The Balassa–Samuelson effect and inflation in the Chinese provinces

The Balassa–Samuelson effect is employed to explain the observed differences in inflation between the Chinese provinces. A three-goods model is proposed to accommodate the specific features of China. The model includes the Balassa–Samuelson effect and demand side factors. It is tested for 29 Chinese provinces using cross-sectional and panel data for the 1992–1999 period. The econometric results cannot refute the hypothesis that the Balassa–Samuelson effect explains durable differences in inflation among provinces. We take this as evidence supporting the view that the Chinese economy broadly works as a market economy.     

Euro-Area Inflation: does the Balassa–Samuelson effect matter?

The paper argues that the Balassa–Samuelson effect is of little importance for the inflation target of the ECB. First, econometric tests of the Balassa–Samuelson effect suggest that the most robust link is found between relative sectoral deflators and relative unit labour costs; i.e. a link that accounts for an incomplete wage pass-through. For the (change in the) HICP — the target of the ECB — and its components additional factors seem to cause divergent international and sectoral developments. Second, countries with high productivity growth in industry may experience a real devaluation in the sector of tradable goods which counters the real appreciation resulting from a relative increase in service prices. It follows that the difference in productivity growth and thus the difference in the size of the relative price adjustment between countries does not have unambiguous consequences for the overall inflation rate, and as such can thus not justify an inflation target well above zero.

Modifications of the Balassa–Samuelson Model: The Effects of Balanced Growth and Capital Accumulation

In this paper modified versions of the Balassa–Samuelson model are developed. We stress the effects of balanced productivity growth and capital accumulation, which is often ignored or not fully understood in existing studies. Our theoretical analysis shows that these effects and the differential productivity growth effect can be presented in a unified framework. Empirical estimates using 1970–1990 sectoral data for the OECD show that our modified models are more suited to the data than the commonly used Balassa–Samuelson model. J. Japan. Int. Econ., March 2002, 16(1) pp. 31–49. Faculty of Economics, Nagasaki University, 4-2-1 Katafuchi, Nagasaki 850-8506, Japan. © 2002 Elsevier Science (USA).Journal of Economic Literature Classification Numbers: F36; F41; F43.     

The interest rate–inflation relationship under an inflation targeting regime: The case of Turkey

This paper examines the relationship between nominal interest rates and the expected inflation rate for the Turkish economy between 2002 and 2009, a period when the inflation-targeting regime was implemented as monetary policy. We use the test of cointegrating rank with a trend-break (a method introduced by Inoue, 1999) and we also apply exogeneity tests. Empirical findings indicate that monetary policy rates depend on inflationary expectations; long-term interest rates are affected by monetary policy; and the weak form of the Fisher effect is valid. This evidence implies that monetary policy has actually influenced the real long-term interest rates; the inflation targeting regime pursued by the Central Bank of Turkey is reliable; and hence realized inflation has remained close to its targeted level.     

China's explicit social security debt: How large?

Local governments in China have used a large amount of funds from individual accounts to finance deficits in the pay-as-you-go social pooling account, resulting in explicit social security debt. It is undoubtedly useful to know how large the debt is and how it will evolve in the future. This paper assesses the debt in China's social security individual accounts. It shows detailed calculations of the revenue, the anticipated funds, expenditures, and the debt in the individual accounts since their inception in 1997. The social security debt for China reached 1.59% of the GDP in 2015. The paper also assesses the historical social security debt in the individual accounts for each province. It shows that social security debt is unevenly spread, reaching more than 10% in Heilongjiang province and being negative in Guangdong province in 2015. The determinants for high debt in the individual accounts are examined based on the data from thirty-one Chinese provinces from 1997 to 2015. The paper also forecasts social security debt in the future and finds that the social security debt will reach over 8% of GDP in 2025 if the current system remains unchanged. Various ways to reduce the social security debt are also explored.     

US growth and budget consolidation in the 1990s: was there a non-Keynesian effect?

The 1990s were an extraordinary period for the US economy, both because of declining budget deficits and emerging budget surpluses, as well as high rates of economic growth. This paper challenges the conventional wisdom that high growth rates caused budget improvements, and claims that budget consolidations also contributed to fostering economic growth. We propose the existence of a non-Keynesian effect, where fiscal policy runs counter to Keynesian theory and fiscal consolidation can foster economic growth. We present empirical evidence that an increase in tax revenues reduces the distortionary bias of future taxation and therefore leads to an increase in consumer confidence and consumption. Two supply side effects are proposed: a reduction in transfers reduced labour market pressures and government savings provided liquidity for financial markets, both of which increased incentives to invest.     

How good was the profitability of British railways, 1870–1912?

This article provides new estimates of the return on capital employed (ROCE) for major British railway companies. It shows that ROCE was generally below the cost of capital after the mid‐1870s and fell until the turn of the century. Addressing cost inefficiency issues could have restored ROCE to an adequate level in the late 1890s but not in 1910. Declines in ROCE hit share prices and investors made little or no money in real terms after 1897. Optimal portfolio analysis shows that, while railway securities were attractive to investors before this date, they would have been justified in rushing to the exits thereafter.     

Time varying pass-through: Will the yen depreciation help Japan hit the inflation target?

This paper argues that the exchange rate could be a powerful transmission channel of the effects of ongoing “unconventional” monetary policies in Japan. It is shown that exchange rate pass-through to domestic prices, once considered near-extinct, has come back strong in recent years. This is especially true for those items that households purchase frequently. Evidence based on VARs as well as TVP-VARs indicates that a 25% depreciation of the yen would produce a 2% increase in the prices of those items. This could have an additional benefit of raising the public’s expectation about future inflation, as their beliefs are often said to be influenced by their daily observations about prices of those items that they buy frequently.     

Rose effect and the euro: is the magic gone?

This paper presents an updated meta-analysis of the effect of currency unions on trade, focusing on the euro area. Using meta-regression methods such as the funnel asymmetry test, evidence for strong publication bias is found. The estimated underlying effect for currency unions other than the eurozone reaches more than 60%. However, according to the meta-regression analysis, the euro’s trade promoting effect corrected for publication bias is insignificant. The Rose effect literature shows signs of the economics research cycle: reported t-statistic is a quadratic concave function of the publication year. Explanatory meta-regression (robust fixed effects and random effects), that can explain about 70% of the heterogeneity in the literature, suggests that results published by some authors might consistently differ from the mainstream output and that study outcomes are systematically dependent on study design (usage of panel data, short- or long-run nature, number of countries in the data set).     

China: How to Fight the Antidumping War?

I. IntroductionSince the erection of WTO in 1995, "dumping" has become a major source of trade disputes among its member countries. The number of antidumping cases pending before various legal forums is climbing up rapidly. According to data on antidumping practice of 2002 released by the WTO Secretariat, 21 member countries initiated 330 antidumping investigations against exports from a total of 64 different countries or customs territories. Of the 330 investigations, there were 182 cases initiated by developed countries and therest of 148 were initiated by developing countries. China,     

The changing relationship between inflation and the economic cycle in Italy: 1861–2012

The article investigates the relationship between GDP and prices in Italy in the long-run, from the country's Unification (1861) up to present day. By using the new national accounts data, over the period 1861–2012, we were able to make Italy the third country to have a historical test of the hybrid Phillips curve (in which both the new Keynesian and the backward-looking Phillips curves are tested), together with the UK and the US. How do economic growth and prices interact in Italy's different stages of economic growth? Unlike the US and the UK, where said interaction was already operating in mid-19th century, in Italy the link between inflation and the economic cycle emerged only after the First World War. We argue that this can be explained owing to Italy's different position in the international economic system and the way foreign conditioning factors (the exchange-rate regime and innovation in transportation) influenced the Italian industrialization. Before the First World War, deflation was imported. This turned out to be compatible with some GDP growth, insofar as the deflationist macroeconomic setting favoured capital inflows and technological upgrading. Whereas, from the First World War until the creation of a common European currency, price variations were mainly a consequence of national policies and domestic conditions: the trade-off with the GDP cycle is now manifest, both in the periods of deflation (the interwar years) and in those of inflation (the second half of the twentieth century). Our findings may also have important implications for present day, since price movements are once again, as in the liberal age, largely imported.     

How much slack was there in the Chinese economy prior to its economic reform of 1978?

The existence of economic slack or inefficiency is a common phenomenon of economies that operate under mandatory central planning. It implies that the economy operates in the interior of its set of production possibilities and not on its frontier. It also implies that output can be increased without any increase in the inputs if the constraints which prevent the economy from operating on the frontier in the first place are removed. Thus, there is “surplus potential output” that is not directly observable and cannot be identified by conventional analysis of the relationship between inputs and output alone. The objective of this study is to attempt to identify and estimate the surplus potential output in the Chinese economy prior to its economic reform in 1978. This will help answer the question of how much of the Chinese economic growth since 1978 can be attributed to the reduction and elimination of the pre-existing economic slack. This question is important because the increase in output due to the reduction or elimination of the economic slack can only take effect once and cannot be continuing. It will also affect the attribution of the sources of Chinese economic growth. Our investigation suggests that a reasonable estimate of the magnitude of the surplus potential output of the Chinese economy on the eve of its reform is approximately 50% of the actual realized output in 1978.     

Monetary targeting for price stability in Bangladesh: How stable is its money demand function and the linkage between money supply growth and inflation?

Since the mid-1980s Bangladesh has implemented a loose form of monetary targeting under two exchange-rate régimes: a pegged system until May 2003 and a ‘managed floating’ exchange-rate system. Under both régimes, broad money has been used as an intermediate target to maintain price stability, which implies as the ultimate goal a relatively low and stable rate of inflation. Inflation in this country has, however, remained moderately high and volatile, especially during the 1970s under the pegged exchange-rate system. With the apparent ineffectiveness of the monetary-targeting system in achieving price stability, even following the 2003 ‘managed float’ of the currency, there has been some suggestion that it should be replaced by, say, inflation targeting. This paper forms an element of a fuller study of the issue. It investigates the behaviour of broad money demand in Bangladesh using annual data over the period 1973–2008. Empirical results suggest that an open-economy broad money demand function has remained stable in Bangladesh since the early 2000s. Empirical results also suggest the existence of a causal relationship between money supply growth and inflation. The paper concludes that, although monetary targeting remains appropriate for Bangladesh, its implementation can be made more effective in stabilising the price level if the Bangladesh Bank enhances its control over the money supply by eschewing nominal exchange-rate stabilisation through foreign exchange market interventions.     

Capital Surges and Credit Booms: How Tight is the Relationship?

It has been frequently argued that surges in capital inflows are a major cause of credit booms and banking crises in emerging market economies. This view suggests that there is little role that can be played by domestic policy to break this linkage. This need not be the case. We show that the linkage between surges and booms is not as strong as is often assumed. One problem with most previous studies is that a wide range of measures for both surges and booms has been used with little checking of the robustness of results. We deal with this issue by replicating 14 different measures of capital surges (gross and net) and 5 credit boom proxies from the literature on a sample of 46 countries from 1981–2010. A second difficulty is that some previous studies have not distinguished between the proportions of surges followed by booms and booms preceded by surges. We found substantial differences between these two relationships. While there is a good deal of variation in the individual correlations the vast majority of the calculated probabilities of a surge being followed by a credit boom fall within the range of 4 % to 13 %. Although the proportion of credit booms preceded by surges is higher, the correlations for both directions are much lower than are frequently assumed. While the probabilities of a surge being followed by a credit boom generally increased from the 1980s to the 1990s they fell again in the 2000s, suggesting the possibility that authorities have become better at limiting the adverse effects of surges on domestic credit growth.     

Monetary policy and the behaviour of inflation in India: Is there a need for institutional reform?

Inflation rates in a number of developed countries follow a common trend over the past five decades: inflation starts out low in the 1950s, rises for a time before peaking in the 1970s, and then falls back to initial levels. Interestingly the behaviour of trend inflation in India broadly exhibits such a pattern. This similarity in the behaviour suggests that any explanation of inflation ought to apply across countries. To this end we construct a reduced-form inflation model for India that encompasses various well-known policy mistake theories as special cases. The restriction imposed by each of these theories on the behaviour of inflation is tested empirically. Reduced-form estimates lend support to all these theories. Although the reason for the inflation bias differs from one theory to the other, the mechanism at the heart of these theories are in fact quite similar. They all lay responsibility for inflation with the nature of monetary institutions. We use these results to interpret India's inflation experience over the past five decades and discuss the implications for institutional reform.     

Openness and income disparities: does trade explain the “Mezzogiorno effect”?

We use Italian regional data to answer the question whether trade affects within-country income differentials. In Italy, the more affluent Northern regions trade more with the rest of the world than the poorer ones in the Southern “Mezzogiorno” regions. Prima facie, there is a positive correlation between external trade and per capita income. Studying this relationship empirically requires taking into account the endogenous component of trade. We argue that panel cointegration models can complement instrumental variables techniques to account for the endogeneity of trade in a panel context. Both methods show a positive link between trade openness and the level of income per capita.     

Status and mortality: Is there a Whitehall effect in the United States?

The influential Whitehall studies found that top-ranking civil servants in Britain experienced lower mortality than civil servants below them in the organizational hierarchy due to differential exposure to workplace stress. I test for a Whitehall effect in the United States using a 1930 cohort of white-collar employees at a leading firm – General Electric (GE). All had access to a corporate health and welfare program during a critical period associated with the health transition. I measure status using position in the managerial hierarchy, attendance at prestigious management training camps and promotions, none of which is associated with a Whitehall-like rank-mortality gradient. Instead, senior managers and executives experienced a 3–5-year decrease in lifespan relative to those in lower levels, with the largest mortality penalty experienced by individuals in the second level of the hierarchy. I discuss generalizability and potential explanations for this reversal of the Whitehall phenomenon using additional data on the status and lifespan of top business executives and US senators.     

Rural to urban land conversion in China — How large is the over-conversion and what are its welfare implications?

The current system of converting farmland to urban land use in China can be characterized as a hybrid system that combines government controls with market-based transfers. In this paper we argue that this hybrid governance structure causes an over-conversion of farmland from the rural to the urban sector, as compared to a competitive market situation, and a welfare reallocation that discriminates against farmland owners. We develop a partial equilibrium model that can be used to examine the impact of the current hybrid governance structure on the over-conversion of farmland and to analyze the welfare changes for different groups of actors and the resulting net social welfare loss. Using a dataset with detailed information on farmland acquisitions and urban land transactions in Yingtan City in Jiangxi Province, we illustrate how this framework can be applied. Our results indicate an over-conversion of 33.5% of the total converted farmland in this city between 1999 and 2003. The welfare of farmland owners affected by the conversion decreased by 1.38 billion RMB, while the net social welfare loss equaled more than 270 million RMB during the same period. The local government obtained 380 million RMB of revenues by re-selling farmland as urban land through competitive conveyance mechanisms between 2002 and 2005, while the manufacturing sector gained an estimated 280 million RMB from buying land use rights at relatively low prices. We conclude that the current policy of increasing urban land conveyance through competitive mechanisms does not address two major underlying causes of over-conversion, and that protection of farmland would be better served by replacing the current hybrid rural to urban land market structure by a competitive land market.     

Fixed Exchange Rates and Disinflation in Emerging Markets: How Large Is the Effect?

We examine developing countries which have institutional quality ratings for the effects of exchange rate rigidity on inflation. The level of institutional development exerts no effect on the impact of currency regimes. However, the interaction of institutional quality and exchange rates has, in the most plausible specifications, a negative impact on inflation. This suggests that fixed exchange rates exert at most a contingent effect on inflation, and indicates that countries in Eastern Europe and Latin America contemplating currency pegs would be better off improving institutional quality prior to adopting the euro or dollar and expecting a large subsequent disinflationary effect. JEL no.  F31, O11