Exploring the Case for Monetary Integration between the Chinese Mainland and Hong Kong

This paper presents an empirical investigation on an important policy issue, namely, whether there is any evidence supporting monetary integration between the Chinese mainland and Hong Kong. We follow two lines of inquiry. First, we present a series of simple tests to find the extent to which trade and/or financial linkages exist between the two regions. Second, we use simple inflation and output differentials and structural VAR techniques to test for the degree of business cycle synchronization between the two regions. The results indicate that there is evidence supporting the existence of trade linkages and that there is also support for the possible synchronization of business cycles. We discuss the implications of this for monetary integration between Hong Kong and the mainland.     

Liquidity,Transaction Costs,and Real Activity

This paper studies the liquidity effect in a pecuniary transaction-cost model. To model the asymmetric impact of monetary injections, we consider two behavioral assumptions: sluggish money demand and sluggish firm investment. It is found that, under reasonable parameterization, the model is capable of generating a dominant liquidity effect. Our result suggests that, with alternative monetary specifications and behavioral assumptions, general equilibrium models are still useful for studying the liquidity effect at business cycle frequencies.     

The impact of intra-industry trade on business cycle synchronization in East Asia

This paper empirically analyzes distinctions between intra- and inter-industry trade indices. The research indicates that the co-movements of business cycles are influenced more through the intra-industry trade channel than by the total volume of trade itself. As trade integration among Asian countries increased, business cycle synchronization among these countries was expected to expand through trade transmission. Inter-industry trade resulting in higher specialization will induce less synchronized business cycles, while intra-industry trade could lead to increased business cycle synchronization. Moreover, I find that increased business cycle synchronization, as one of the optimum currency area criteria, is overemphasized.     

Trade Intensity and Business Cycle Synchronicity in Africa

Abstract: Business cycle synchronicity, which is the key requirement for sharing a common currency, is not particularly strong within the prospective African monetary unions. However, this parameter is not irrevocably fixed and may be endogeneous vis‐à‐vis the integration process. For example, trade may increase the similarity of economic disturbances. This paper tests such an effect among the 53 African countries from 1965 to 2004. The estimated results suggest that trade intensity increases the synchronization of business cycles in the African context. The magnitude of the ‘endogeneity effect’ is, however, smaller than similar estimates among industrial countries.     

Financial Factors in the Business Cycle of a Small Open Economy: The Case of Korea

Financial factors influencing the business cycle have received considerable attention in recent years in the aftermath of the global financial crisis in 2008. This paper examines the role of financial factors in the business cycle by considering Korea, a small open economy, that experienced a severe financial crisis in 1997 as well as the recent global financial crisis. We estimate small open economy Bayesian DSGE (dynamic stochastic general equilibrium) models with financial factors and analyze the role of these financial factors in the business cycle in the context of Korea. The results indicate that the model based on an endogenous financial accelerator and a modified monetary policy rule provides a better explanation to the data than that without the financial factors and justify the recent attention to financial factors influencing the business cycle.     

Estimation of the East African Community's trade benefits from promoting intra‐regional trade

In the literature on economic integration, the optimum currency area (OCA) theory says that there should be a high degree of trade between potential members of a monetary union for them to benefit from the use of a single currency. This study uses an augmented gravity model of trade to estimate the East African Community's (EAC) trade effects, as this community decided to participate in a monetary union by 2024. The study uses the fixed effect filter (FEF) estimator, which follows a two‐step approach and outperforms the standard fixed effects (FE) estimator. The results indicate that EAC has the potential to increase trade among partner states by 122% more than expected from the normal trade levels. The study, therefore, supports the ongoing East African Monetary Union process. However, to improve the likelihood of creating a more sustainable monetary union, the study recommends these countries to primarily focus on the full implementation of the customs union and common market steps. The main contribution of this study is that it provides robust estimates of the EAC's effects on intra‐regional trade using more recent data and updated econometric techniques.     

Intra-regional trade and business cycles in Southeast Asia

Conclusion In this note we considered the relationship between trade integration and the cross-country correlation of business cycle activity in southeast Asia. We found a positive and significant relationship between the degree of bilateral trade intensity and the cross-country bilateral correlation of business activity over the period 1986–1996, a period when trade integration was proceeding rapidly. Thus, the Frankel and Rose (1997) finding that more trade integration between industrialized countries tends to result in more highly synchronized business cycles, appears to be robust to a sample of countries which have diverse income levels and economic structures and are likely to have less bilateral intraindustry trade.     

ZONE‐TARGETING MONETARY POLICY PREFERENCES AND FINANCIAL MARKET CONDITIONS: A FLEXIBLE NON‐LINEAR POLICY REACTION FUNCTION OF THE SARB MONETARY POLICY

We estimate a flexible model of the monetary policy reaction function of the South African Reserve Bank based on a representation of the policymaker's preferences that capture asymmetries and zone‐targeting behaviours. We augment the analysis to allow for responses to financial market conditions over and above inflation and output stabilisation to address the current debate on the importance of financial asset prices in monetary policy decision making. The empirical results show that the monetary authorities' response to inflation is zone symmetric. Secondly, the monetary authorities' response to output is asymmetric with increased reaction during business cycle downturns relative to upturns. Thirdly, the monetary authorities pay close attention to the financial conditions index by placing an equal weight on financial market booms and recessions.     

Is there a direct effect of money?: Money’s role in an estimated monetary business cycle model of the Japanese economy

In this paper, to study the alternative monetary transmission mechanism to the traditional interest rate channel which may even work under zero nominal interest rates, we estimate the monetary business cycle model of the Japanese economy that incorporates the direct role of money. Estimation is conducted on the system of equations in a state-space form via maximum likelihood estimation. We, however, find that the direct effect of money is extremely small in Japan. This finding is the same as those obtained for the U.S. in Ireland [Ireland, P., 2004. Money’s role in the monetary business cycle. Journal of Money, Credit and Banking 36, 969–984] and the Euro area in Andres et al. [Andres, J., Lopez-Salido, D., Valles, J., 2001. Money in an Estimated Business Cycle Model of the Euro area. Working Paper 121, Bank of Spain].     

Interest Rates, Leverage, and Money

The current mainstream approach to monetary policy is based on the New Keynesian model and is expressed in terms of a short-term nominal interest, such as the federal funds rate in the United States. It ignores the role of leverage and also downplays the role of money in basic monetary theory and monetary policy analysis. But as the federal funds rate has reached the zero lower bound and the Federal Reserve is in a liquidity trap, the issue is whether there is a useful role of leverage and monetary aggregates in monetary policy and business cycle analysis. We address these issues and argue that there is a need for financial stability policies to manage the leverage cycle and reduce the procyclicality of the financial system. We also argue that in the aftermath of the global financial crisis and Great Contraction there is a need to get away from the New Keynesian thinking and back toward a quantity theory approach to monetary policy, based on properly measured monetary aggregates, such as the new Center for Financial Stability Divisia monetary aggregates.     

Monetary unions, external shocks and economic performance: A Latin American perspective

During the last few years there has been a renewed analysis in currency unions as a form of monetary arrangement. This new interest has been largely triggered by the Euro experience. Scholars and policy makers have asked about the optimal number of currencies in the world economy. They have analyzed whether different countries satisfy the traditional “optimal currency area” criteria. These include, among other: (a) the synchronization of the business cycle; (b) the degree of factor mobility; and (c) the extent of trade and financial integration. In this paper I analyze the desirability of a monetary union from a Latin American perspective. First, I review the existing literature on the subject. Second, I use a large data set to analyze the evidence on economic performance in currency union countries. I investigate these countries’ performance on four dimensions: (a) whether countries without a national currency have a lower occurrence of “sudden stop” episodes; (b) whether they have a lower occurrence of “current account reversal” episodes; (c) what is their ability to absorb international terms of trade shocks; and (d) what is their ability to absorb “sudden stops” and “current account reversals” shocks. I find that belonging to a currency union has not lower the probability of facing a sudden stop or a current account reversal. I also find that external shocks have been amplified in currency union countries. The degree of amplification is particularly large when compared to flexible exchange rate countries.     

Myopia,Discretion, and Commitment in a Two‐Period AS/AD Model

A large body of pedagogical literature has recently emerged to place the New Keynesian framework for analyzing business cycle fluctuations and the conduct of monetary policy into undergraduate economics curricula. This article develops the graphical apparatus for the analysis of optimal monetary policy in the context of a two‐period model under alternative assumptions about the formation of inflationary expectations. It demonstrates that differences in assumptions about the formation of inflationary expectations translate into quite different conclusions regarding the optimal conduct of monetary policy.     

Regional monetary integration in the presence of two large countries: What modality makes sense for East Asia?

This paper analyzes the modalities of East Asian monetary integration by taking note of the relevance of two large economies, one outside the region (the United States) and one inside (Japan), for monetary policy making. Within the framework of a three-country model, it derives the social welfare of two regional economies and uses numerical calibration to show how it crucially depends on the specific modality of monetary integration. By using parameters obtained from the actual macroeconomic data for 1981–1996, we find that the smaller regional economy (Korea) always benefits from monetary integration, while the large regional economy (Japan) benefits from monetary integration only when it is asymmetric (such as a peg to a common basket or yenization), so that it can continue to enjoy some monetary autonomy. Symmetric integration, while not a viable option for East Asia in the short run, may become feasible in the long run if economic integration deepens sufficiently to produce convergence in economic structure and synchronization of business cycles.     

全球化与经济周期同步性——以中国和OECD国家为例

本文利用新方法测度经济周期同步性,构建1984～2007年面板数据研究中国与OECD国家的经济周期同步性及其传导机制。研究发现,中国同OECD国家的经济周期同步性与传统理论存在一定差异,双边贸易强度、金融与投资开放度、产业结构的相似程度都将显著地增加中国同OECD国家的经济周期同步性。     

Financial market integration,exchange rate policy,and the dynamics of business and employment in Korea

We study the consequences of different degrees of international financial market integration and exchange rate policies in a calibrated, medium-scale model of the Korean economy. The model features endogenous producer entry into domestic and export markets and search-and-matching frictions in labor markets. This allows us to highlight the consequences of financial integration and the exchange rate regime for the dynamics of business creation and unemployment. We show that, under flexible exchange rates, access to international financial markets increases the volatility of both business creation and the number of exporting plants, but the effects on employment volatility are more modest. Pegging the exchange rate can have unfavorable consequences for the effects of terms of trade appreciation, but more financial integration is beneficial under a peg if the economy is subject to both productivity and terms of trade shocks. The combination of a floating exchange rate and internationally complete markets would be the best scenario for Korea among those we focus on.     

Openness and the Effects of Fiscal and Monetary Policy Shocks on Real Output in Nigeria (1960–2003)*

Abstract: This study investigates the effects of monetary and fiscal policies on the real output growth in a small open economy. It is a country‐specific, time series study that verifies the implication of increasing economic openness on the efficacy of monetary and fiscal policy. A modified GARCH model was used to estimate the anticipated and unanticipated shocks. Two measures of fiscal and monetary shocks were combined with openness and real oil price shocks in a VECM model to assess the effects of anticipated and unanticipated policy shocks on the output equations. The empirical results showed that anticipated and unanticipated fiscal and monetary shocks had no significant positive effects on real output. This suggests that the open macroeconomic version of the policy ineffectiveness proposition was valid for both monetary and fiscal policy shocks in Nigeria. This is in consonance with earlier works in this area. Furthermore, the degree of openness and oil price shocks had a negative implication on the efficacy of macroeconomic policy in Nigeria; also in agreement with the Dutch Disease Syndrome. Finally, the policy implication of this study therefore is that trade liberalization policy should be implemented cautiously. The Nigerian economy is weak to withstand the unwholesome consequences of full economic integration.     

Business Cycle Synchronisation: Disentangling Trade and Financial Linkages

Drawing on a large cross-section of countries, this paper explores whether closer economic ties between countries foster business cycle synchronisation and disentangles the role of the various channels, including trade and financial linkages as well as the similarity in sectoral specialisation. Our results confirm that output comovement is higher for country pairs with closer trade linkages and similar patterns of sectoral specialisation. By contrast, it remains difficult to find a direct relationship between bilateral financial linkages and output correlation. However, our results suggest that financial integration spurs business cycle synchronisation indirectly by raising the similarity in sectoral specialisation. Notably, the main findings hold regardless of whether financial linkages are captured in terms of FDI or portfolio holdings.     

The International Synchronisation of Business Cycles: the Role of Animal Spirits

Business cycles among industrial countries are highly correlated. We develop a two-country behavioral macroeconomic model where the synchronization of the business cycle is produced endogenously. The main channel of synchronization occurs through a propagation of “animal spirits”, i.e. waves of optimism and pessimism that become correlated internationally. We find that this propagation occurs with relatively low levels of trade integration. We do not need a correlation of exogenous shocks to generate synchronization. We also empirically test the main predictions of the model.     

Prospects for a Monetary Union in the East Africa Community: Some Empirical Evidence

This paper examines generalised purchasing power parity (G-PPP) and business cycle synchronisation in the East Africa Community with the aim of assessing the prospects for a monetary union. The univariate fractional integration analysis shows that the individual series exhibit unit roots and are highly persistent. The fractional bivariate cointegration tests suggest that there exist bivariate fractional cointegrating relationships between the exchange rate of the Tanzanian shilling and those of the other EAC countries, and also between the exchange rates of the Rwandan franc, the Burundian franc and the Ugandan shilling. The Fractionally Cointegrated Vector AutoRegressive (FCVAR) results imply the existence of a single cointegrating relationship between the exchange rates of the EAC countries. On the whole, there is evidence in favour of G-PPP. In addition, there appears to be a high degree of business cycle synchronisation between these economies. On both grounds, one can argue that a monetary union should be feasible.     

An impact of economic integration through trade: on business cycles for 10 East Asian countries

Many recent studies about East Asian countries discussed “natural” economic integration through trade, but there are few rigorous empirical studies on how their economies were affected by the evolution of economic integration within the region. This paper investigates the effect of bilateral trade dependence on the co-movement of business cycles for 10 East Asian countries. We find that economic fluctuations tend to be more synchronized within the region as trade interdependence among them deepens. This finding suggests the necessity of cooperative efforts to prevent or adjust unfavorable future economic crisis in East Asia.