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.     

Can a comparative capitalism approach explain fiscal policy activism?

This study investigates the implications of models of capitalism for the responsiveness of countries’ fiscal policies during business cycles using new data for member countries of the Organization for Economic Cooperation and Development and China. We expand the literature by adding the category of East Asian nonliberal capitalism to the established distinction of liberal market economies and nonliberal coordinated market economies. These three differ substantially not just in their fiscal policies, but also in monetary policies, degree of financial market orientation, exchange rate regime, and labor market organization. As in previous studies, we find that governments of liberal economies adopt more countercyclical fiscal policies. Departing from existing studies, however, among the nonliberal models of capitalism, (East Asian) state-led models have more countercyclical fiscal policies than (European) coordinated market economies, perhaps as countercyclical as liberal economies, both historically and during the 2007–9 crisis. This is due to less independent central banks, managed float of exchange rates, and limited financial market orientation and financial openness in East Asia, which allow for more active fiscal policy. Among political factors, left-of-center governments, fractionalized party systems, and election years are associated weakly with countercyclical fiscal policy, as expected. Labor market coordination and welfare generosity have unclear roles in regard to fiscal policy, a topic for future research.     

东亚消费风险分担的度量及潜在福利分析

文章利用1970-2004年的相关数据,度量了东亚13个经济体的消费风险分担的程度以及东亚地区在实现完全风险分担后带来的潜在福利收益.实证结果表明:东亚区域资本市场在平滑GDP冲击方面的作用非常小,对区域借贷市场虽有一定的作用,但较为有限,这说明东亚的消费风险分担程度还相当低;相比OECD国家和欧盟国家,东亚各经济体风险分担的福利收益是比较高的.     

The prospects of a monetary union in East Asia

This paper assesses the empirical desirability of the East Asian economies to form a monetary union. The Structural Vector Autoregression (VAR) method is employed to assess the nature of macroeconomic disturbances among the East Asian countries, as a preliminary guide in identifying potential candidates for forming an Optimum Currency Area (OCA). In comparison with European countries, East Asia has less symmetric underlying structural shocks but the speed of adjustment to shocks is much faster. The empirical results suggest that there exists a scope among some small sub-regions, comprising mainly of ASEAN countries, for potential monetary integration. The finding of an increased symmetry of shocks among countries after the Asian Financial crisis indicates that the regional policy-coordinating effort after the crisis has put the region on the right track if monetary union is a desired goal.     

制度因素与东亚双边贸易:贸易引力模型的实证分析

银行与金融、政府干预、黑市活动、资本流动与外国投资、货币政策对东亚经济体出口贸易有重要影响,银行与金融、政府干预、产权、政府负担对东亚经济体进口贸易有重要影响。提高政府干预质量,积极合理地引进国际直接投资,建立并完善公正廉洁高效的司法体系应成为东亚经济体各政府未来重要的政策取向。     

The endogeneity of the Optimum Currency Area criteria in East Asia

The Asian financial crisis in mid-1997 has increased interest in policies to achieve greater regional exchange rate stability in East Asia. It has renewed calls for greater monetary and exchange rate cooperation. A country's suitability to join a monetary union depends, inter alia, on the trade intensity and the business cycle synchronization with other potential members of the monetary union. However, these two Optimum Currency Area criteria are endogenous. Theoretically, the effect of increased trade integration (after the elimination of exchange fluctuations among the countries in the region) on the business cycle synchronization is ambiguous. Reduction in trade barriers can potentially increase industrial specialization by country and therefore resulting in more asymmetry business cycles from industry-specific shocks. On the other hand, increased trade integration may result in more highly correlated business cycles due to common demand shocks or intra-industry trade. If the second hypothesis is empirically verified, policy makers have little to worry about the region being unsynchronized in their business cycles as the business cycles will become more synchronized after the monetary union is formed. This paper assesses the dynamic relationships between trade, finance, specialization and business cycle synchronization for East Asian economies using a Generalized Method of Moments (GMM) approach. The dynamic panel approach improves on previous efforts to examine the business cycle correlations — trade link using panel procedures, which control for the potential endogeneity of all explanatory variables. Based on the findings on how trade, finance and sectoral specialization have effects on the size of common shocks among countries, potential policies that can help East Asian countries move closer toward a regional currency arrangement can be suggested. The empirical results of this study suggest that there exists scope for East Asia to form a monetary union.     

Foreign interest rate shocks and exchange rate regimes in East Asia

Using a theoretical dynamic stochastic general equilibrium model and an empirical panel vector autoregression, we assess the transmission of foreign real interest rate shocks on the volatility of various key macroeconomic variables in nine small open economies in East Asia taking into account the role of exchange rate regimes. Both the theoretical and empirical findings confirm the hypothesis that flexible exchange rate may work as a shock absorber when the economy is hit by foreign real interest rate shocks. The findings suggest a clear trade-off between the volatility of real exchange rate and real output to foreign interest rate shocks, both the US and G7 real interest rates, where the responses of real output are mitigated in countries that have more flexible exchange rate regime.     

Environmental rationalities and the development state in East Asia: Prospects for a sustainability transition

This paper reviews what is known about recent trends in environmental governance among the newly industrializing countries of East Asia and the implications of these developments for a sustainability transition within the region. The conceptual starting point for the review is research that examines sustainability transitions within the framework of a multi-level perspective on system innovation. One of the challenges presented by this framework is that of understanding how existing political economies and governance structures promote stability or change in socio-technical regimes. By socio-technical regimes we mean the predominant organizational, social and technological configurations through which societal needs are constituted and met. In the case of the rapidly industrializing and urbanizing economies of East Asia, the trajectory of socio-technical regimes will have profound consequences for local, regional and global environments. Our review of trends in environmental governance as they relate to socio-technical regimes within the region traces a pattern of initial efforts to strengthen environmental regulatory regimes very much along the lines of the policy models of OECD economies. The degree to which these initial efforts have taken root varies from country to country in the region. What is beginning to emerge in several countries within the region, however, are a variety of policy and institutional innovations that hold promise for opening up spaces for change in socio-technical regimes, and for creating opportunities for new pathways of industrialization and urbanization to take hold that are less pollution, materials and energy-intensive.     

On the Future of Inflation Targeting in East Asia

This article analyzes the problems associated with inflation targeting (IT) regimes in a number of East Asian countries. It scrutinizes the policy conflicts that can arise when a central bank that has adopted a formal inflation target to guide the conduct of monetary policy simultaneously manages the exchange rate and pursues financial stability objectives. To this end, it empirically investigates the importance of exchange rate and terms of trade movements as determinants of inflation rates across East Asian economies and discusses the role of central banks in guarding financial stability and the ways this may conflict with an IT regime. The article argues that IT never really has been a suitable monetary framework for East Asian countries and that it should hence be supplanted by transparent monetary frameworks that explicitly recognize the multiple goals that are being pursued by East Asian central banks.     

外部供需冲击视角下的东亚货币合作可行性研究

区域货币合作在维护区域金融稳定、促进区域经济发展方面具有不可替代的作用。欧洲主权债务危机爆发后,人们对东亚能否继续进行货币合作产生了疑问,有必要结合欧债危机产生的新情况、新问题,从新的视角探讨东亚货币合作的可行性。文章从供给与需求两方面的经济结构冲击对称性视角,对东亚10个经济体之间的冲击相关系数、冲击规模与调整速度进行了实证分析,证实了东亚区域不同经济体之间存在着不同的对称性,具有双边和次区域货币合作的经济基础。同时文章提出东亚区域未来货币合作的形式、实现路径和风险防范措施。     

Is a monetary union feasible for East Asia?

The empirical suitability of the East Asian economies for potential monetary integration is assessed. The structural vector autoregression (VAR) method is employed to identify the underlying shocks using a three-variable VAR model across the East Asian economies. The estimates of the EEC are used as a benchmark to compare the size of the underlying shocks and the speed of adjustment to shocks in both regions to determine the feasibility of forming an optimum currency area (OCA) in East Asia. The empirical results do not display strong support for forming an OCA in the East Asian region. The results do imply, however, that some small subregions are potential candidates for OCAs, since their disturbances are correlated and small and these economies adjust rapidly to shocks.     

Macroeconomic Linkages and Regional Monetary Cooperation: Steps Ahead*

There is a growing appetite for economic cooperation in East Asia. Although the region has forums to facilitate this, economic cooperation has focussed largely on discussion of issues and policies ? cooperative action is confined to functional cooperation in finance. There is scope for further cooperation in strengthening markets and institutions, with a view to accelerating convergence and stability in the region and deepening shared preferences about policy objectives, including on monetary and exchange rate issues. Although monetary policy in East Asia is generally focussed on controlling inflation, differences remain in economic structure and preferences about policy trade‐offs, markets, and institutions.     

Macroeconomic transitions and the transmission mechanism: Evidence from Turkey

This paper investigates changes to the macroeconomic transmission mechanism in Turkey following a major reform of monetary policy in the early 2000s. We use a Threshold VAR (TVAR) framework to test for and then estimate a model with endogenous transitions between regimes. We detect two regimes, with a clear transition between them in 2003–4. The pre-reform regime is characterized by high inflation, passive monetary policy and persistent responses to shocks. The post-reform regime is characterized by low inflation, active and credible monetary policy and markedly less persistent responses to shocks. Using a model that contains sufficient variables to capture diverse transmission mechanisms, working through the real exchange rate, domestic credit and monetary policy, we find evidence of sharp changes in transmission mechanisms. Post-reform, the response of Turkey to macroeconomic shocks has changed to be similar to those in other modern, market-orientated economies.     

Macroeconomic policy uncertainty shocks on the Chinese economy: a GVAR analysis

This article studies the spillovers of economic policy uncertainty (EPU) from developed economies to China in terms of the source, extent and persistence by estimating a global vector autoregressive (GVAR) model with both financial and trade variables acting as the transmission channels. Our findings confirm the existence of international transmissions of policy uncertainty, while the patterns differ markedly. The US EPU appears to be the most significant cause of the fall of export, industrial production, equity price and exchange rate, meanwhile, the EU EPU is also to be blamed for the depreciation of RMB. In contrast to industrial production, which shows the largest negative impact, Chinese inflation increases to a relatively smaller extent with the EPU shocks ranking as the US, Japanese and the EU. Regardless of the minor impact on a long-term interest rate, the short-term interest rate in China reacts positively to the European and US EPU shocks. Despite the independent national monetary policies, EPUs from the EU, Japan and the UK can decrease the Chinese monetary aggregate. In summary, the Chinese economy responds the most to the US EPU, especially to its inflation expectation disagreement component, whereas it responds the least to the UK EPU.     

Asian real interest rates, nonlinear dynamics, and international parity

This study tests for nonlinearities in the real interest differentials of four South East Asian economies with respect to Japan and the United States. The logistic and exponential smooth transition regression models are applied to monthly data over the sample period 1977M1–2000M3. There is evidence of nonlinearities in Asian real interest differentials where nonlinearities are often captured by the logistic smooth transition autoregressive (STAR) model. The extent of nonlinearities varies across the sample with the Singapore–Japan and Thailand–Japan differentials exhibiting the sharpest transition from one regime to another. Large shocks to real interest parity (RIP) are more likely to lead to the reestablishment of parity at a faster rate than small shocks. Modeling the nonlinear stochastic dynamics of RIP can thus be useful for policymaking purposes in recovering information on monetary and financial crises.     

东亚货币合作可行性的经济数据检验——基于OCA理论的分析

在最优货币区理论构筑的分析框架下,东亚区域在经济开放度、出口产品结构相似性、经济冲击对称性方面达到了OCA理论的标准,而在生产要素的流动性、金融市场一体化等方面距离最优货币区的标准尚有差距,但是这种差距正在缩小。通货膨胀相似性方面东亚整体虽未满足OCA标准的要求,但是有次区域已经符合这一标准。考虑到最优货币区标准的内生性,而且大量文献通过对东亚地区进行分组并采用不同的研究方法,证明东亚地区存在形成最优货币区的潜力,因而对次区域的货币合作可行性分析依然乐观。     

The Race to Connect East Asia: An Unending Steeplechase

East Asia has become more integrated as a region over the past quarter century. In looking ahead, this article identifies five central obstacles to further regionalism. Three address the composition of any future East Asian region: the arenas in which cooperation is sought, the geographic scope of any future region, and the extent to which regional ties are formalized. The other two variables will influence the future regardless of how the first three are resolved: the structure and balance of domestic political forces, and leadership. The complex interactions of these five are then examined in the recent moves toward preferential trade pacts, increased regional monetary and financial cooperation, and security.     

THE SIZE OF FISCAL MULTIPLIERS AND THE STANCE OF MONETARY POLICY IN DEVELOPING ECONOMIES

Implementing fiscal programs during monetary policy expansions seems to improve significantly their economic stimulus. We find this result by estimating the effect of government consumption shocks on gross domestic product (GDP) using a panel of 23 developing economies. Our goal is to better understand the reasons for the low fiscal multipliers found in the literature by performing estimations for alternative exchange rate regimes, business‐cycle phases, and monetary policy stances. In addition, we perform counterfactual simulations to analyze the possible gains from fiscal‐monetary policy coordination. Our results also show lower multipliers in developing economies with flexible regimes, especially during economic slowdowns. (JEL E62, E63, F32)     

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 EFFECTS OF NEWS WHEN LIQUIDITY MATTERS

We analyze the impact of news (information shocks) in economies where liquidity matters, including those with endogenous credit limits, and those with assets serving as collateral or media of exchange. Although we also consider news about productivity and credit conditions, a leading case concerns monetary policy announcements. Real or monetary news has big effects on markets, potentially causing cyclic or boom–bust responses, even though we focus on the unique transition consistent with stationarity after shocks. In particular, policy announcements may induce instead of reduce volatility. We also discuss the implications for the inflation puzzle, forward-guidance puzzle, and other apparent anomalies.