Currency Substitution and the Stability of the Demand for Money in East Asia

Abstract

This paper models and tests the stability of the demand for money in five East Asian countries—Indonesia, Malaysia, Philippines, Singapore, and Thailand—in the context of an open economy. The Johansen multivariate cointegration vector error correction analysis against quarterly data covering the period 1985:1–2001:4 was used. It was found that a stationary long run cointegrating relationship exists between broad money, real income, domestic interest rates, foreign interest rates corrected for exchange rate depreciation, and the expected rate of depreciation of the exchange rate. The results show that US Treasury bills rates and the foreign exchange rate vis-à-vis the US dollar play a significant role in the East Asian countries money demand relationship. This suggests that currency substitution vis-à-vis the US dollar may be an important consideration in the design and implementation of monetary policy in the East Asian countries. Furthermore, the results show that the Asian currency crises impacted the money demand functions negatively in these countries. CUSUM and CUSUMSQ stability tests show no evidence of parameter instability of the money demand functions in three of the five countries throughout the period under investigation.     

人民币国际化决定因素分析

货币国际化收益公式是研究货币国际化理论的核心问题。一国货币到国际货币,铸币税收益与境外储备资产金融业收益远大于其所付出的相关成本。但是,货币国际化收益不是一国货币国际化的决定因素,其决定因素还在于该货币的市场选择与制度安排的结果,在于其内在的世界经济地位等因素。     

Economic reform and the stability of the demand for money in Tanzania

This paper investigates whether there exists a stationary long-runequilibrium relationship between real money balances, real income,inflation and expected depreciation in Tanzania which can beidentified as a money demand function. As the institutionaland regulatory framework in Tanzania has undergone a seriesof changes since economic reforms began in the mid-1980s, shiftsin parameters over time might have occurred, causing instabilityin the money demand function. Using Johansen's maximum likelihoodand dynamic modelling procedure, the paper finds equilibriumin the long run and a stable money demand function. These findingsimply that, even though economic liberalization and relaxationof controls could have induced instability in the money demandfunction as conjectured in the literature, such instabilitywas not significant enough to inhibit the estimation of short-and long-run demand for money.     

ESTIMATING EXCHANGE RATE AND BILATERAL TRADE BALANCE RELATIONSHIPS: THE EXPERIENCE OF SUB-SAHARAN AFRICAN COUNTRIES

This paper examines the effects of exchange rate changes on the bilateral trade balance of ten African countries vis‐à‐vis the US using annual data over period 1977‐2002. Both the Johansen and panel cointegration tests find cointegration among the series. The country FMOLS results show that real exchange rate depreciation improves the trade balance in six of ten countries in contrast to Tanzania in which it worsens the trade balance, with no effect found in Ghana, Morocco and Senegal. Foreign real income improves the trade balance in two countries but worsens it in another three. Finally, domestic real income negatively affects the trade balance in four countries but improves it in another three. The three‐panel coefficients are correctly signed and significant at the 1% level.     

Bailouts,Inflation, and Risk-Sharing in Monetary Unions

This paper presents a new rationalization for bailouts of sovereign debt in monetary unions, such as those observed during the recent Euro crisis. It introduces a model where member countries of the monetary union are ex-ante identical, and each derives utility from consumption and disutility from the union-wide inflation rate. The union’s central bank is utilitarian and lacks commitment. Countries borrow or save in a market for nominal sovereign debt in response to idiosyncratic income shocks, with countries that receive positive income shocks saving and countries that receive negative income shocks borrowing. Ex post, the monetary union’s central bank will attempt to devalue sovereign debt through surprise inflation, as this will redistribute income from rich creditor countries to poor debtor countries. Creditor countries choose to bailout debtor countries because bailouts will weaken the redistributive motives of the central bank and forestall surprise inflation. As bailouts in this environment constitute a payment from lucky creditor countries to unlucky debtor countries, they mimic a risk-sharing arrangement that insures against income shocks. The payments made by creditor countries are incentive-compatible due to the shared currency and inflation rate in the monetary union. This ability of countries to provide each other with incentive-compatible insurance constitutes a novel theory of optimal currency areas. This insurance benefit of the monetary union is largest for countries with negatively correlated income shocks, in contrast to the classic Mundell-Friedman optimal currency area criterion.

     

Twin Banking and Currency Crises and Monetary Policy

Currency crises are found to be strongly associated with banking crises. This paper constructs a twin banking and currency crisis model by introducing the banking sector into the currency crisis model and examining the case in which the exchange rate risk is located in the banking system. The model shows that an unanticipated shock caused by the shift of investors’ expectations and/or a negative productivity shock can trigger a twin banking and currency crisis. To achieve both financial stability and economic stability, the central bank uses multiple monetary policy instruments. In contrast to the conventional policy recommendation in response to a currency crisis, i.e., interest rate hike, we find that when the exchange rate risk is located in the banking sector, the monetary policy option to prevent a twin crisis is to lower the policy interest rate and the reserve requirement ratio and raise the interest rate on reserves. Our results show that the location of the exchange rate risk matters for the choice of an appropriate monetary policy response during a crisis.     

The currency ratios 1920–80: A re-examination

Conclusions This study has analyzed the long run determinants of the ratio of currency to M1 and M2 over the period 1920–80. For both ratios, its results confirm Cagan's well-known findings on the importance of deposit yields and tax rates. Unlike Cagan, who did not attempt to construct a proxy variable for the ratio of currency-intensive to total transactions, the ratio of spending on nondurables and services to total bank clearings was used in this study as such a proxy and found to be a better explanatory variable than expected real per capita income. At times, movements in this variable were an important contributor to changes in both money ratios. In addition, movements in the ratio of teenagers to total population, a variable not considered by Cagan, had a role in explaining the 1961–73 rise in C/M1.The finding that alterations in the tax rates change the money multiplier, and hence the money stock, in the opposite direction serves as an offset to the argument advanced recently that tax cuts, since they may increase the demand for money as well as (more familiarly) the rate of desired spending, may actually be contractionary.The views expressed in this paper are those of the authors and not those of the Congressional Research Service or the Library of Congress.     

China's Exchange Rate Movements and Corporate Currency Invoicing Strategies

Since China introduced a new managed floating exchange rate regime in 2005, the persistent appreciation of the renminbi against the US dollar has led Chinese firms to reassess their choice of invoice currency among the dollar and other international alternatives to price their exports. The present paper performs a systematic invoice currency analysis by surveying the published literature, summarizing criteria for decision-making, and evaluating the choices available to Chinese exporters implementing currency invoicing strategies to maximize expected profits. This study finds that the euro could play an increasing role as the invoice currency of Chinese firms, although the US dollar will still play a dominant role. Chinese exporters might shift gradually from the dollar to the euro in the face of the falling dollar, balancing between the two by necessity.     

Re-examination of J-curve effect for Japan,Korea and Taiwan

This study uses the generalized impulse response function from the vector error correction (VEC) model to examine whether the J-curve effect exists for Japan, Korea, and Taiwan. Both bilateral (with the US) and aggregate (with the rest of the world) cases are considered. Special attention has been given to the number of lag orders and conintegration selection and the tests of exogeneity of foreign income and structural changes. The conventional J-curve phenomenon can only be observed in Japan’s aggregate trade case. In Korea and Taiwan, where most export to import ratio increases during the currency contract period, is consistent with the theory that both economies are small.     

Borrower attributes and the risk of default of conventional mortgages

Using a nationwide sample of 9,000 conventional mortgages, this paper examines their default based on a set of key borrower and loan characteristics. The results of a maximum likelihood failure time model show that the default risk is higher for small mortgages with a high loan-to-value ratio and for borrowers with low income and many dependents. The results also suggest that default is negatively correlated with the age of the property and the borrower's disposable income net of monthly financial obligations.     

Personal Income Tax Reform in China in 2018 and Its Impact on Income Distribution

In the context of personal income tax (PIT) reform in China in 2018, this paper examines some of the major issues of concern regarding the reform and income distribution. Using the China Personal Income Tax Micro‐simulation model, the paper compares the differences between the 2011 and 2018 PIT systems, and finds that residents relying on different income sources may face a large degree of real tax rate change. Once the tax system is altered to PIT 2018, the coverage of PIT for wage earners will decrease from 46.9 to 23.4 percent, the income redistributive effect will drop from 1.95 to 1.22 percent and the PIT's role in fiscal revenue will also be negatively affected. Nevertheless, if individual income continues to grow, the share of PIT in fiscal revenue is expected to return to the 2018 level in 2022, but its income redistribution function is difficult to recover in the short term. The paper finds that the effect of PIT on income distribution depends on the tax structure. Gradual transition to an “entirely comprehensive” tax system when conditions are appropriate will achieve better income redistribution results at a lower average tax rate.     

Do Chinese farmers reinvest in grain production?

Grain production is affected by the relocation of farm household labour from on-farm to off-farm activities and by an increase in the investment in grain production as a result of increase in farm household income that occurs along with such a labour shift. This study uses a recent farm household survey data to examine whether Chinese grain households do reinvest in grain production. It has found that household income growth contributes to higher investment in grain production although a higher share of non-agricultural income has a negative effect. The authors' other research has found a negligible direct impact of farm to non-farm labour transfer on grain production. We may conclude that in the near future, the total impact (direct and indirect) of labour transfer from farm to non-farm production on grain output is expected to be positive. In the long run, in may become negative when more and more labour shifts out of grain production and marginal product of labour becomes positive.     

我国货币流通速度的协整和误差校正模型

基于协整和误差校正模型对货币流通速度的实证分析表明,我国M1流通速度与收入、通货膨胀率和货币化变量之间存在长期稳定的协整关系,M2流通速度与收入、价格指数、货币化变量和储蓄率之间存在长期稳定的协整关系,所有符号符合理论预期。M1流通速度的短期动态函数的稳定性比M2的要差一些。这表明目前我国以货币供应量作为货币政策的中介目标是可行的,且应主要以M2为货币政策的中介目标,同时不忽视对M1的监测。     

Determinants of the profitability of China's regional SOEs

This paper examines the determinants of the profitability of China's local state enterprises. The investment share of non-state enterprises is found to be positively related to the profitability of regional SOEs. Openness measured by exports share in GDP is positively related to regional SOEs' profitability in all cross-sectional and most panel regressions. Debt ratio is negatively related to SOEs' profitability in most cross-sectional and panel regressions. The ratio of unhealthy assets to total assets is negatively related to the profitability in all cross-sectional regressions and is negatively but insignificantly related to the profitability in most panel regressions.     

Optimal currency shares in international reserves: The impact of the euro and the prospects for the dollar

Foreign exchange reserve accumulation has risen dramatically in recent years. The introduction of the euro, greater liquidity in other major currencies, and the rising current account deficits and external debt of the United States have increased the pressure on central banks to diversify away from the US dollar. A major portfolio shift would significantly affect exchange rates and the status of the dollar as the dominant international currency. We develop a dynamic mean-variance optimization framework with portfolio rebalancing costs to estimate optimal portfolio weights among the main international currencies. Making various assumptions on expected currency returns and the variance–covariance structure, we assess how the euro has changed this allocation. We then perform simulations for the optimal currency allocations of four large emerging market countries (Brazil, Russia, India and China), adding constraints that reflect a central bank's desire to hold a sizable portion of its portfolio in the currencies of its peg, its foreign debt and its international trade. Our main results are: (i) The optimizer can match the large share of the US dollar in reserves, when the dollar is the reference (risk-free) currency. (ii) The optimum portfolios show a much lower weight for the euro than is observed. This suggests that the euro may already enjoy an enhanced role as an international reserve currency (“punching above its weight”). (iii) Growth in issuance of euro-denominated securities, a rise in euro zone trade with key emerging markets, and increased use of the euro as a currency peg, would all work towards raising the optimal euro shares, with the last factor being quantitatively the most important. J. Japanese Int. Economies 20 (4) (2006) 508–547.     

相对贫困对农村劳动力迁移决策的影响研究——来自江西的经验分析

相对贫困假说认为影响农民外出务工的因素不仅仅在于城乡两地的绝对收入差距．也在于农民在农村参照系内感受到的相对贫困程度。本文基于作者2006年对江西两村54户家庭、183位个体劳动力的问卷访谈数据,验证了相对贫困对农民迁移决策的显著影响;研究同时发现可耕地数量与农民迁移决策的非线性关系,“种田可以解决温饱问题,却不能解决收入问题”;教育支出已成为影响农户经济决策的重要因素之一,大量农民因孩子的教育费用而离家务工。     

Black abortion demand

Conclusion This study estimates the demand for abortion by black women. The empirical results find that black abortion demand is price inelastic, negatively related to unemployment conditions, and positively related to the presence of state Medicaid and a college education. These results are consistent with the findings in prior studies of all childbearing women. The only two findings at odds with those of all childbearing women were that black women's abortion demands are considerably more responsive to changes in income and do not depend on marital status.     

De-monetisation, inflation and coffee: the demand for money in Uganda

This paper investigates the recent macroeconomic history ofUganda using time series models for the demand for the threemain monetary aggregates. A collapse of income and high inflationled to de-monetisation. The flight from currency and demanddeposits was limited by their use for transactions, but demandfor time and savings deposits was largely a function of inflation.The role of the exchange rate and the price of coffee in determiningan asset demand for money was mixed. Re-monetisation since thelate 1980s has been slower than de-monetisation.     

Ricardo and Keynes on war finance

Conclusion Ricardo and Keynes were remarkably close on many of the practical problems of war finance, despite their sharp and somewhat polemical difference on the question of whether an over-issue of currency or an excessive aggregate demand was exclusively the cause of inflation. During a war, when both the quantity of money and aggregate demand are excessive, they would both predict inflation. And, they stood together in the fight against the evils of inflation, because it caused a violent and unjust redistribution of income and wealth. They both accepted the obvious fact that wartime expenditures would crowd out private spending, but they denied that this would necessarily affect interest rates. Keynes expected the short-run marginal efficiency of capital to adjust to the rate of interest established by the Bank of England; whereas Ricardo expected the bank rate to adjust to the long-run rate of profit under a regime of full convertibility. Ricardo recognized, however, that the bank could set arbitrarily low nominal rates of interest, even during a period of inflation, if its currency were not convertible. Finally, they both opposed large increases in the national debt and recommended redeeming the debt with a property tax after the end of the war. Would any Classical or Keynesian economists be so bold today? An earlier draft of this paper was presented at the universities of Padua, Venice, Western Ontario, and Saskatchewan.     

EXCHANGE MARKET PRESSURE,MONETARY POLICY,AND ECONOMIC GROWTH: ARGENTINA, 1993–2004

The exchange market pressure (EMP) against a currency has been frequently measured as the sum of the loss of international reserves plus the loss of nominal value of that currency. This paper follows the tradition of investigating the interactions between such a measure of EMP and monetary policy; but it also questions the usual omission of output growth in empirical investigations. The focus of this work is Argentina between 1993 and 2004. As in previous studies, we found some evidence of a positive and double‐direction relationship between EMP and domestic credit. But output growth also played a role in the determination of EMP, even more than domestic credit or interest rates. Also, there is some evidence that EMP affected growth negatively.