The real dollar-yen exchange rate,asymmetries in trade flows and the current account in a perfect-foresight model for developing East Asia

This paper explores permanent, unanticipated shocks in the yen-dollar exchange rate in a perfect-foresight, infinite-horizon, representative-agent model for an open, semismall economy that produces a single good, imports intermediate inputs and investment goods from Japan and competes with Japan in external markets. Therefore, the model captures some of the features of the developing countries of East Asia. External debt is constrained by a country-risk premium that depends on the level of external debt. The capital stock is maintained and incremented by an endogenous mixture of Japanese and home goods. An appreciation of the dollar against the yen is neutral for external indebtedness and the trade account in the long run, but raises the capital stock, consumption and hence welfare in the long run; the home currency depreciates against the dollar but appreciates against the yen. Whether a cycle of current account surpluses followed by current account deficits or vice versa is generated depends on the initial response of the shadow value of external debt.     

Accumulation,Structural Change and External Balances in a World with Internationally Traded Environmental Assets

Environmental literature has largely neglected macroeconomic considerations, especially open economy and asset market ones. This paper develops a small country framework that seeks to address these issues. Medium‐ and long‐run aspects are explored using standard trade and portfolio balance models, modified to incorporate trade in claims on non‐renewable resources (environmental assets). In the medium run, changes in environmental regulations, saving behavior and other variables affect the current account, investment and composition of output. In the long run, both the sectoral intensity of environment use and the structure of the economy are affected, as are the capital stock and the global distribution of claims on resources.     

Financial liberalization,openness and convergence

All industrialized nations relied on capital account controls for significant periods of their economic development and relaxations of capital account restrictions thought to be an integral aspect of economic development. Economists long advocated the removal of capital controls as a stabilizing factor of the development process to improve efficiency and return economies from distorted factor prices to production frontiers. Empirically, however, financial liberalizations have become associated with capital flow reversals, where initial capital inflows at the onset are subsequently offset by capital outflows resulting in higher levels of accumulated indebtedness. We investigate how capital flow reversals caused by financial liberalizations affect the speed of convergence of an economy. We show that financial liberalizations reduce short run convergence speeds, implying that open economies should experience significantly less output volatility but also longer transitions. The increased smoothness in response to initial shocks comes at a cost: as foreign borrowing rises to smooth domestic income fluctuations causing an increase in the domestic interest rate OECD data confirms our findings.     

Wealth Distribution,Elasticity of Substitution and Piketty: An ‘Anti‐Dual’ Pasinetti Economy

This paper studies the dynamics of wealth distribution between workers and capitalists in a neoclassical growth model with differential saving rates. It shows that if capitalists are thriftier than workers and the factors elasticity of substitution is high enough to ensure endogenous growth, capitalists’ share of total wealth asymptotically tends to one. It is also proved that a tax on capital income shifts the long run distribution of wealth in workers’ favor, and that the capitalists’ share of total wealth is a decreasing function of the tax rate. The results of the paper are compared to Piketty's ‘fundamental laws’ of capitalism.     

On the Link Between Exchange‐rate Regimes,Capital Controls and Monetary Policy Autonomy in Small European Countries, 1979–2000

We investigate international monetary‐policy transmission under different exchange‐rate and capital‐account regimes in eleven small, open economies during the 1980s and 1990s. We find no systematic link between ex‐post monetary‐policy autonomy and exchange‐rate regimes. Capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks, though not strict autonomy. The results are consistent both with short‐term autonomy for small countries even under fixed exchange rates and an open capital account, and with long‐term dependence under flexible exchange rates and an independent stability target. Results also indicate that euro‐area market interest rates are significantly more responsive to the development of the corresponding US rate than were the previous national rates.     

The economic consequences of corporate tax rates reductions in the EU: Evidence using a computable general equilibrium model

In a globalised world, governments are eager to attract foreign investors by lowering corporate tax rates. Recent trends point towards a revival of a race to the bottom in corporate income tax (CIT) rates in developed economies. EU countries have been active in this respect. A generalised fall in CIT rate could prove detrimental to tax revenues and trigger increase in other taxes to meet fiscal policy objectives. However, it could also spur investment and growth and prove to be a good fiscal policy strategy if, as a result, the corporate tax base increases. The final economic and fiscal impact of a reduction in CIT rates is therefore unclear. Using a CGE model, we find that uncoordinated tax reforms significantly impact national economies and third‐country effects can be significant when large countries implement CIT rate cuts. Small countries are better off unilaterally reducing their CIT rate at the expense of other EU countries. We find that negative spillovers are mitigated when the country reducing its CIT rate restores its budget balance by cutting either public expenditures or social transfers. A larger degree of non‐EU capital mobility also tends to reduce the negative spillover effects of unilateral CIT rate reductions.     

资本市场与国际收支:来自工业化国家的经验数据

本文从理论和经验上论证了资本市场与国际收支的关系。通过分析18个工业化国家的经验数据得出:一国如果拥有一个发达的资本市场,往往吸引较多的国外资金通过证券投资大量流入,引起资本账户顺差,与之同时往往伴随着经常账户逆差。这一结论的政策含义是:发达的资本市场是一国合理利用外资的一个重要前提;与之同时,发达的资本市场可能是一国国际收支平衡过程中实现自我调节的缓冲器。我国多年来一直保持资本账户巨额顺差,但主要是通过FDI实现的,这种格局的形成也与我国资本市场的缺陷有关。对我国而言,建设一个发达的资本市场对我国国际收支管理有着多方面的积极意义。     

Innovation dynamics and labor force restructuring with asymmetrically developed national innovation systems

The concept of National Innovation System (NIS) has gained a great deal of intellectual and practical attention over the past three decades. We present an endogenous growth model where the NIS of a country determines its accumulation of technological knowledge and the arrival rate of innovations depends on the distance from the technological frontier to the current technological development level (TDL) of the country. We show how, even within an ideal common market environment and despite the compensatory mechanism provided by migration and the advantage of backwardness enjoyed by the laggard countries, differences in TDLs among countries foster the economic stagnation of technological laggards. That is, the structural consequences derived from technological underdevelopment are persistent and not simply due to the depreciation of human capital, but to the absence of innovation incentives that follows. Numerical simulations and an empirical analysis are performed to illustrate the main results and relate them to the current European common market setting and the innovation policies of its members.     

Composition and growth effects of the current account: A synthesized portfolio view

This paper analyzes a useful accounting framework that breaks down the current account to two components: a composition effect and a growth effect. We show that past empirical evidence, which strongly supports the growth effect as the main driver of current account dynamics, is misconceived. The remarkable empirical success of the growth effect is driven by the dominance of the cross-sectional variation, which, under conditions met by the data, is generated by an accounting approximation. In contrast to previous findings that the portfolio share of net foreign assets to total assets is constant in a country, both our theoretical and empirical results support a highly persistent process or a unit-root process, with some countries displaying a trend. Finally, we reestablish the composition effect as the quantitatively dominant driving force of current account dynamics in the past data.     

Do Remittances Facilitate a Sustainable Current Account?

We examine how workers' remittances impact on the current account. In doing so, we focus on how remittances affect the sustainability rather than the size of current account balances. We find that the presence of remittances makes it more likely that exports and imports are cointegrated, thereby lending support to current account sustainability. Furthermore, quantile regression analysis suggests that increased remittances are associated with a faster speed of current account adjustment towards long‐run equilibrium, particularly for those countries characterised by already highly persistent current account balances. In contrast to a literature that emphasises an adverse Dutch disease impact of workers' remittances on the real exchange rate in terms of reduced external competitiveness, our findings suggest that remittances are actually beneficial to the current account balance.     

Exchange rate expectations and monetary policy

The adjustment process to a monetary disturbance is studied in a model of perfect capital mobility and flexible exchange rates. Exchange rate expectations are emphasized and used to establish an adjustment process. In the short run, a monetary expansion gives rise to a depreciation in the exchange rate and a reduction in saving due to the terms of trade deterioration. The exchange rate depreciation, in the short run, may be in excess of the long-run depreciation. The trade balance in the short run may worsen. The long-run equilibrium of the analysis conforms to the Mundell-Fleming results that establish the force of monetary policy under flexible rates.     

China’s Macroeconomic Imbalances: Causes and Consequences

In recent years, China has experienced two forms of extreme macroeconomic imbalance: an expenditure imbalance in the sense of very high investment and very low consumption, giving rise to rapid capital accumulation; and an imbalance between expenditure and production, producing external imbalance, i.e. a huge surplus on the current account of the balance of payments. Both imbalances imply a low rate of time discount by both government and society: consumption in the present is forgone in favour of consumption in the future. The paper examines how these imbalances came about and goes on to consider whether they can be sustained and how they might be redressed. There is no evidence that the rapid capital accumulation has reduced the rate of profit on capital and thus the incentive to invest. However, persistent external imbalance poses a threat to investment if it generates excess liquidity and asset bubbles. The current account surplus rose remarkably in the years 2004–07. This was associated with exogenous increases in competiveness and in saving, both attributable to the economic reform policies. On current policies, the surplus is likely to rise again once the world economy recovers from its recession. This poses three sorts of problems, each of which is examined in turn: difficulties for macroeconomic stabilisation policies; risk of capital loss on the foreign exchange holdings; and the threat of retaliation by China’s trading partners. A combination of internal and external policies will be required to redress the imbalance.     

Factor rewards and the international migration of unskilled labor: a model with capital mobility

"Conventional economic wisdom holds that the migration of unskilled labor from less developed countries to neighboring developed countries should be expected to narrow the wage gap between those countries, and thereby reduce the incentive for further migration. [The authors suggest that] if capital is mobile internationally this reasoning may be inappropriate. Instead, emigration of unskilled labor out of the less developed country provides an incentive for capital to leave the country, too. As a consequence, wage rates move in the same direction in each country, and the gap between wage rates across countries even may increase."     

Monetary Union Viability: A Criterion Proposal

We propose a model that represents the dynamic behaviour of a monetary union comprising two countries whose natural interest rates are initially unequal. This initial disparity and the subsequent application of a common monetary policy generate different national inflation rates and lead to losses of competitiveness, foreign deficits, and the indebtedness of one country with respect to the other. We propose as a viability criterion for the modelled monetary union a combination of non‐explosive foreign debt and the ability of the central bank to neutralize the contracting effects of taking on additional debt to avoid falling into a liquidity trap.     

Boom‐and‐bust Cycles,External Imbalances and the Real Exchange Rate

When the current account balance and net capital outflows do not exactly offset each other, international payment flows arise. Payment flows into a country push the real exchange rate up, payment outflows push it down. This article uses a model of optimal consumption and portfolio choice to determine the factors that drive international payment flows during boom‐and‐bust cycles. It shows that during such episodes, capital inflows first exceed the deficit on current account, strengthening the currency. Later on, when the return on domestic capital reverts to its normal level, the current account recovers, yet the overall decline of the net foreign asset position provokes a fall of the real exchange rate even below its initial level. Case studies of countries experiencing rapid economic expansions followed by economic and financial meltdowns confirm the article's theoretical predictions.     

The US dollar- scenario of a world currency

The exchange rate of the US dollar fell sharply last year. What part was played by the adverse “fundamentals” of the US economy, the large current account deficit, the country’s heavy foreign indebtedness and the substantial budget deficit? How will the dollar behave in future?     

INTEREST RATE,DEBT, DISTRIBUTION AND CAPITAL ACCUMULATION IN A POST‐KALECKIAN MODEL

In the present paper we extend Lavoie's (Metroeconomica, 1995, vol. 46, pp. 146–177) ‘Minsky–Steindl’ model, building our analysis on a Kaleckian distribution and growth model which has already taken into account distribution effects of interest rate variations on the short‐run equilibrium. Into this model the effects of debt and debt services are explicitly introduced and the effects of interest rate variations on the short‐ and the long‐run equilibrium are derived. It is shown that the effects of interest rate variations on the endogenously determined equilibrium values of the model not only depend on the parameter values in the saving and investment functions but also on the interest elasticity of distribution and on initial conditions with respect to the interest rate and the debt–capital ratio.     

Rhetorics of saving–investment correlations and the international mobility of capital: A survey

This study surveys the literature on saving–investment (SI) correlations and international mobility of capital (IMC) generated over more than three decades since the 1980s. Several studies have shown the presence of paradoxically high SI correlations for the developed countries with observed high IMC, and low SI correlations for the developing countries with observed low IMC. The studies accounting for structural breaks in model parameters provide dominant support for the decrease in SI correlations and increase in IMC after the switch from fixed to flexible exchange rate regime and the removal of policy restrictions on capital flows. The intertemporal optimisation approach to current account and the open-economy growth and dynamic stochastic general equilibrium models mainly provide theoretical predictions and suggest that it is possible to find high SI correlations in the wake of high IMC. The increases in international capital flows have been the natural corollary of the growth of international trade in goods and services and increases in foreign direct investment flows. It is these factors, rather than international trade in capital market securities (bonds and equities) driven by the diversification benefits of financial portfolios per se, that have been the key levers of international financial flows.     

The skill premium and economic growth with costly investment,complementarities and international technological-knowledge diffusion

We analyse the skill premium and the growth rate in an innovator-imitator general equilibrium growth model assuming (i) internal costly investment in both physical capital and R&D, (ii) complementarities between intermediate goods in production and (iii) technological-knowledge diffusion. We find that in the imitator country these three elements influence the economic growth rate and the skill premium. In the innovator country, while the growth rate is affected by costly investment and complementarities, the skill premium is not affected by any of our assumptions. It depends solely on the productive advantage of high-skilled over low-skilled labour, which suggests that the sustained increase in the skill premium observed in several developed countries over the last three decades may have been due to increases in such productive advantage.     

The saving rate and the upgrade of the trade commodity structure in developing countries: A dynamic H–O model under an oligopolistic market structure

This paper constructs an oligopolistic dynamic Heckscher–Ohlin (H–O) model of a small open economy to analyze the relationship between the saving rate and the upgrade of the trade commodity structure. The analysis shows that the saving rate determines the trade commodity structure of a country in the long-run equilibrium. Furthermore, a developing country with a low capital–labor ratio in the initial state will change from exporting labor-intensive goods in the initial state to exporting capital-intensive goods in the long-run equilibrium if it has a higher saving rate, and this upgrade of trade commodity structure has a social welfare effect under an oligopolistic market structure. The effect of trade policy on the upgrade of the trade commodity structure is uncertain in our model; therefore, a high saving rate is the irreplaceable driving force for trade commodity structure upgrades in developing countries.