Capital mobility and EU enlargement

Capital Mobility and EU Enlargement. — The membership of the Eastern European transition economies in the EU would require inter alia the full liberalization of their capital flows. Using the correlation between domestic saving and investment, this paper provides empirical evidence of the openness with respect to foreign capital that the accession states have attained so far. A comparison with the southern members of the EU shows that the countries under review have reached a similar degree of integration in quantitative terms. Yet, further adjustment in qualitative terms, i.e., in the structure of capital flows, can be expected as the process of accession proceeds.     

The monetary exchange rate model in the long run: An empirical investigation

The Monetary Exchange Rate Model in the Long Run: An Empirical Investigation. — This paper uses the Johansen multivariate cointegration method to examine three variants of the monetary approach to the long-run exchange rate model: flexible price, forward-looking and sticky price monetary models. Evidence is provided for four bilateral sterling exchange rates. The sensitivity of the results to the measurement of monetary aggregates is also examined. The cointegration results provide dismal evidence for the flexible price and forward-looking models irrespective of the measurement of money. The findings are more mixed for the sticky price model, particularly when broad money is used.     

State-space estimation of rational bubbles in the Yen/Deutsche Mark exchange rate

State-Space Estimation of Rational Bubbles in the Yen/Deutsche Mark Exchange Rate. — This paper considers a series that uncovered interest parity predicts to be white noise and inspects it for evidence of stochastic rational bubbles. State-space methods are used that specify a bubble component of the series as an unobserved state. The technique’s effectiveness is demonstrated by Monte Carlo experiments. One span of the series is found in which a stochastic rational bubble specification clearly dominates the white noise specification. It coincides with a period of general financial turm-oil in the associated economies, i.e. Japan and Germany during 1989 and early 1990.     

Chinese exchange rate and price effects on G3 import prices

This paper explores the degree of price and exchange rate interdependence between China and the G3 (US, Japan and the Euro-zone) by undertaking a VAR based shock analysis. A GARCH framework is also employed to derive the conditional variances to uncover the extent of volatility transmission. We address two key issues. First as there have been concerns about low value-added cheap Chinese goods flooding G3 markets, we attempt to measure the impact of Chinese prices on G3 import prices. Second, we focus on the transmission of exchange rate shocks – a subject which we approach by examining shocks in China's bilateral exchange rate with each of these major trading partners (the US, Japan and the Euro Area). Our results indicate that reduced import prices from China are the channel through which aggregate domestic prices in the G3 remain depressed, while the impact of the RMB exchange rate with G3 currencies appears less powerful. This finding implies that the Chinese authorities’ RMB exchange rate policy is relatively unimportant and, in particular, that a revaluation of the RMB would not do much to reduce the US trade deficit. In terms of volatility spillover, the relatively flexible RMB exchange rate against the Euro results in RMB-EUR volatility having a stronger influence than the more tightly controlled RMB-USD rate on the volatility of Chinese export prices.     

Asian Currency Unit (ACU), deviation indicators and exchange rate coordination in East Asia: A panel-based convergence approach

Employing the panel convergence method of Phillips and Sul (2007) to the nominal deviation indicators of two recent unofficial constructions of an Asian Currency Unit (ACU) index, this paper examines the existence and extent of convergence in the movements of East Asian currencies against the ACU. Empirical results reveal that intra-East Asian exchange rate movements have not converged to form one, cohesive and unified bloc where currencies share homogenous movements, regardless of whether one examines the data on intra-East Asian exchange rate movements before or after the collapse of Lehman Brothers in September 2008. Instead, a separate number of convergent clubs or blocs in the region have formed in recent years. Finally, and most importantly, we observe at the end of the period of our examination that economies in the region are, generally, converging at different speeds to two opposing poles of convergence, that is, groups of relatively depreciating currencies and, on the other, groups of relatively appreciating currencies.     

Sign predictions of exchange rate changes: Charts as proxies for Bayesian inferences

Sign Predictions of Exchange Rate Changes: Charts as Proxies for Bayesian Inferences. - One recurrent and controversial feature of high-frequency exchange rate returns is the apparent profitability of simple chartist rules. This paper attests the relevance of these rules for predicting the upward and downward tendencies in speculative prices. First, it is shown by means of a variant to the standard Markov switching model that there are swings in the mean for various weekly exchange rate returns. The paper proceeds by showing that certain chartist rules detect these regime shifts quite accurately. As such, these rules can be interpreted as workable proxies for the Bayesian filtering rule of Hamilton.     

Examining nonlinear dynamics of exchange rates and forecasting performance based on the exchange rate parity of four Asian economies

This paper employs smooth transition autoregressive (STAR) models to investigate the nonlinear dynamic behavior of exchange rate deviations based on the exchange rate parity (ERP) theory in four Asian economies: Japan, South Korea, Taiwan and Singapore. In this study, quarterly data from 1978 Q1 through 2007 Q4 are analyzed. The empirical results indicate that the deviations in the exchange rate of all four countries reject the null of linearity. The rate deviations in the Japanese and Korean cases exhibit a dynamic and smoothly symmetric ESTAR type process, while those in the Taiwanese and Singaporean cases match the smoothly asymmetric LSTAR type with respect to depreciating and appreciating regimes. These nonlinear characteristics can be explained by the existence of heterogeneous behavior and asymmetric information among economic agents. Furthermore, the estimation results of a nonlinear least squares (NLS) regression indicate that most of the parameter estimates are significant at the 10 percent level. The forecasted Japanese and Korean rate deviations in the ESTAR model are not superior to those from the AR model, possibly because these two countries experienced a serious fluctuation during the Asian financial crisis that occurred in 1997. However, based on the criterion of the RMSE, the forecasted Taiwanese and Singaporean rate deviations in the LSTAR model outperform those in the AR model.     

Exchange rate uncertainty and the efficiency of the forward market for foreign exchange

Exchange Rate Uncertainty and the Efficiency of the Forward Market for Foreign Exchange. — The paper investigates to what extent exchange rate uncertainty can account for the observed deviations from the forward market efficiency hypothesis (FMEH). The empirical analysis employs a simple varying parameter regression to allow uncertainty to modify the central parameters of the FMEH in a direct way. Uncertainty is proxied by significant exchange rate changes. The results indicate that there is considerable support for the FMEH if one allows the intercept term to vary over time.     

The fundamental determinants of financial integration in the European Union

The Fundamental Determinants of Financial Integration in the European Union. — This paper focuses on the fundamental determinants of the degree of financial integration in the European Union over the period 1974–1993. Using closed interest rate differentials to measure the intensity of capital controls and applying a pooled cross-section time-series approach, the authors find realized inflation, government instability and gross fixed capital formation to have a strong and significantly positive effect on the intensity of capital export controls. In addition, they expect the influence of economic and financial market structure on closed interest rate differentials to increase in the future.     

The Japanese trade balance: Recent history and future prospects

The rise in the yen in the early 1990s was held out as a `solution' to the persistent Japanese trade surplus. I argued, instead, that the sharp rise in the yen through mid-1993 would lead at most to a modest decline in net exports. This forecast, made in late 1993, was remarkably accurate, despite a subsequent fall in the dollar to 80 yen. It reflects a resilient feature of trade data known to most empirical researchers: that relative price movements account for only a fraction of observed movements in the balance of trade or current account.     

The effect of exchange rate volatility on international trade in East Asia

In this paper, we empirically investigate the relationship between exchange rate volatility and international trade, focusing on East Asia. Our findings are summarized as follows: first, intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions. Second, one important source of the discouragement is that intermediate goods trade in international production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of East Asian trade. Third, the negative effect of the volatility is greater than that of tariffs and smaller than that of distance-related costs in East Asia.     

Responding to the global financial crisis: Vietnamese exchange rate policy, 2008–2009

The paper presents an analysis of exchange rate policy in Vietnam during 2008–2009. In early 2008, the country faced a sudden reversal of capital flows as signs of developing domestic vulnerabilities became evident. The downward pressure on the dong then intensified with the onset of the global financial crisis in the fall. In these environments, the Vietnamese authorities responded with various exchange rate policy measures. The paper documents a shift in Vietnam's de facto exchange rate regime, from a basket peg to a simple US dollar peg, when the domestic vulnerabilities became compounded by the evolving global crisis. The authorities utilized additional measures to relieve pressure on the parallel exchange rate. An event study methodology finds little evidence of systematic effectiveness for these policy actions; any effectiveness was short-lived. A close examination of individual actions suggests that the impact of foreign exchange market intervention appeared more consistent than any other type of measure and most effective when combined with other measures.     

Parameter instability, superexogeneity, and the monetary model of the exchange rate

Parameter Instability, Superexogeneity and the Monetary Model of the Exchange Rate. — This paper argues that failure to test for parameter time invariance yields misleading results. Time heterogeneity other than unit roots will make the parameters of the unrestricted system unstable and statistical inference invalid. However, if the instability stems from a particular subset of variables (superexogenous with respect to the parameters of interest), conditioning on them results in a partial model with stable parameters, and standard inferential procedures can then be used. We apply this methodology to test the monetary model of the exchange rate and find that both system and single-equation estimates support it in the case of yen-dollar exchange rate.     

双重身份的困扰:贸易“大国”和金融“小国”

本文基于宏观经济学的基本原理揭示了今天中国货币流动性过剩的根本原因在于对外经济依存的经济结构这一问题的本质,同时阐明了目前还处于金融小国阶段的中国经济对改变目前这种现状的艰难性和受这种现状冲击的危害性。在比较了三种可选择的方案后,论文提出了和谐的国内经济结构调整和金融、汇率制度改革应先于资本账户开放的战略。     

International transfer of knowledge: The role of international trade and geographic proximity

International Transfer of Knowledge: The Role of International Trade and Geographic Proximity. —The paper examines empirically the effect of international trade and geographic proximity on knowledge inflow to Sweden. Swedish patent data is used to trace knowledge flows. Both geographic proximity and international trade are in a first estimation found to affect knowledge flows. An extreme bounds analysis is conducted on the estimated coefficients. The coefficient for geographic proximity is sensitive to the choice of included variables but the coefficient for international trade is robust. The paper concludes therefore, that international trade facilitates the exchange of knowledge.     

Demand, comparative advantage and economic geography in international trade: Evidence from the OECD

Demand, Comparative Advantage and Economic Geography in International Trade: Evidence from the OECD. — This paper examines the influence of demand on the pattern of net trade for 17 OECD countries. It is found that demand differences are important as a cause of international trade. In fact, for the majority of countries, demand factors explain more of the net trade pattern than do factor proportions. The evidence offers some support for the modern geography and trade theories: high domestic demand in an industry leads to a net export for the majority of cases. The evidence is, however, not clear-cut. Moreover, a demand bias in favour of domestic varieties leads to a net export. Here, the evidence is clear-cut.     

Exchange controls, international capital flows and saving-investment correlations in the UK: An empirical investigation

Exchange Controls, International Capital Flows and Saving-Investment Correlations in the UK: An Empirical Investigation. - This paper reexamines the Feldstein-Horioka approach to measure the degree of international capital mobility, focusing on the difference between the short-run and the long-run saving-investment correlation coefficient. The authors also investigate the effectiveness of the abolition of exchange control which, in October 1979, ended a long period of restrictions on capital flows between the UK and the international economy. Their results suggest that the short-run saving-investment correlation is significantly higher than the long-run one. Unlike most of the relevant literature, the empirical evidence suggests that the UK is financially highly integrated with the world economy after 1979.     

Optimal economic institutions under rational overconfidence,with applications to the choice of exchange rate regime

We study the optimal choice of exchange rate regime when agents have beliefs that are mutually inconsistent. A general framework for identifying optimal policies in such situations is proposed and then used to compare fixed and floating exchange rate regimes. Agents are assumed to have diverse rational beliefs (rather than rational expectations), implying the prevalence of (rational) overconfidence. We argue that in such a situation, in comparing economic institutions, one should employ the concept of ex‐post optimality rather than that of Pareto optimality. Fixing the exchange rate is ex‐post optimal because it eliminates mistaken actions (based on mistaken beliefs).     

The economics of convergence: Towards monetary union in Europe

The Economics of Convergence: Towards Monetary Union in Europe. —In this paper, the literature on monetary integration has been surveyed in order to discover the economic rationale of the Maastricht convergence requirements. The traditional theory of optimum currency areas is silent on the need for Maastricht-type convergence requirements. Similarly, the “new” view of monetary integration using credibility concepts cannot easily be used to justify these convergence requirements. It is also argued that the dynamics of the convergence requirements will almost certainly lead to a “Great Divide” of the European Union. The paper concludes that less emphasis should be put on prior convergence conditions and more on strengthening the functioning of the future monetary institutions in the Union.     

The composition of the human capital stock and its relation to international trade: Evidence from the US and Britain

The Composition of the Human Capital Stock and Its Relation to International Trade: Evidence from the US and Britain. — This paper examines the factor intensity of US and UK trade using standard factor content techniques. In particular, it considers the role of labour skills in international trade. The principal focus is to demonstrate that specialisation according to skills has two dimensions-according to the general level of human capital and according to different types of skill at the same level of education and training. This analysis is conducted for different trading partners for each country. The paper also offers some methodological evidence on the effects on factor content analysis of the (dis)aggregation of factors and on the role of internationally varying production techniques.