ASIAN BUSINESS CYCLE SYNCHRONIZATION

This paper develops a multilevel structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural vector autoregression with a multilevel factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering 9 emerging Asian economies and G‐7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that although the role of the global factors has intensified over the past 15 years for most of the economies, output fluctuations in Asia have remained less synchronized with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Therefore, although emerging Asian economies cannot ‘decouple’ completely from the advanced economies, they have, nonetheless, sustained a strong independent cycle among themselves. We also find that synchronized supply shocks contributed more to the observed synchronization in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement and transmission of other supply shocks through, for example, vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronization in emerging Asia.     

Technology shocks around the world

This article investigates the effects of a permanent technology shock on labor input in the major seven developed countries. The recent empirical literature which uses Structural Vector Autoregressions (SVAR) with long-run restrictions has argued that technology shocks lead to a persistent and significant decline in employment in most of the G7 countries. We claim that the international transmission of shocks prevents the use of existing SVAR models, but also suggests alternative specifications to properly uncover their effects. We show in a quantitative two-country model that a measure of labor productivity aggregated across countries is more immune to persistent, if not permanent, shocks and allows to accurately identify the responses of the labor input to a technology shock. Using labor productivity at the G7 aggregate level, we find that the response of employment changes critically in most of the major seven developed countries.     

The Vulnerability of ASEAN+3 Countries to International Financial Crises

This article focuses on the reaction of the Association of Southeast Asian Nations (ASEAN) economies to international financial shocks. The crises in emerging markets at the end of the last century underlined the significant vulnerability of the emerging ASEAN economies to international financial fluctuations and a lack of sustainability in their exchange rate regime. A structural VAR model is used to analyze the efficiency of the measures adopted by these countries after this episode of crisis in order to protect their economies against speculative attacks. The results reveal that the impact of the recent subprime crisis on emerging ASEAN countries is less significant than that observed in industrialized ones.     

Global banking,global crises? The role of the bank balance-sheet channel for the transmission of financial crises

We examine whether shocks to leveraged creditors with cross border holdings have an incidence on debtor countries׳ risk of suffering financial turmoil. We construct a new proxy of shocks to international banks׳ balance-sheets using credit ratings and the structure of their international assets. This allows us investigating the effect of (foreign) bank balance-sheet shocks on domestic financial turmoil in a large sample of 146 developed and emerging economies from 1984 to 2011. Our proxies of shocks towards bank balance-sheets are strong predictors of systemic banking crises in their debtor countries. Confirming these results, bilateral bank flows significantly decrease when creditor banks׳ assets are hit by negative shocks, as measured by credit rating downgrades from third-party countries. Short-term liabilities towards global banks appear to increase roll-over and funding risks, thereby amplifying the impact of shocks to foreign lenders’ balance-sheets. Domestic banking sectors vulnerabilities, such as illiquid assets and a low deposit-asset ratio, are found to increase crisis contagion risk. In contrast, a high level of global liquidity attenuates the transmission of shocks to international banks׳ assets to debtor countries.     

The role of international reserves holding in buffering external shocks

An extended literature analyses the accumulation foreign exchange holding observed in many developing and emerging countries since the 2000s. Empirical studies on the self-insurance motive suggest that high-reserves economies are more resilient to financial crises and to international capital inflows volatility. They show also that pre-crisis foreign reserve accumulation explains post-crisis growth. However, some papers suggest that the relationship between international reserves holding and reduced vulnerability is nonlinear, meaning that reserve holding is subject to diminishing returns. This article devotes more attention to the potential nonlinear relationship between the foreign reserves holding and macroeconomic resilience to shocks. For a sample of nine emerging economies, we assess to what extent the accumulation of international reserves allows to mitigate negative impacts of external shocks on the output gap. While a major part of the literature focuses on the global financial crisis, we investigate this question by considering two sub-periods: 1995–2003 and 2004–2013. We implement threshold VAR model in which the structure is allow to change if the threshold variable crosses a certain estimated threshold. We find that the effectiveness of reserve holding to improve the resilience of domestic economies to shocks has increased over time. Hence, the diminishing returns of foreign reserve holding stressed in the previous literature must be qualified.     

对外开放和经济波动的关联性检验——中国和东亚新兴市场国家的案例

本文运用研究非对称性冲击问题的实证方法考察和比较了东亚4国(韩国、印尼、泰国和中国)在经济开放过程中内外金融资源的相对价格——实际利差的变化及由此引起的宏观经济(产出、货币和银行信贷)的波动特征。这一研究的政策意义在于通过区分外部因素的基本面(mean)变化和突发性的波动(volatility)对本国经济所产生的不同性质的溢出效应(spillover),为政府制定不同的针对性措施提供理论根据。通过引入非对称“时变波动”(asymmetrictimevaryingvolatility)特征的二元EGARCHVAR实证模型,论文得到了三个主要结论第一,虽然为维持名义汇率的稳定,各国政府都积极地干预外汇市场,由此影响了当期内外利差的收敛,但包括中国在内的4个国家金融的实际开放程度都在不断加大。第二,除上世纪90年代国际资本移动的鼎盛阶段外,各国的经济波动并不是由外部冲击直接带来的,而是国内经济的不确定因素导致的。第三,比较各国经济波动特征,可以发现汇率制度、金融市场的开放程度以及资本市场的发展状况对经济波动有很大的影响。     

The impact of macroprudential policies on the transmission of shocks across financially integrated countries

We study the implications of macroprudential policies across countries on the transmission of shocks when international investment activities are allowed. In a two-country dynamic stochastic general equilibrium (DSGE) model in which international investors are borrowing constrained and pledge international assets, we introduce a time-varying loan-to-value (LTV) ratio that adjusts to the variation of three different financial vulnerability indicators. We examine the effect of these policies on negative productivity and borrowing capacity shocks. Although time-varying LTV ratios reduce the international propagation of the productivity shock, their response to the shock depends on the financial vulnerability indicator with which the LTV ratio changes. With a productivity shock, the adjustment of the LTV ratio to the deviation of credit or asset price helps to reverse the negative impact of the shock. With a financial shock, LTV ratios varying with a deviation of credit-to-GDP ratio or aggregate credit can mitigate the impact of a negative financial shock. Adjustment of the LTV ratios reduces the fluctuation of international investors' balance sheets, investment, and productivity. We find that countries improve their welfare when time-varying LTV ratios are in place. The magnitude of the welfare gain differs with both the financial vulnerability indicator and the shock.     

Global banking and international business cycles

This paper incorporates a global bank into a two-country business cycle model. The bank collects deposits from households and makes loans to entrepreneurs, in both countries. It has to finance a fraction of loans using equity. We investigate how such a bank capital requirement affects the international transmission of productivity and loan default shocks. Three findings emerge. First, the bank's capital requirement has little effect on the international transmission of productivity shocks. Second, the contribution of loan default shocks to business cycle fluctuations is negligible under normal economic conditions. Third, an exceptionally large loan loss originating in one country induces a sizeable and simultaneous decline in economic activity in both countries. This is particularly noteworthy, as the 2007–09 global financial crisis was characterized by large credit losses in the US and a simultaneous sharp output reduction in the US and the Euro Area. Our results thus suggest that global banks may have played an important role in the international transmission of the crisis.     

Accounting for global dispersion of current accounts

We develop a multi-country quantitative model of the global distribution of current account and external balances. Countries accumulate domestic capital and foreign assets to smooth consumption over time against exogenous productivity shocks in the presence of liquidity constraints. In equilibrium, optimal consumption and investment responses to persistent productivity shocks imply a degree of intertemporal substitution across countries that can explain up to one-third of the current account dispersion in the data.     

Does foreign direct investment increase exports’ productivity? Evidence from developing and emerging countries

Raising the productivity content of exports is an important issue for developing and emerging countries. What role do foreign firms play in this process? This question has not been adequately studied. We contribute to the literature by generalizing the role of foreign direct investment (FDI) in the host country’s export productivity level. Using panel data, we present new empirical evidence suggesting that FDI boosts the overall productivity level of the developing and emerging countries’ exports.     

BUSINESS CYCLES IN SMALL OPEN ECONOMIES: EVIDENCE FROM PANEL DATA BETWEEN 1900 AND 2013

Using a novel data set for 17 countries between 1900 and 2013, we characterize business cycles in both small developed and developing countries in a model with financial frictions and a common shock structure. We estimate the model jointly for these 17 countries using Bayesian methods. We find that financial frictions are an important feature for not only developing but also small developed countries. Furthermore, business cycles in both groups of countries are marked with trend productivity shocks. Common disturbances explain one third of the fluctuations in small open economies, especially during important worldwide phenomena.     

International business cycle spillovers since the 1870s

This article considers the evolution of international business cycle interdependencies among 27 developed and developing countries since the beginning of 1870s, utilizing the generalized vector autoregressive (VAR)-based spillover index of Diebold and Yilmaz (2012), which allows the construction of a time-varying measure of business cycle spillovers. We find that, on average, 65% of the forecast error variance of the 27 countries’ business cycle shocks is due to international spillovers. However, the magnitude of international business cycle spillovers varies considerably over time. There is a clear increasing trend since the end of World War II and until the mid-1980s. After that, international business cycle interdependencies declined during the period that was dubbed the Great Moderation and stabilized around the beginning of the twenty-first century. During the Great Recession of 2008–2009, international business cycle spillovers increased to unprecedented levels. Finally, developed countries are consistently ranked as net transmitters of cyclical shocks to developing counties throughout the sample.     

Foreign workers and productivity in an emerging economy: The case of Malaysia

Many developed and developing countries are experiencing large and growing levels of international migration of labor. However, the large majority of research on the economic impact of inflows of migrant workers on host economies focuses exclusively on developed countries. In this paper, we address this gap in the literature by examining migrant‐induced productivity effects in the emerging economy of Malaysia. Importantly, the Malaysian case is typical for many Asian economies where, next to high skilled foreign workers, large numbers of migrants consist of low skilled workers that are employed in host economies on a temporary basis. Using detailed industry level data for the period 2005 to 2009, we find that both high skilled and low skilled foreign workers generate positive productivity effects in Malaysian manufacturing industries. Furthermore, our results identify a strong presence of industry heterogeneity, as the effects of foreign workers, in general, and low skilled foreign workers, in particular, are pronounced in labor and assembly intensive modern industries with a strong export focus. This indicates the importance of foreign workers for the contemporary international competitiveness of the Malaysian manufacturing sector. As such, our findings provide important new input to the debate on the role of low skilled foreign workers in processes of development of the Malaysian economy.     

Is East Asia an optimum currency area?

This paper assesses the empirical desirability of the East Asian economies to an alternative exchange rate arrangement (a monetary union) that can potentially enhance the exchange rate stability and credibility in the region. Specifically, the symmetry in macroeconomic disturbances of the East Asian economies is examined as satisfying one of the preconditions for forming an Optimum Currency Area (OCA). We extend the existing literature by improving the methodology of assessing the symmetry shocks in evaluating the suitability of a common currency area in the East Asian economies employing the Bayesian State-Space Based approach. We consider a model of an economy in which the output is influenced by global, regional and country-specific shocks. The importance of a common regional shock would provide a case for a regional common currency. This model allows us to examine regional and country-specific cycles simultaneously with the world business cycle. The importance of the shocks decomposition is that studying a subset of countries can lead one to believe that observed co-movement is particular to that subset of countries when it in fact is common to a much larger group of countries. In addition, the understanding of the sources of international economic fluctuations is important for making policy decisions. The falling share of country specific factor and the rising role of region factor indicate that East Asia has become increasingly favorable for a monetary union. However, the share of country-specific factor that is still significant implies that it could be costly to renounce individual currencies to advance into a monetary union in East Asia.     

The Underlying Link between Fiscal Policy Patterns and International Reserves

This paper extends the model in Aizenman and Marion (2004 ) to study the underlying link and interaction between fiscal policy patterns and international reserves in developing countries. It shows that because of conditional access to international credit markets, the immediate impact of an adverse shock on an emerging economy is a lower level of international reserves and a procyclical fiscal policy. However, facing the uncertainty of future shocks, the authorities in this economy then have a strong incentive to hoard more precautionary reserves if possible. If the economy successfully accumulates more reserves, it can have a lower tax rate in the second period and its fiscal policy would be more countercyclical. The model's predictions are consistent with new empirical findings.     

Is ‘oil and gas’ industry of ASEAN5 countries integrated with the US counterpart?

ABSTRACT

This paper employs the VARMA-MGARCH-ABEKK model and Granger causality on 15 years’ daily time series data to examine investment opportunities in the oil and gas industries for ASEAN5 countries relative to the US counterpart. It shows that the latter leads the former in decomposing integration into cross-country effects on returns and conditional return volatilities. The empirical results show that investors can gain an international intra-industry diversification benefit in Malaysia, the Philippines, Singapore and Vietnam by holding US oil and gas assets in their portfolios whereas Asian oil and gas assets may result in negative shocks due to the increase in return volatilities for Malaysia, Singapore and Vietnam. However, Thailand are insensitive to the cross-country intra-industry diversification. While making trading decisions, investors should be aware of the impulse responses of ASEAN oil and gas markets from the shocks in the US and the Asian markets and their asymmetric spill over effects.     

ON THE SOURCES OF AGGREGATE FLUCTUATIONS IN EMERGING ECONOMIES

Recent research on macroeconomic fluctuations in emerging economies has advocated introducing a stochastic productivity trend or allowing for interest rate shocks and financial frictions. We estimate a model that encompasses these two approaches, shedding light on their relative merits and on how financial frictions affect the transmission of shocks. The model accounts for aggregate fluctuations by assigning a dominant role to financial frictions in amplifying conventional (temporary) productivity shocks, whereas trend shocks play a minor role. A link between spreads and expected future productivity emerges as essential for a reasonable approximation to the data.     

ASIAN FINANCIAL LINKAGE: MACRO‐FINANCE DISSONANCE

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activity? To answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz and gauge the degree of interaction in both financial markets and real economic activity among Asian economies. We first show that the degree of the international spillover in stock markets is uniform, irrespective of the groups of countries concerned, such as the G3 and ASEAN4. This suggests the importance of global common shocks in stock markets. We then discuss the macro‐finance dissonance. In stock and bond markets, the United States has been the main driver of fluctuations. However, China has emerged as an important source of fluctuations in real economic activity.     

Monetary policy shocks and productivity measures in the G-7 countries

An implication of two-country international real business cycle models is that total factor productivity should be an exogenous stochastic process. Economic theories which feature labor hoarding, variable capacity utilization, and increasing returns predict that measured productivity shifts are not exogenous; instead, expansionary aggregate demand shocks should lead to an increase in measured productivity. For each of the G-7 countries, this paper measures quarterly aggregate total factor productivity for the domestic country and its rest-of-world (G-6) counterpart. In each case the domestic productivity measures are not strictly exogenous: expansionary U.S. monetary policy shocks, as well as other G-6 monetary policy shocks, lead to productivity expansions. The evidence indicates that international business cycle models are misspecified unless they feature endogenous productivity mechanisms.Received: June 2001, Accepted: December 2001, JEL Classification: E5, F4Correspondence to: Charles L. EvansFor their helpful comments, we thank Mario Crucini, Patricia Reynolds, and Steve Strongin. The views expressed in this paper do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.     

The sovereign spread in Asian emerging economies: The significance of external versus internal factors

This paper investigates the dynamic relations between external factors, domestic macroeconomic factors with sovereign spreads, debt to GDP ratio, etc. in Asian emerging countries. First, we develop a theoretical model that determines the equilibrium debt level, probability of default and sovereign spread and draw empirical implications. We then employ a Structural Vector Autoregression (SVAR) model to investigate empirically how the spread of sovereign debt is influenced over time by both external and domestic factors. The empirical results show that variations in sovereign spreads are mainly driven by external shocks, with the term structure of US interest rate and the global risk aversion having the most important role. The findings also indicate that shocks from the US have a direct effect on sovereign spread and an indirect effect via domestic macroeconomic fundamentals. Finally, the evidence produced validates the presence of some response patterns of sovereign spread to the external shocks.