the trade collapse at 36 to 49 percent of the total fall of exports to the Soviet Union by the CEECs (except Romania), with the impact of domestic recession being in all cases stronger than the CMEA dissolution effect. An attempt has also been made to estimate the impact of the Soviet trade shock on GDP levels in CEECs. The results obtained indicate that the collapse of exports to the Soviet Union in 1991 may have been responsible for about one third of the officially reported GDP fall in Czechoslovakia and Poland, and for more than half of the GDP fall in Bulgaria and Hungary, but the impact of the CMEA-induced export fall was much smaller. The impact of the Soviet trade shock on Romania was negligible. The results obtained suggest a smaller impact of the Soviet trade shock on Hungary and Poland, as compared with some other studies. The conclusions should, however, be treated with caution, because of many untested assumptions underlying the analysis.I would like to acknowledge helpful comments received on earlier drafts of the paper by Daniel Gross, Dieter Hesse, Gabor Oblath, and Mica Panic. The views expressed in the paper are, however, my own responsibility.     

Economic integration and similarity in trade structures

In this paper, we look at the similarity of the trade structures toward the EU market between four CEECs and the EU15. We evaluate the appropriateness of different indices to compare export flows—correlation indices and distance metrics—opting for the use of the Bray-Curtis semi-metric. We examine both how the export composition of a country has changed over time and how the export composition has changed with respect to the EU15 export composition. Finally, we test if the dynamics of sectoral distribution of the CEECs’ exports is related to the role acquired by processed trade in the 1990s. We give evidence that processed trade is crucial in explaining changes in the overall structure of exports of transition countries, and that greater economic integration in terms of trade flows and processing trade does not always lead to greater export similarity.

Manufacturing FDI and economic growth: evidence from Asian economies

Previous empirical studies on inward foreign direct investment (FDI) and economic growth generate mixed results. This article suggests that the ambiguous results might be caused by the use of total FDI. We study the heterogeneous effects of different sector-level FDI inflows on host country's economic growth. Data from 12 Asian economies over the period of 1987 to 1997 are employed. Strong evidence shows that FDI in manufacturing sector has a significant and positive effect on economic growth in the host economies. FDI inflows in nonmanufacturing sectors do not play a significant role in enhancing economic growth. Furthermore, without the decomposition of total FDI inflows, the effect of manufacturing FDI on host country's economic growth is understated by at least 48%.     

Financial market development and trade openness: evidence from emerging economies

International trade is said to be the engine of economic growth. Despite an enormous effort to explain this phenomenon, the relationship between financial market development and trade openness and integration into the world economy is still an enigma. This article investigates the relationship between financial market development and trade openness. To do this, we develop a long-run and short-run model (a bounds testing approach to cointegration) for 18 emerging economies over the period 1980 to 2011. Estimates from all models show that financial market development, including both the stock market and the banking sector, has significant effect on trade openness in both short-run and long-run phenomena in the majority of countries. Despite many similarities among emerging economies, additional evidence suggests that the link between either stock market development or banking sector development with trade openness works via each country’s specific structure.     

Monetary policy and commodity terms of trade shocks in emerging market economies

Commodity terms of trade shocks have continued to drive macroeconomic fluctuations in most emerging market economies. The volatility and persistence of these shocks have posed great challenges for monetary policy. This study employs a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model to evaluate the optimal monetary policy responses to commodity terms of trade shocks in commodity dependent emerging market economies. The model is calibrated to the South African economy. The study shows that CPI inflation targeting performs relatively better than exchange rate targeting and non-traded inflation targeting both in terms of reducing macroeconomic volatility and reducing the losses of a non-benevolent central bank. However, macroeconomic stabilisation comes at a cost of increased exchange rate volatility. The results suggest that the appropriate response to commodity induced exogenous shocks is to target CPI inflation.     

International policy coordination for financial market stability in the Asian economies

Based on the understanding of financial crisis as the self-fulfilling crisis of speculators belief system, this paper examines the feasibility of introducing the Tobin tax system to reduce financial volatility in the Asian foreign exchange markets. The model analysis in this paper provides the following policy implications. To reduce the motivation to deviate from the policy coordination, it is required to allow all tax revenues to collecting countries, especially to Singapore and Hong Kong. Even without the participation of the major western countries, the start of the tax policy coordination in the Asian region can have significant signalling effects to reduce speculative motivation.     

Structural transformation and growth of merchandise trade of low-income economies 1980–1992

The Heckscher-Ohlin Vanek theorem, which predicts a direct relationship between exports and greater supply of factors used to produce those exports, performs only 50 percent of the time. However, there is no alternative theory which explains such a relationship. This paper analyzes the growth of merchandise trade of low-income countries, with particular reference to the growth of exports and net exports as these countries move from the predominantly agricultural goods producing era to the manufactured goods producing era. Results suggest, among other things, that industrial structure and governmental policies play an important role in the growth of merchandise trade.     

The global effects of productivity gains in Asian emerging economies

This paper investigates international responses of key macroeconomic variables to simultaneous shocks to productivity in the traded sector in eight Asian emerging and developing countries. We use panel estimation techniques to construct component sub-models in a thirty country global vector autoregressive (GVAR) model. We identify the shocks by using sign restricted impulse responses. We find that increases in traded-sector productivity in Asian emerging and developing countries have a positive effect on economic growth and international trade for most countries.