Investment, Pass-Through, and Exchange Rates: A Cross-Country Comparison

Using detailed data from the United States, Canada, the United Kingdom, and Japan, we examine the implications of exchange rates for time series of sectoral investment. Both theoretically and empirically, we show that investment responsiveness to exchange rates varies over time, positively in relation to sectoral reliance on export share and negatively with respect to the share of imported inputs in production. Important differences exist in investment endogeneity across high- and low-price-over-cost markup sectors, with investment in low-markup sectors often significantly more responsive to exchange rates. Cross-country differences in investment response are only partially explained by industrial organization arguments.     

Does Real Exchange Rate Depreciation Boost Capital Accumulation? An Intertemporal Analysis

This paper examines the investment‐enhancing effect of real exchange rate (RER) depreciation in a two‐sector small open economy model where a representative firm in the tradable sector maximises its discounted profit over an infinite planning period. In this framework, a one‐time, permanent, unanticipated depreciation in the RER leads to a higher steady‐state level of capital stock and investment. This consequently increases the optimal investment rate associated with an arbitrary level of capital stock as the saddle path shifts upwards. In the benchmark calibration, the investment‐enhancing effect of RER depreciation is sizeable. One per cent depreciation in the RER leads to an increase of 0.4444 per cent in the rate of capital accumulation.     

Policy Uncertainty about Australia's Carbon Price: Expert Survey Results and Implications for Investment

Australia's carbon‐pricing policy remains in doubt due to a lack of bipartisan political support. A survey of Australian‐based carbon‐pricing experts demonstrates profound policy uncertainty: 40 per cent of respondents expect the current carbon‐pricing mechanism to be repealed, but 80 per cent expect that there will be a carbon price in 2020. The forward price curve is U‐shaped and has great variance, with the 60 per cent confidence interval spanning from zero to A$25/t in 2020. Carbon policy uncertainty causes large excess costs in Australia's energy sector and may result in delay and diversion of investment.     

On the relationship between intermediate input imports and export quality in China

This paper studies the connection between intermediate input imports and firms’ export quality using firm‐level data from 2000 to 2007. Our regression results show that intermediate input imports promote manufacturing firms’ export quality through ‘variety effects’ and ‘innovation effects’, though the effects are significantly different among firms with different characteristics, and the magnitude of these effects differs across import sources and the quality of imported intermediate inputs themselves. Moreover, we find that a good institutional environment is conducive to the strengthening of the positive influence of intermediate input imports on export quality. Furthermore, the dynamic decomposition demonstrates that the reallocation effect is the key force through which imported inputs boost industrial aggregate quality growth. Taken together, these results suggest that product upgrading facilitated by quality embedded in imported intermediate inputs, a good institutional environment and market share reallocation help Chinese firms to improve the quality of their export products.     

Export Market Dynamics and Plant‐Level Productivity: Impact of Tariff Reductions and Exchange‐Rate Cycles*

In this paper, we examine how changes in tariff rates and industry‐specific real exchange rates affect the entry/exit process to export markets and productivity growth. Using the experience of the Canadian manufacturing sector over three decades, we find that firms in export markets enjoy faster productivity growth than non‐participants. The size of the growth advantage depends on whether real exchange rates are increasing or decreasing. The increase in the value of the Canadian dollar during the post‐2000 period almost completely offset the productivity growth advantages enjoyed by new exporters during this period.     

Skill Upgrading in New Zealand, 1986–2001

Educational attainment increased markedly in New Zealand between 1986 and 2001, while the income premia for higher qualifications first increased and then stabilised or decreased over the 1990s. We first document the growth in qualification‐based skills and then examine its contribution to average income growth and the relationship with relative demand changes. Of the 15 per cent increase in real average incomes between 1986 and 2001, upskilling accounted for 25 per cent, while 70 per cent was due to income growth across all qualifications. The pattern of qualification employment share and relative income changes provides evidence of changing demand for skills within detailed industry–occupation cells.     

The Changing External Exposure of Australian Industry

This article examines changes in trade‐related external exposure for Australian industry from 1990–91 to 2000–01, using primary and composite measures that capture the effects of exports, imports and imported inputs. The primary measures show that export market share for all exporting industries increased, but import market share increased at an equal or greater rate both overall and in most industries. Input value import shares also increased across virtually all industries. Two composite measures are calculated, the Index of Effective Exposure (IEE) and an extended IEE incorporating import market shares. The extended IEE shows that the net external exposure of Australian industry has been increasing over the decade, particularly in the Manufacturing and Mining Divisions. The net exposure of Australian manufacturing industries is lower than expected compared to the United States, Canada, the United Kingdom and Japan, but the rankings of manufacturing industries in each country are similar and becoming more so.     

The Effect of Changes in Real Exchange Rates on Employment: Evidence from Manufacturing Industries in China, 1980–2002

This paper analyzes the effect of changes in real exchange rate on manufacturing employment. Our theoretical model predicts the positive effect of depreciation of real exchange rate on employment through a firm’s expectation on changes in real exchange rate and the interaction between real exchange rate and a firm’s import and domestic input. Using China’s manufacturing data during the 1980–2003 period, we find that depreciation of real exchange rate promotes employment growth in manufacturing industries, while change in real exchange rate is not a significant factor in promoting wage growth. We also find that an increase in export share offsets partially the effects of real exchange rate on employment and real wages. Translated from Journal of World Economy, 2005, (4): (in Chinese)     

International business cycles and the relative price of investment goods

Abstract Is the relative price of investment goods a good proxy for investment specific technology? We model this relative price in a flexible price international economy with two fundamental shocks, namely, the total factor productivity (TFP) shock and the investment‐specific technology (IST) shock. We show that the one‐to‐one correspondence between the IST shock and the relative price of investment goods breaks down in an international economy because of the short‐run correlation between the terms of trade and the relative price of investment goods. The data congruent negative correlation between the investment rate and the relative price of investment goods thus does not necessarily reflect decline in investment frictions (rise in IST), as suggested by many studies. A calibration experiment with the US data demonstrates that such an inverse relation between rate of investment and the relative price of investment goods basically reflects the positive effect of TFP on the terms of trade for a broad range of economies where the home bias in consumption exceeds investment and there is a sizable adjustment cost of investment.     

Do tax cuts generate twin deficits? A multi‐country analysis

Abstract We study the effects of tax shocks on the budget and external deficits for 16 industrialized countries over the post‐1970 period. Our structural approach is based on a small open economy model where a tax cut affects the external deficit by two distinct channels. The demographic channel works through the overlapping‐generation structure of the model. The forecasting channel works through the dynamic structure of the model. Our empirical analysis documents that tax shocks generate twin deficits, and that both channels play important roles in explaining the positive comovement between the budget and external deficits.     

SECTORAL EXCHANGE RATE PASS-THROUGH: TESTING THE IMPACT OF POLICY REFORMS IN INDIA

This paper analyses the impact of India's policy reforms on exchange rate pass‐through into import and export prices, using panel data (at one‐digit SITC level) for pre‐ (1980–90) and post‐reform (1991–2001) periods. While the pass‐through into import prices has declined, the pass‐through into export prices (in USD terms) has increased during the 1990s. The results suggest that, relative to rupee depreciation, Indian exporters increased their USD prices around 20% in the 1980s, but decreased them by around 70% in the 1990s. Moreover, the number of sectors exhibiting some degree of pass‐through increased in the 1990s (six), relative to the 1980s (three). These changes may be attributable to the elimination of currency and trade controls, which increased competition among firms and fostered a concern with market share gains in the 1990s over an attempt to use depreciations to increase profits in the 1980s.     

WHAT DRIVES EXPORT COMPETITIVENESS? THE ROLE OF FDI IN CHINESE MANUFACTURING

Export competitiveness (XC) is a country's ability to compete globally through expanding export capacity and upgrading export sophistication. How does foreign direct investment (FDI) affect XC? This article studies the issue based on evidence from Chinese manufacturing. Using data on 21 manufacturing sectors for 31 regions over 2005–2011, we construct the XC index and its three composite indicators, following the Organization for Economic Co‐operation and Development (OECD) and United Nations Industrial Development Organization (UNIDO). Four findings emerge from the estimates: (a) FDI is a key driver of China's export success; (b) China's absorptive capacity reinforces the effects of FDI through domestic learning efforts; (c) FDI seems to contribute more to export capacity than export upgrading, especially in labor‐intensive/low‐tech products; and (d) high‐tech FDI from the western world seems to be more conducive to export upgrading than low‐tech FDI from developing economies. (JEL F21, F23, O14, O53)     

Where Do Australians Invest?

In this article, we analyse the geography of Australia's international portfolio investment using the International Monetary Fund's Co‐ordinated Portfolio Investment Survey dataset. Preliminary results suggest that Australia's external holdings of equity and debt as a percentage of national income almost doubled between 1997 and 2001. However, Australia's international investment position as a percentage of national income is one of the lowest amongst the major OECD countries. In 2001 approximately two‐thirds of Australia's total investments were in the United States and the United Kingdom. By contrast Australia's trade share (exports plus imports as a percentage of Australia's total world trade) with these countries was approximately 20 per cent in the same year. The major determinants of Australia's geographical allocation of portfolio investment indicate a broad correspondence between stock market capitalisation of destination countries and the allocation of Australian financial investments but with some deviations from that baseline, where the deviations are correlated with Australian trade patterns.     

Export surges

How can developing countries stimulate and sustain strong export growth? To answer this question, we examine 92 episodes of export surges, defined as significant increases in manufacturing export growth that are sustained for at least 7 years. We find that export surges in developing countries tend to be preceded by a large real depreciation, which leaves the exchange rate significantly undervalued. In contrast, in developed countries, the role of the exchange rate is less pronounced. We examine why the exchange rate is important in developing countries and find that the depreciation is associated with a significant reallocation of resources in the export sector. In particular, depreciation stimulates entry into new export products and new markets. These new exports are important, accounting for over 40% of export growth on average during the surge in developing countries. We argue that a large real depreciation induces firms to expand the product and market space for exports.     

Exchange rate pass-through to domestic producer prices: Evidence from Korean firm-level pricing survey

This note studies exchange rate pass-through to the prices of domestically produced goods, exploring the firm-level pricing survey conducted by the Bank of Korea. The data reveal the imported inputs channel of, as well as nonlinear and asymmetric, exchange rate-pass-through.     

Some Effects of Reducing Excess in Infrastructure Charges on the Export Coal Industry*

Excess rail freight and port charges on the Australian export coal industry amount to over 10 per cent of export prices and represent a form of ad valorem tax. Efficiency and distributional effects of removing the excess charges are assessed using a quantitative commodity model and a qualitative general equilibrium assessment. Removal of the excess charge would increase production by 29 per cent by the year 2000, slightly reduce upon prices and generate national efficiency gains of over $150 million a year. The mining industry and the Federal government gain and the State governments lose     

FOREIGN ENTRY LIBERALIZATION AND EXPORT QUALITY: EVIDENCE FROM CHINA

This paper examines the impact of foreign entry deregulation in China on the export price and quality of manufacturing firms through input–output linkage. We create a unique dataset describing the extent of regulatory control over foreign entry across approximately 900 industries covering all primary, manufacturing and services sectors. Results suggest foreign entry deregulation encourages firms to improve product quality and increase export prices. Deregulation in the manufacturing sectors has more impact on downstream export price and quality, compared with services sectors. Moreover, firms having larger imported inputs benefit more from foreign entry deregulation. These effects are robust to alternative specifications. (JEL F1, D2, O2)     

Reserves,Sovereign Wealth Funds and the Resilience of Global Imbalances

Reserves and sovereign wealth funds (SWFs) assets should be jointly considered for the assessment of global imbalances, hence their denomination as sovereign external assets (SEAs): both are public capital outflows from developing to developed countries, both hinder adjustment in current account surplus and deficit countries and, therefore, both contribute to sustain global imbalances. They represented 135 per cent and 50 per cent of net and gross US financing needs, respectively, in 2007. Reserves contribute 80 per cent and SWFs 20 per cent. They will go on providing resilience to the global imbalances, and the relative importance of SWFs is set to increase if commodity prices stay high.     

Determinants of vertical integration in export processing: Theory and evidence from China

This paper examines the determinants of vertical integration versus outsourcing in export processing, by exploiting the coexistence of two export processing regimes in China, which designate by law who owns and controls the imported components. Based on a variant of the Antràs-Helpman (2004) model, we show theoretically that control over imported components for assembly can affect firm integration decisions. Our empirical results show that when Chinese plants control the use of components, the export share of foreign-owned plants is positively correlated with the intensity of inputs provided by the headquarter (capital, skill, and R&D). These results are consistent with the property-rights theory of intra-firm trade. However, when foreign firms own and control the components, there is no evidence of a positive relationship between the intensity of headquarters' inputs and the prevalence of vertical integration. The results are consistent with our model that considers control over imported components as an alternative to asset ownership to alleviate hold-up by export-processing plants.     

Trade taxes and international investment

Abstract .  This paper demonstrates that international investment disturbs the conventionally understood equivalence between import tariffs and export taxes. Fundamentally, remittances to foreigners introduce an additional pecuniary channel between countries so that two-good Lerner Symmetry generally will not hold. Moreover, because tariffs subsidize investors in the local import competing sector while export taxes can extract rent from foreign investors in the export sector, the pattern of international investment will influence government preferences over trade policy  instruments  as well as levels. Notably, trade tax symmetry is restored by introducing a third policy tool in the form of a direct a tax on international remittances.