Residential rents and price rigidity: Micro structure and macro consequences

Why was the Japanese consumer price index for rents so stable even during the period of the housing bubble in the 1980s? To address this question, we use a unique micro price dataset which we have compiled from individual listings (or transactions) in a widely circulated real estate advertisement magazine. This dataset contains more than 700,000 listings of housing rents over the last 20 years. We start from the analysis of microeconomic rigidity and then investigate its implications for aggregate price dynamics, closely following the empirical strategy proposed by Caballero (Caballero and Engel, 2007). We find that 90% of the units in our dataset had no change in rents per year, indicating that rent stickiness is three times as high as in the United States. We also find that the probability of rent adjustment depends little on the deviation of the actual rent from its target level, suggesting that rent adjustments are not state-dependent but time-dependent. These two results indicate that both the intensive and extensive margins of rent adjustments are small, resulting in a slow response of the CPI for rent to aggregate shocks. We show that the CPI inflation rate would have been higher by 1% point during the bubble period, and lower by more than 1% point during the period following the burst of the bubble, if Japanese housing rents were as flexible as those in the United States.     

Exchange Rate Pass-Through: Evidence Based on Vector Autoregression with Sign Restrictions

We estimate exchange rate pass-through (PT) into import, producer and consumer price indexes for nine OECD countries, using a method proposed by Uhlig (2005). In a Vector Autoregression (VAR) model, we identify the exchange rate shock by imposing restrictions on the signs of impulse responses for a small subset of variables. These restrictions are consistent with a large class of theoretical models and previous empirical findings. We find that exchange rate PT is less than one at both short and long horizons. Among three price indexes, exchange rate PT is greatest for import price index and smallest for consumer price index. In addition, greater exchange rate PT is found in an economy which has a smaller size, higher import share, more persistent exchange rate, more volatile monetary policy, higher inflation rate, and less volatile aggregate demand.     

The Relevance of the Monetary Model for the Euro / USD Exchange Rate Determination: a Long Run Perspective

This study tries to fill a vacuum in the literature on the relevance of economic fundamentals for the Euro / USD exchange rate determination. We adopt the Monetary Model for the Exchange Rate Determination as our testing vehicle and investigate the relevance of various versions of this model over a long time horizon, spanning the period from the inception of Euro till the present time. We rely on cointegration analysis to conduct our empirical research and in accordance to the relevant literature we fail to accept most of the variants of this model. However, we get encouraging results from an expanded version of the Monetary Model where demand and productivity factors appear in the set of the exchange rate determinants.     

基于超调模型和虚拟经济视角的汇率动态分析

汇率决定及其动态调整分析是汇率理论的研究内核。文章以汇率超调模型为基础,突出虚拟经济与实体经济双轮驱动及其与宏观经济总供给和总需求关联运行的作用机理,结合非线性宏观金融理论在货币供需分析中引入可交易金融资产,尝试构建新的分析框架。在虚拟经济与实体经济视角下分析美元名义汇率的动态变化,并以此为基础进行实证研究,考察美元汇率及经济失调。     

Industry-specific Real Effective Exchange Rate for China： 2000-2009

This paper measures the industry-specific real effective exchange rate （REER） for China by matching domestic and foreign industry-level price and trade data series. We find that after 2005 the REER appreciates more in the ＂chemical, plastics, rubber and fuels industry＂ and the ＂＇machinery and equipment industry,＂ but remains roughly constant or even depreciates in other industries. The nominal exchange rate generally accounts for over 50 percent of the aggregate real effective exchange rate JTuetuations, but this conclusion does not apply to three of nine industries. We apply the industry-specific REER to re-examine the relationship between the exchange rate and trade, and find that the industry-specific REER index performs better than the traditional aggregate REER index. We recommend that the Chinese Government officially adopt industry-specific exchange rates instead of using the aggregate effective exchange rates to evaluate the competitiveness of Chinese industries in the international market.     

China's economic development: does exchange rate and FDI nexus matter?

This study aims to investigate the relationship between China's exchange rate, foreign direct investment (FDI) inflows, and economic development. We applied the bound testing approach on aggregate level data from 1981 to 2013. The results showed that the Chinese economy benefitted from a lower exchange rate over this period, and that there was a direct link between FDI inflows and economic development on an aggregate level both in the long and short run. The results of the Granger causality test identified a long‐ and short‐run association among these variables. The GMM estimations with dummies for financial crises and RMB exchange rate policy fluctuations also confirmed the growth enhancing impact of the exchange rate and FDI inflows. To promote sustainable economic development in the future, China should focus on improving the levels of domestic investment and human capital, as well as supervising the level of openness and capital controls.     

Japanese foreign direct investment and regional trade

We examine the relationship between Japanese FDI outflows, domestic and foreign fixed investment, and the exchange rate. The results indicate that aggregate FDI outflows have been driven by investment in Japan and the exchange rate, while the geographic distribution of such investment has been influenced by foreign economic conditions. We also find that FDI outflows have a temporary impact on exports but a permanent effect on imports. We find no evidence that behavior with respect to East Asia differs from that with respect to North America or Europe.     

Chinese exchange rate and price effects on G3 import prices

This paper explores the degree of price and exchange rate interdependence between China and the G3 (US, Japan and the Euro-zone) by undertaking a VAR based shock analysis. A GARCH framework is also employed to derive the conditional variances to uncover the extent of volatility transmission. We address two key issues. First as there have been concerns about low value-added cheap Chinese goods flooding G3 markets, we attempt to measure the impact of Chinese prices on G3 import prices. Second, we focus on the transmission of exchange rate shocks – a subject which we approach by examining shocks in China's bilateral exchange rate with each of these major trading partners (the US, Japan and the Euro Area). Our results indicate that reduced import prices from China are the channel through which aggregate domestic prices in the G3 remain depressed, while the impact of the RMB exchange rate with G3 currencies appears less powerful. This finding implies that the Chinese authorities’ RMB exchange rate policy is relatively unimportant and, in particular, that a revaluation of the RMB would not do much to reduce the US trade deficit. In terms of volatility spillover, the relatively flexible RMB exchange rate against the Euro results in RMB-EUR volatility having a stronger influence than the more tightly controlled RMB-USD rate on the volatility of Chinese export prices.     

The Political Economy of Exchange Rate Regimes: Evidence from Hong Kong and Taiwan

This paper investigates whether the macroeconomic performance of a small- open economy depends on the choice of exchange rate regimes. Hong Kong and Taiwan - two economies with many similar macroeconomic characteristics, but different in their choices of exchange rate regimes - provide a good setting to study the relation between the choice of exchange rate regime and macro-economic performance. We examine the basic facts of growth and inflation and the coefficients' stability of their vector autoregression (VAR), as well as cyclical characters of other aggregate variables in Hong Kong and Taiwan. Our empiric finding indicates that macroeconomic performance is not systematically related to exchange rate regimes.     

PURCHASING POWER PARITY WITH RANK TESTS FOR NONLINEAR COINTEGRATION IN AFRICAN COUNTRIES

This study applies nonlinear cointegration to assess exchange rates with the corresponding relative prices and aggregate price levels for 20 African countries. We find that a nonparametric rank test has higher power than parametric testing procedures; a true data‐generating process of exchange rate is in fact a stationary nonlinear process. We examine the validity of purchasing power parity (PPP) from the nonparametric nonlinear point of view and provide robust evidence that clearly indicates PPP holds true for these countries. Hence, the long‐run African countries exchange rate adjustments are in equilibrium with the relevant fundamentals as suggested by the PPP hypothesis in a nonlinear way.     

Price convergence in the EU—an aggregate and disaggregate approach

This article examines the price dispersion in the European Union (EU) over 15 years (1990–2005). An extensive overview of the literature offers inconclusive results with the half-lives of price shocks from 2.8 to 282 months. Until now, most of the empirical research has been either micro or macro based. In contrast, we conducted a complex analysis utilizing both aggregate and disaggregate price data. The macro approach is based on a Comparative Price Level index calculated as the ratio between PPPs and exchange rate. The disaggregate analysis utilizes the actual prices of almost 150 individual products sold in the 15 capital cities of the EU. We conducted sigma and beta convergence in the analysis of both datasets. There are several differences in results depending on whether the calculation was based on indices or actual prices. Additionally, the model is tested to measure the contribution of different factors in explaining the observed convergence pattern. Most of the explanatory power comes from the differences in GDP (or wages), exchange rate volatility and differences in taxes. The Euro effect when controlling for exchange rate volatility, is not significant.     

Bubble into reallocation: How bubbles improve capital allocation in China

This paper develops a theoretical framework to shed lights on the relations between the segmented financial market and the housing bubble in China. In our framework, capital misallocation across firms plays a central role. The segmented financial market causes discrimination against private enterprises and favoritism to state-owned firms. This biased financial system not only gives rise to capital misallocation across firms but also significantly pushes down the equilibrium interest rate in the formal financial market. The overly low interest rate in the formal financial market causes a rational bubble in a dynamically efficient economy. More importantly, the bubble improves capital allocation across firms by crowding out inefficient investment in the state-owned sector. Despite the role of improving capital allocation, bubbles may still reduce welfare by crowding out aggregate capital.     

Can We Still Lean Against the Wind?

In an overlapping generations model without financial frictions, Gali (Am Econ Rev 104(3):721–752, 2014) observed that a ‘leaning against the wind’ monetary policy is likely to aggravate the fluctuations in the bubble. He found that optimal monetary policy in such an economy must strike a balance between stabilization of the bubble and stabilization of aggregate demand. This paper extends Gali (Am Econ Rev 104(3):721–752, 2014)’s model by introducing various financial frictions in the bubbly economy with a Samuelson 2-period overlapping agents and examine how ‘leaning against the wind’ macro-prudential policies like capital adequacy affect the size and volatility of bubble, inflation and aggregate demand. While the results of the model with financial frictions vindicate Gali (Am Econ Rev 104(3):721–752, 2014) that a leaning against the wind monetary policy generates a larger volatility in the bubble than a policy of benign neglect, the paper finds that minimisation of bubble volatility requires an active macro-prudential policy. It is also observed that stronger interest rate response of monetary policy to the bubble necessitates a stronger macroprudential response possibly to absorb the excess volatility generated by the monetary policy. However, the paper also finds that tightening macroprudential policy parameter beyond a threshold value may encourage banks to take more risks and increase credit supply, aggravating the bubble in the process. With respect to macroprudential policy, there is no conflict between stabilization of current aggregate demand and stabilization of future aggregate demand and both call for a strong macroprudential response, at least until the macroprudential parameter attains the threshold value, although the conflict between the two objectives persists with respect to monetary policy as in Gali (Am Econ Rev 104(3):721–752, 2014). Empirical verification of the provisioning cost channel through structural vector autoregression confirm that a positive provisions shock can contract asset bubbles by restricting credit, output and a delayed marginal response of interest rate spreads.     

Exchange rates and the trade balance: the case of Singapore 1970 to 1996

The purpose of this paper is to examine the relationship between the real trade balance and the real exchange rate for bilateral trade in merchandise goods between Singapore and the USA on a quarterly basis over the period 1970 to 1996 using the partial reduced form model of Rose and Yellen (1989). We also hope to shed further light on what has become known as the ‘Singapore export puzzle’: the observation that, despite periods of rapid nominal and real appreciation of the Singapore dollar, export growth in aggregate has remained buoyant.Our findings suggest that the real exchange rate does not have a significant impact on the real bilateral trade balance for Singapore and the USA, thus confirming previous work which finds a weak relationship between changes in the exchange rate and changes in export and import prices and volumes for Singapore. We also found little evidence of a J-curve effect. Although positive coefficients linking real exports with lagged values of the real exchange rate might be indicative of ‘small country’ pricing by exporters in U.S. dollars, it is not clear that this is masking J-curve effects from an initial rise in import values as the home currency depreciates.     

How well can monetary factors explain the exchange rate of the euro?

This paper uses different versions of the monetary approach to the exchange rate in order to investigate how well this approach can explain the nominal exchange rate of the euro vis-à-vis six currencies during the recent past. It studies the period 1980–2003 and uses data on the euro for the period since the euro was launched and values for the synthetic euro for the period preceding European Monetary Union. The results of the estimation are mixed. While they suggest that a long-run relationship between the variables included in the monetary model exists for five out of six currencies, the individual countries studied seem to support different versions of the model.     

An empirical study on the hysteresis of currency substitution in Cambodia

This paper examines whether the currency substitution (CS) phenomenon in Cambodia is in a hysteresis state. We employ a simple model of money-in-the-utility function with two currencies (home and foreign), in which the effect of network externalities on the use of foreign currency is taken into account. The equation derived from the model is estimated using the autoregressive distributed lag approach to cointegration for the period from June 1993 to June 2009. Our estimation results indicate that (1) there exists a stable, long-run relationship among the variables considered, (2) the CS ratio increases when people expect a higher rate of depreciation in the exchange rate, and most importantly, (3) there is evidence supporting the existence of a network externality, thereby implying the hysteresis of the CS phenomenon in Cambodia. Given the characteristics of the CS process in Cambodia, any measure or policy option to bring down the CS degree must be carefully considered.     

Monetary policy of the Bank of Japan—inflation target versus exchange rate target

This paper reviews the empirical evidence on the monetary policy of the Bank of Japan (BOJ). The main findings confirm [McKinnon, R., Ohno, K., Dollar and Yen, Resolving Economic Conflict between the United States and Japan. MIT Press, Cambridge, MA, USA, 1997] thesis that the BOJ has tried to stabilize exchange rate. The interest rate is counter-cyclical to the exchange rate and the coefficient of inflation, which is not weakly exogenous, is significantly smaller than 1. Impulse response analysis confirms the BOJ’s sensitivity not only to inflation and output gap but also to exchange rate. Finally, historical decomposition reveals a major role for exchange rate in explaining cyclical patterns of the interest rate, especially during the bubble period.     

Unemployment in Latin America and the Caribbean

This study constructs a new data set on unemployment rates in Latin America and the Caribbean and then explores the determinants of unemployment. We compare different countries, finding that unemployment is influenced by the size of the rural population and that the effects of government regulations are generally weak. We also examine large, persistent increases in unemployment over time, finding that they are caused by contractions in aggregate demand. These demand contractions result from either disinflationary monetary policy or the defense of an exchange-rate peg in the face of capital flight. Our evidence supports hysteresis theories in which short-run changes in unemployment influence the natural rate.     

IMPLICATIONS OF REAL EXCHANGE RATE MISALIGNMENT IN DEVELOPING COUNTRIES: THEORY,EMPIRICAL EVIDENCE AND APPLICATION TO GROWTH PERFORMANCE IN ZIMBABWE

The influence of exchange rate signals in an economy is very powerful and often pervasive. Moreover, sustained real exchange rate overvaluation will, by distorting resource allocation away from productive activities, eventually lead to drastic adjustments of relative prices and reduction of aggregate economic growth. However, the direct theoretical and empirical link between exchange rate misalignment and macroeconomic indicators still remains to be fully understood. Nonetheless, empirical studies continue to make attempts to understand this relationship by exploring relationships that incorporate different measures of exchange rate misalignment in traditional growth regression models. Based on a behavioural equilibrium exchange rate derived measure exchange rate misalignment, this paper presents an empirical analysis of the relationship between real gross domestic product growth and real exchange rate misalignment for Zimbabwe. After controlling for other structural and policy variables, the main findings demonstrate that exchange rate misalignment exerts a negative and highly statistically significant impact on growth. Overall, the results lend support to the hypothesis that chronic real exchange rate overvaluation was a key fundamental behind the post‐2000 economic growth contraction in Zimbabwe.     

An SVAR Approach to Evaluation of Monetary Policy in India: Solution to the Exchange Rate Puzzles in an Open Economy

Following the exchange-rate paper by Kim and Roubini (J Monet Econ 45(3):561–586, 2000), we revisit the questions on monetary policy, exchange rate delayed overshooting, the inflationary puzzle, and the weak monetary transmission mechanism; but we do so for the open Indian economy. We further incorporate a superior monetary measure, the aggregation-theoretic Divisia monetary aggregate. Our paper confirms the efficacy of the Kim and Roubini (J Monet Econ 45(3):561–586, 2000) contemporaneous restriction, customized for the Indian economy, especially when compared with recursive structure, which is damaged by the price puzzle and the exchange rate puzzle. The importance of incorporating correctly measured money into the exchange rate model is illustrated, when we compare models with no-money, simple-sum monetary measures, and Divisia monetary measures. Our results are confirmed in terms of impulse response, variance decomposition analysis, and out-of-sample forecasting. In addition, we do a flip-flop variance decomposition analysis, finding two important phenomena in the Indian economy: (i) the existence of a weak link between the nominal-policy variable and real-economic activity, and (ii) the use of inflation-targeting as a primary goal of the Indian monetary authority. These two main results are robust, holding across different time period, dissimilar monetary aggregates, and diverse exogenous model designs.