Global current account adjustment: trade implications for the euro area countries

Although the euro area is not one of the major players in current global imbalances, the rebalancing of the current global imbalances is coupled with a significant appreciation of the euro against. In this paper, I present estimations of trade equations for individual euro area countries using a vector error correction model. Each euro area member has got a different trade elasticity, in the short as well as in the short run. Results show that exchange rate innovations affect individual euro area countries at different rates, complicating the response of the euro area’s one-size-fits-all monetary policy.

Evaluating China’s Integration in World Trade with a Gravity Model Based Benchmark

This paper assesses China’s “natural” place in the world economy with a new set of trade integration indicators, which are used as a benchmark in order to examine whether China’s share in international trade is consistent with fundamentals such as economic size, location and other relevant factors. They constitute a better measure of trade integration that incorporates many more factors than traditional openness ratios. The model tracks international trade well and confirms that China is already well integrated in world markets, particularly with North America, several Latin American and East Asian emerging markets and most euro area countries.

Does financial integration make banks more vulnerable? Regulation,foreign owned banks,and the lender-of-last resort

We describe a simple model in which banks’ prudential efforts and public regulation can reduce the probability of bankruptcy. Focusing on the European example, we contrast the national case with an integrated banking market and find that banks will exert, and public regulators will demand, greater prudential effort to monitor their bank’s activities. Thus, financial integration may increase voluntary prudential behavior by banks, avoid a regulatory “race to the bottom,” and improve the soundness of the financial system. Along similar lines, we show that the absence of a dedicated lender of last resort within the euro area can reduce the probability of financial crisis. Despite these findings, the overall level of regulatory activity may remain suboptimal from a European perspective. We also discuss incentives for European banks to organize their foreign holdings in branches or subsidiaries.

Is the Middle East an Optimum Currency Area? A Comparison of Costs and Benefits

This paper examines the macroeconomic costs and benefits of adopting a common currency for 13 Middle Eastern countries. Economic theory suggests that the main benefit is enhanced price stability, while the main cost is higher business-cycle volatility if the member country’s output is not sufficiently correlated with the area’s, as a whole. Using data from 1980–2005, the paper finds that the estimated cost and benefit measures exhibit substantial variability across the countries and are sometimes positively correlated. Moreover, focusing on the results for the last decade, it seems that many Middle Eastern countries (such as Bahrain, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Syria and United Arab Emirates) have achieved remarkable convergence both in business-cycle synchronization and inflation outcomes.

Do Transition Economies and Developing Countries Have Similar Destinies?

This paper evaluates the potential of transition economies for achieving sustainable improvements in living standards vis-à-vis developing countries based on their productivity performance. The comparison is made using a bootstrapped Malmquist productivity index and its technological and efficiency change components. The results of estimation indicate that transition economies enjoy significantly higher increases in technical efficiency than developing countries with comparable rates of real GDP growth. Therefore, these results suggest that the former group of countries may have better growth prospects than the latter group, giving empirical support to Stern and Fries’ (Foreign Policy 111:164–165, 1998) optimism that transition economies are the “tiger” economies of tomorrow.

The choice of inflation targeting—an empirical investigation

A growing number of countries have anchored their monetary policy to an explicit numerical rate or range of inflation since such an inflation targeting framework was first adopted by New Zealand in 1989. This paper empirically investigates economic structure and institutional factors associated with a country’s choice of inflation targeting using a dataset of 66 countries for the period of 1980–2000. It is found that a sound fiscal position is significantly and positively associated with the choice of inflation targeting framework; the central bank is more likely to adopt inflation targeting with greater financial depth; institutional capacity including central bank autonomy and flexible exchange rate regime is important for the choice of inflation targeting.

Japanese Banks’ monitoring activities and the performance of borrower firms: 1981–1996

We construct an index measure that quantitatively describes the monitoring activities of Japanese banks. Using micro data on Japanese banks and borrower firms, we examine the effects of bank monitoring on the profitability of borrower firms. We find significant positive effects in the periods 1986–1991 and 1992–1996, although there is no significant effect in the period 1981–1985. We also examine how banks’ monitoring affects borrowers. The results show that the positive effects of banks’ monitoring on borrowers’ profitability are mostly caused by screening effects, not performance-improving effects.

The road to liberalization: Policy design and implementation of Taiwan’s privatization

Among newly industrializing economies, Taiwan represents an archetypical example of a country in the process of economic catching up with institutional environments standing somewhere between Western and transition countries. Thus, Taiwan’s privatization experience may provide a means to assess the generalizability of conclusions drawn from prior research conducted in both kinds of countries. In the face of changing economic and political environments, Taiwan revamped its blueprint for privatization in 1989 as a major plank of its economic shift toward liberalization. Although it has proceeded on a trial-and-error basis, the policy has thus far yielded substantial though mixed results. This study systematically reviews Taiwan’s policy design and implementation of privatization, which originally was modeled on but later diverged from the Western experience as a result of the immature institutional settings and political compromises in various regards. Taiwan’s privatization, in a relative small scale to those in transition economies, is characterized by a set of stylized policy initiatives that provide a reference point for other developing countries.

Do Patent Protection and Technology Transfer Facilitate R&D in Developed and Emerging Countries? A Semiparametric Study

This paper examines if patent protection and technology transfer facilitate R&D in a sample that includes both developed and emerging countries. A semiparametric model is used to estimate the relevant parameters using country level data from 21 countries, of which six are emerging, for the period 1981–1997. The results suggest thresholds in patent protection and technology transfer: patent protection has a positive effect which weakens at high levels of protection, and FDI has a positive effect only if the country depends heavily on FDI.

Currency Unions: Some Lessons from the Euro-Zone

Whilst there are many sizeable benefits from currency union, the main disadvantage is often the difficulty of adjusting to an asymmetric shock. Such adjustment is easier when the separate countries (regions) in such a union have flexible labour markets, and when there is a federal fiscal system to ease the adjustment process. The euro-zone has neither. We show that the trends in relative unit labour costs have in several recent cases been worsening relative competitiveness, thereby putting the euro-zone under greater centrifugal pressure. Nevertheless the costs of ‘exit’ are so high that it would only probably occur as a consequence of political mis-calculation.

Overall trade specialization and economic development: countries diversify

This paper provides evidence for an aspect of trade often disregarded in international trade research: countries’ sectoral export diversification. The results of our semiparametric empirical analysis show that, on average, countries do not specialize; on the contrary, they diversify. Our results are robust for different statistical indices used to measure trade specialization, for the level of sectoral aggregation, and for the level of smoothing in the nonparametric term associated with per capita income. Using a generalized additive model (GAM) with country-specific fixed effects it can be shown that, controlling for countries’ heterogeneity, sectoral export diversification increases with income.

Estimates of the Open Economy New Keynesian Phillips Curve for Euro Area Countries

This paper extends the existing literature on the open economy New Keynesian Phillips Curve by incorporating three different factors of production, domestic labor and imported as well as domestically produced intermediate goods, into a general model which nests existing closed economy and open economy models. The model is estimated for nine euro area countries and the euro area aggregate. We find that the general specification of our model improves the fit of the New Keynesian Phillips Curve considerably compared to the closed economy specification. The estimates of the structural parameters of the model suggest strong heterogeneity in the degree of price rigidity across euro area counties. Furthermore, we find the degree of price rigidity to be systematically lower in the open economy specification than in the closed economy specification and also lower than in the general specification of our model.

A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility

We study the impact of Japanese foreign exchange intervention on the volatility of the yen/dollar exchange rate since the early 1990’s in a GARCH framework with interventions as exogenous variables. Using daily intervention data provided by the Japanese Ministry of Finance, we show that the effect of interventions varies over time. From 1991 up to the late 1990’s, Japanese foreign exchange intervention is associated with an increase in volatility of the yen/dollar exchange rate. After the year 1997, Japanese foreign exchange intervention correlates with reductions in exchange rate volatility. This can be explained by the fact that Japanese foreign exchange intervention remained quasi unsterilized in the liquidity trap.

The Evolving Role of China and India in the Global Financial System

Three main features characterize the international financial integration of China and India. First, while only having a small global share of privately-held external assets and liabilities, these countries are large holders of official reserves. Second, their international balance sheets are highly asymmetric: both are “short equity, long debt.” Third, China and India have improved their net external positions over the last decade although neoclassical models would predict them to be net borrowers. We argue that domestic financial policies are key to understanding these patterns and the future role of China in the international financial system.

Foreign Direct Investment Liberalization Between Canada and the USA: A CGE Investigation

In this paper, we develop a computable general equilibrium (CGE) model to shed quantitative light on the implications of a scenario of deeper economic integration between Canada and the United States, where the barriers for foreign direct investment are preferentially eliminated. Our model distinguishes between the activities of domestic and foreign-owned firms at the microeconomic level, both in terms of demand and production characteristics. Overall our findings suggest that further investment liberalization between the two countries will accelerate the shaping of Canada’s industrial structure, as manifested by recent trends.

Funding Shocks and Optimal University Admissions and Financial Aid Policies

A positive shock to funding, such as a major donation, causes an optimizing university to raise its admissions standards and reduce tuition charges net of financial aid across all student categories. However, the shock’s effect on enrollment may not be uniform. Student categories given little weight in the university’s objective function may be treated as inferior goods; that is, positive shocks decrease their enrollments, while other student categories’ enrollments are increased. The paper’s findings shed light on the effect of federal direct-to-student aid on tuition levels, permitting a new perspective on William Bennett’s controversial hypothesis that aid accommodates tuition hikes.

The Determinants of the Secondary Market Price of Less Developed Countries’ Debt

A present-value model of less developed countries’ (LDC) debt is developed to understand the factors that affect the discount on the secondary market. LDC debt trades at a substantial discount on the secondary market. This paper investigates the determinants of the discount for a sample of 13 countries over a 9 year period. The findings show that debt–exports, foreign currency reserves–imports and total debt service to exports ratios are significant determinants of the secondary market prices of LDC debt. The discount is higher in countries where debt–exports ratios are higher and is lower for those with lower foreign currency reserves–imports ratios. Concentration of debt with money center banks has a positive and significant effect on the secondary market price of debt.

Is reversion to PPP in euro exchange rates non-linear?

The paper tests for nonlinearities in the adjustment of the euro exchange rate towards purchasing power parity (PPP). It presents new survey based evidence consistent with non-linear patterns in euro exchange rate dynamics. Moreover, based on an exponential smooth transition autoregressive (ESTAR-) model, it finds strong evidence that the speed of mean reversion in euro exchange rates increases non-linearly with the magnitude of the PPP deviation. Accordingly, while the euro real exchange rate can be well approximated by a random walk if PPP deviations are small, in periods of significant deviations, gravitational forces are set to take root and bring the exchange rate back towards its long-term trend. Deviations from the PPP equilibrium for the euro-dollar rate need to be stronger in order to reach the same adjustment intensity as for other rates.

Connecting National Safety Nets: The Dialectics of the Basel II Contracting Process

Basel II consists of supervisory guidelines negotiated by representatives of central banks and national regulatory commissions that were members of the Basel committee on Banking Supervision (BCBS). The BCBS is itself a regulatory response to globalization, which is connecting national safety nets in market-driven ways. A country’s financial safety net is a social contract established by short-lived agents for principals in long-lived economic sectors. Restraints placed on the authority of the BCBS members to contract for their principals by domestic politics explains: why Basel II authorizes individual countries to implement the agreement in markedly different ways; why US implementation of Basel II ran into so much doubt, controversy, and delay; and how the implementation debate set small and large banks and the Federal Reserve and other federal regulators against one another.