Purchasing Power Parity during Currency Crises: A Panel Unit Root Test under Structural Breaks

We investigate the stationarity of real exchange rates using a panel of Asian and South and Latin American countries by applying a new panel unit root test that is robust to structural breaks due to currency crises. It turns out that the long-run PPP relationship is relevant for the Asian countries, which experienced a flexible exchange rate, whereas for the South and Latin American countries, for which the exchange rate has been pegged to the U.S. dollar for a long time, the PPP relationship breaks down. In Asian countries PPP appears to hold before the 1997 crisis, which is not the case for the South and Latin American countries. This suggests that the Asian flu corresponds to a second-generation type of crises, whereas the 1995 Mexican tequila fits the first-generation models better. JEL no. C13, C33, E41     

Does China have an impact on foreign direct investment to Latin America?

We analyze empirically whether the emergence of China as a large recipient of FDI has affected the amount of FDI received by Latin American countries. Allowing for the structural break related to China's WTO accession, we found a significant negative impact of Chinese inward FDI on that of Mexico until 2001 and on that of Colombia after that date. The rest of Latin American countries do not seem to be affected by Chinese inward FDI. For the region as a whole, there is no significant Chinese effect on Latin America’s FDI.     

Using principal components to produce an economic and social development index: An application to Latin America and the U.S.

This paper presents a principal components methodology for determining the weights for a set of indicators in a composite index of development. The procedure is applied to a 36-variable data set consisting of 1990 data for 19 Latin American countries and corresponding 1960 and 1990 data for the individual U.S. states. This paper compares the results with other well-known indices and uses the combined data set to better understand the level and scope of development in each region and over time. The general results are that the level of development of Latin American countries in 1990 are roughly distributed over the U.S. states in 1960 (though with a larger range), and the structure of development in Latin America is similar to the U.S.     

Does foreign direct investment cause long run economic growth? Evidence from the Latin American and the Caribbean countries

The empirical evidence about the temporal precedence between foreign direct investment (FDI) and economic growth in open developing economies is mixed. In this research effort, we explored the FDI-growth nexus for 16 developing countries of Latin American and the Caribbean countries during the last three decades, a period in which many of these countries introduced various economic and financial reforms. As a departure from many previous studies, the current analysis uses the Granger noncausality test procedure recently developed by Toda and Yamamoto (J Econ 66:225–250, 1995), and Dolado and Lutkepohl (Econ Rev 15:369–386, 1996)–TYDL. Our results suggest that the null hypothesis that ‘FDI does not Granger cause economic growth’ is rejected for all countries except Dominican Republic, Trinidad and Tobago, and Jamaica. There is also evidence of unidirectional causality from growth to FDI for all countries except Bolivia, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador, Guatemala, and Jamaica. We found bidirectional causality for Argentina, Brazil, Mexico, Peru and Venezuela.     

Inward and outward foreign direct investment and poverty: East Asia vs. Latin America

Using panel data of 12 middle-income countries in East Asia as well as Latin America, this paper examines how openness in general and outward FDI in particular affects poverty. While economic growth and trade openness are found to be associated with lower poverty, both outward and inward FDI adversely affect the mean income of the poorest quintile of the population. The results hold in both regions, though the Latin American countries seem to be in a somewhat less favorable situation.     

The complementarity between U.S. foreign direct investment stock and trade

Within a gravity model framework, this paper will establish that trade and foreign direct investment (FDI) are complementary, using trade and FDI stock data on a bilateral basis between the U.S. and 51 other countries over the period 1982 to 1994. U.S. outward FDI is found to have a larger predicted impact on U.S. exports than does inward FDI. On the other hand, inward FDI is found to have a larger predicted impact on U.S. imports than does U.S. outward FDI. These results are directly linked to patterns of intrafirm trade within the multinational enterprise (MNE), a result consistent with the transactions cost theory of MNEs. In addition, a sectoral analysis indicates that U.S. outward FDI in manufacturing has a large predicted impact on both exports and imports, whereas U.S. outward FDI in services has a large predicted impact on U.S. exports but little or no predicted impact on imports. Detailed comments and suggestions were provided by Joe Daniels, Albert Berry, and seminar participants at the University of Toronto, York University, Industry Canada, and the 1999 annual Canadian Economics Association meeting. Research assistance was provided by George Georgopoulos and Anthony Yao. The authors are responsible for any remaining errors.     

Is China's FDI coming at the expense of other countries?

We analyze how China's emergence as a destination for foreign direct investment is affecting the ability of other countries to attract FDI, using an approach that accounts for the endogeneity of China's FDI. Results suggest that China's rapid growth and attractions as a destination for FDI also encourages FDI flows to other Asian countries, as if producers in these economies belong to a common supply chain. There is also evidence of FDI diversion from OECD recipients. We interpret this in terms of FDI motivated by the desire to produce close to the market where the final sale takes place. Firms more inclined to invest in China for this reason are correspondingly less inclined to invest in the OECD. A detailed analysis of Japanese foreign direct investment outflows disaggregated by sector further supports these conclusions. J. Japanese Int. Economies 21 (2) (2007) 153–172.     

The effects of regional trade agreements on FDI by its origin and type: Evidence from U.S. multinational enterprises activities

The effects of regional trade agreements (RTAs) on foreign direct investment (FDI) depend on both the origin and type of FDI. To estimate the various effects of RTAs, I differentiate between various types of FDI by using data on the sales destinations of foreign subsidiaries of U.S. multinational enterprises (MNEs), while also addressing the endogeneity of RTA formation. Consistent with the theory of MNEs, I find that RTAs reduce horizontal FDI from intra-RTA countries and increase export-platform and total FDI from extra-RTA countries. Moreover, the overall effects of RTAs are positive for extra-RTA FDI, but inconclusive for intra-RTA FDI. The results also support the effect of integrated markets’ economies of scale in inducing extra-RTA FDI.     

Is devaluation expansionary or contractionary: Evidence based on vector autoregression with sign restrictions

The purpose of the paper is to examine the impact of real exchange rate changes – real devaluation or real depreciation – on outputs in 16 countries that fall within one of the three groups: Latin American countries, Asian countries, and non-G3 developed countries. For the first time in the contractionary devaluation literature, the analysis is based on a Vector Autoregression (VAR) model with sign restrictions method by Uhlig (2005) and Fry and Pagan (2011). The exchange rate shock is identified by imposing restrictions on the signs of impulse responses for a small subset of variables. The findings are as follows: (1) whether output increases after a real devaluation or not has little to do with whether the current account improves or not; (2) Latin American countries are quite homogenous in that the current account generally improves while output decreases after real devaluation; and (3) contractionary devaluation could happen in developed countries as well as in developing countries.     

Foreign Direct Investment and Services Trade: Evidence from Malaysia and Singapore

Abstract

Services trade is an important source of growth in Malaysia and Singapore. Both economies are export-oriented and actively court foreign direct investment (FDI) to advance their economic objectives of industrialization and economic development. This paper examines the causal linkages between inward FDI and the country's engagement in services trade in bi-variate and tri-variate VAR frameworks. The empirical findings for Singapore show evidence of bi-directional causality between inward FDI and the total trade volume in services (i.e. the absolute sum of payments and receipts) as well as between FDI and services imports (in the tri-variate specification). This may reflect her relative open foreign investment policy and free trade regime in services. For Malaysia, the evidence of causality is weaker and uni-directional, from inward FDI to services imports. These findings are consistent with the different stages of economic development and openness attained by the two sample countries, and they provide useful background for trade and foreign investment policies and development strategies.     

Vertical foreign direct investment: Evidence from Japanese and U.S. multinational enterprises

Foreign direct investment (FDI) in developing countries has increased since the 1990s, but there is mixed evidence of vertical FDI associated with factor-seeking motives. This paper estimates the vertical motive of offshore production by multinational enterprises (MNEs) by exploiting past schooling characteristics as instruments for skilled-labor abundance in a host country. Using panel data on Japanese and U.S. MNEs in the 1990s, I find that skilled-labor abundance has a significantly negative impact on sales of manufacturing foreign affiliate only for Japanese MNEs. The results suggest that vertical FDI activity was more prevalent in Japanese MNEs than U.S. MNEs. A plausible explanation is that Japanese MNEs might be more vertically integrated with their offshore production than U.S. MNEs. A difference in foreign outsourcing activities could generate the observed deviation between Japanese and U.S. MNEs.     

部分拉美国家人均GDP5000美元时经济社会发展的特征及启示

继上海、北京、天津、浙江等省市后,今后一个阶段我国将有更多的省市跨越人均GDP 5000美元关口。发展经济学认为,一国人均GDP超过5000美元则经济呈加速成长。但部分拉美国家在人均GDP突破5000美元后,经济发展出现大幅振荡,长期原地踏步。笔者总结了部分拉美国家在人均GDP 5000美元左右的经济发展特征,分析了经济社会问题及产生原因,总结提出了我国人均GDP 5000美元后经济社会发展的几点启示。     

The monetarist explanation of inflation: The experience of six Asian countries

Studies on inflation, employing the Harberger-type monetarist model, have focused almost entirely on the hogh inflation experiences, usually those of Latin American countries. This model is applied here to the six Asian countries, which contain low and moderate inflation cases. The empirical results show that the growth of money stock was not the primary source of inflation in these countries. The failure of the monetarist model to explain the behavior of prices in Asian countries may be due (1) partly to the monetization of these economies which makes the growth of money stock endogenous, and (2) partly to its rigid specification which excludes the impact of the various domestic and external cost pressures. To test the validity of the latter proposition, the monetarist model is augmented by the inclusion of import prices which are widely alleged to have intensified inflationary pressures. The empirical results do indeed provide support for this view. As regards monetary policy the findings of this paper suggest that monetary discipline may be, by and large, ineffective in controlling inflation in moderate inflation countries.     

How Does Corruption Influence the Effect of Foreign Direct Investment on Economic Growth?

Abstract

We investigate the effect of foreign direct investment (FDI) on economic growth in 130 countries from 1995 to 2008, considering the role of corruption in each country as an absorptive factor. The estimation results indicate that although FDI alone does not promote economic growth, it has a significant effect on economic growth if the interaction term between FDI and corruption is considered. Specifically, FDI has a positive impact on economic growth when corruption is severe, but a negative impact if corruption is below a certain threshold.     

The Determinants and Motivations of China's Outward Foreign Direct Investment: A Spatial Gravity Model Approach

Abstract

The study attempts to investigate the features and determinants of China's outward foreign direct investment (OFDI) into 138 countries and Chinese firms' investment strategies over the 2003–2009 period using an augmented gravity model with spatial linkages. The respective evaluations of China's OFDI are indicative of the important role played by non-financial OFDI. At the same time, Chinese firms prefer to invest in high-tech industries in developed countries while also focusing on the extraction of natural resources around the world. The empirical findings show that the host country's economic size has a significantly positive effect in terms of promoting Chinese OFDI. Chinese firms favour a complex-vertical platform in the developed countries while they prefer a market potential foreign direct investment (FDI) surrounding the host developing countries and an export-platform FDI in the petroleum exporting countries based on the surrounding market potential effect and spatial effect. The fuel extraction motive plays a key role in China's OFDI in line with the realities of Chinese FDI strategies in recent years.     

Currency Substitution and the Stability of the Demand for Money in East Asia

Abstract

This paper models and tests the stability of the demand for money in five East Asian countries—Indonesia, Malaysia, Philippines, Singapore, and Thailand—in the context of an open economy. The Johansen multivariate cointegration vector error correction analysis against quarterly data covering the period 1985:1–2001:4 was used. It was found that a stationary long run cointegrating relationship exists between broad money, real income, domestic interest rates, foreign interest rates corrected for exchange rate depreciation, and the expected rate of depreciation of the exchange rate. The results show that US Treasury bills rates and the foreign exchange rate vis-à-vis the US dollar play a significant role in the East Asian countries money demand relationship. This suggests that currency substitution vis-à-vis the US dollar may be an important consideration in the design and implementation of monetary policy in the East Asian countries. Furthermore, the results show that the Asian currency crises impacted the money demand functions negatively in these countries. CUSUM and CUSUMSQ stability tests show no evidence of parameter instability of the money demand functions in three of the five countries throughout the period under investigation.     

The delicate balance for jointly pursuing economic growth in Latin America and China

This paper examines the sources of economic growth for a group of Latin American countries in relation to their export performance in China. The analytical framework is based on an extended normalized quadratic profit function. The ensuing econometric results confirm that a favorable export record with China represents a positive source of growth for Latin America. However, it also creates long-run dependability conditions in terms of reduced prices and thinner profits that weaken its growth capacity. Latin American countries must seek product diversification away from their current commodity base and aggressively climb up the value chain to remain competitive worldwide.

Managerial Relevance: identify the sources of economic growth for a group of Latin American countries in relation to their export performance in China; the weakness of this economic growth model; how to seek product diversification away from their current commodity base with emphasis on value chain.     

Optimal Pegs for East Asian Currencies

It has been evidenced that the U.S. dollar is prominent in the exchange rate regimes of Asian countries. This paper shows that the relative stability of Asian exchange rates against the U.S. dollar until the 1997 crisis is not accounted for by the theory of optimum currency areas, in contradiction to the situation in Europe vis-à-vis the deutsche mark. An alternative framework is proposed where the absence of a yen bloc is explained by the mismatch between the country distribution of trade and the currency distribution of the debt. It is shown that the lack of cooperation makes Asian countries underweight the yen in their implicit basket pegs.J. Japan. Int. Econ., March 1999,13(1), pp. 44–60. University of Lille 2 (CADRE) and CEPII, 9 rue G. Pitard, 75015 Paris, France.Copyright 1999 Academic Press.Journal of Economic LiteratureClassification Numbers: F31, F33, F36.     

Glass Ceilings versus Sticky Floors: Evidence from Southeast Asia and an International Update

Using counterfactual decompositions combined with quantile regression, we investigate the pattern of gender wage differentials in Asian and Latin American countries and combine the findings with existing evidence for European and other mostly developed countries. While in the group of Latin American countries glass ceilings are prevalent, no clear evidence of glass ceilings is found in the group of Asian countries where, generally, sticky floors or a mixed pattern is the norm. The findings are robust with as well as without occupation controls. In addition, analysis by sector points to glass ceilings in the public sector in most countries, while in the private sector the patterns vary. Combining the new evidence from the present study with existing evidence (in total we consider 60 countries), a comprehensive global picture of gender wage differentials is provided. Possible explanations for differences in patterns of gender wage differentials are discussed.     

A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation

Several alternative measures of “effective” exchange rates are discussed in the context of their theoretical underpinnings and construction. Focusing on contemporary indices and recently-developed econometric methods, the empirical characteristics of these differing series are examined for the U.S., the euro area, and several East Asian countries. The issues that confront the applied economist or policymaker in using the measures of real effective exchange rates available are illustrated in several case studies from current interest: (i) evaluating exchange rate misalignment; (ii) testing the Balassa-Samuelson effect; (iii) estimating the price responsiveness of trade flows; and (iv) assessing the potential impact of competitive devaluations. JEL Classification Numbers: F31, F41