Do international investment income flows smooth income?

Do International Investment Income Flows Smooth Income? — One mechanism by which international capital market integration can smooth consumption is to stabilize national income. In order to provide income smoothing, net international investment income should negatively co-vary with GDP. Moreover, to maximize stabilization of GNP in the face of GDP fluctuations, the yield on foreign assets should move countercyclically and the yield on foreign liabilities procyclically. In both time series and panel settings, we reject these hypotheses, suggesting that positive gross international investment income positions are not associated with income smoothing at businesscycle frequencies.     

Does exchange rate volatility deter Japan-China trade? Evidence from pre- and post-exchange rate reform in China

This paper is an empirical investigation of the effect of RMB-JPY volatility on Japan-China trade with a special emphasis on the impacts of the reform of the RMB exchange rate regime implemented on July 21, 2005. We estimated two types of volatility measures (one based on the ARCH model and the other the usual standard deviation) utilizing daily data from Jan. 2002 through Dec. 2011 and examined both short-run and long-run effects of this volatility on exports of each country to the other with an ARDL approach. The results indicate that Japan's exports to China are not affected by the exchange rate volatility, but China's exports to Japan are negatively influenced during the reform period. Furthermore, the level of the exchange rate has no influence on Japanese exports, but it has a significant impact on Chinese exports. This asymmetric result may be due to differences in the depth of financial markets and in the maturity of exporters of the two countries.     

Were capital flows the culprit in the Weimar economic crisis?

This paper examines the role of capital flows in the interwar German economy. We use a calibrated model of sudden stops as our analytical framework and derive four key findings. First, capital flows aggravated the boom–bust cycle of the Weimar economy. Second, these flows were strongly associated—during different periods—with reparations, conditions in the US capital market, and German domestic events. Third, capital flows before 1930 allowed Germany to pay reparations on credit and thus postponed the hour of reckoning when that debt had to be serviced using trade surpluses. Fourth, the German economic downturn in 1931 was due more to capital flows than to productivity shocks or reparations.     

Do contagion effects exist in capital flow volatility?

The cross-border transmission of a financial shock has been a subject of rich literature. While a large number of studies have focused on the phenomenon of strong co-movements of asset prices and capital flows in the event of financial stress, very few discussed the contagion or spillover effects in terms of capital flow volatility. This paper is one of the first attempts to assess, empirically, whether or not there is a global and regional spillover effect in the volatility of capital flows to emerging and developing countries. Based on the sample of 49 emerging and developing countries for the period 1980–2009, the empirical results suggest strong and significant contagion effects in the volatility of capital flows to individual economies. The magnitudes of contagion vary depending on the type of capital flows, whether it is foreign direct investment (FDI) or portfolio and other investment (mostly bank lending). The findings also suggest the volatility dynamics of gross flows is different from that of net flows. The volatility of net inflows is more exposed to intra-regional contagion compared to that of gross inflows.     

Does local governments’ budget deficit push up housing prices in China?

Budget deficit has been a common fiscal pressure facing Chinese cities since the 1994 fiscal reform. Meanwhile, land lease sales have become a significant off-budgetary revenue to local governments since 2003. This paper investigates whether financing budget deficit is an important driving force of the recent soaring housing prices when local governments function as the monopoly supplier of urban land. A conceptual framework is developed to illustrate a transmission mechanism from budget deficit to housing prices. This leads to an empirical model consisting of two simultaneous structural equations for housing prices and land prices. Using data for the 35 major Chinese cities from 2003 to 2011, an empirical exercise shows that although budget deficit has a positive effect on land prices, it is the factors from demand side, such as amenities, income and the user cost of housing capital, that have been pulling up the housing prices.     

Newton’s gravity law and import prices in the Asia Pacific

This paper investigates the proposition that an exchange rate depreciation will cause import prices to rise by more than the same magnitude appreciation which will cause them to fall. This asymmetry proposition is undertaken for 8 countries across the Asia Pacific using the Johansen and Engle and Granger procedures. The results show that six out of seven countries cannot reject the hypothesis of asymmetry. It is also found that one estimate each exhibits absolute PPP, complete asymmetric pass-through and partial symmetric pass-through. Partial asymmetric pass-through occurs in nine cases, and two cases exhibit explosive asymmetric pass-through. Malaysia lacked a co-integrating vector.     

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.     

Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?

This paper revisits the comparison of the effects of inflation targeters versus hard fixers and intermediate exchange rate regimes. In particular, we are interested in exploring the impact of inflation targeting (IT) on real effective exchange rate (REER) volatility for a panel of 62 developing countries over the period 2006–2012. We also analyze the impact of IT regimes on REER in terms of its two component parts, i.e. relative tradable prices across countries as well as sectoral prices of tradables and nontradables within countries. The paper accounts for self-selection concerns regarding policy adoption and examines the effects of commodity exports and foreign exchange intervention. Notably, IT regimes seem to have experienced greater REER volatility, largely driven by external prices in developed countries. For developing countries, IT regimes show no difference in REER volatility, though there is some evidence that they have lower volatility in internal prices.     

Do bank loans and local amenities explain Chinese urban house prices?

Based on Chinese city-level data from 1999 to 2012 and controlling for geological, environmental, and social diversity, our multi-step estimation suggests that credit plays a significant role in driving up house prices after the Great Recession, whereas property prices only influence bank lending before 2008. Local amenities such as higher education, green infrastructure, healthcare, and climate also positively affect house prices. Moreover, the impacts of bank loans on housing prices tend to be related to the level of amenities, suggesting that pooling macroeconomic and urban economic data may be important for housing market research in the future.     

Do house prices play a role in unconventional monetary policy transmission in Japan?

This study comprehensively analyzes the role of house prices in the transmission mechanism of unconventional monetary policy (UMP) in Japan using structural vector autoregression models. The empirical results show that house prices are significantly affected by UMP shocks, and fluctuations in house prices considerably affect macroeconomic variables. With a set of robustness checks and extensions, the findings indicate that house prices provide important channels for UMP transmission.     

Sowing the seeds for the subprime crisis: does global liquidity matter for housing and other asset prices?

We assess the relationship between global liquidity and two important classes of asset prices on a global scale. For this purpose, we estimate a variety of VAR models for the global economy using aggregated data which represent the major OECD countries. According to the impulse responses obtained a positive shock to global liquidity raises the global house price index and later on via commodity prices also the global GDP deflator to the same extent. Hence, we conclude that there are subsequent spill-over effects from house prices to the overall price level. However, we are not able to find any empirical evidence in favor of the hypothesis that stock prices significantly react to changes in global liquidity.

Does international trade competition influence candidates and voters? The case of Japanese Lower House elections

In this study, we explore the effects of regional exposure to manufacturing imports and exports on candidates and voters in national elections through panel data analyses, dealing with the possible endogeneity issues. We show that candidates tailor their stances toward trade policy in response to changes in local trade exposure. Increased manufacturing exports drive candidates to support relatively open trade policies; however, increased manufacturing imports do not influence candidates’ stances on trade policy. We also find that changes in local trade exposure influence citizens’ voting behavior. In districts with increased exports of manufacturing products, voters tend to cast ballots for parties that pledge to promote a free trade agreement as opposed to those that adopt a cautious attitude toward it. In districts that experience increased imports of manufacturing products, voters tend to support parties that are clearly opposed to establishing it. The economic issues related to international trade appear to be important to both candidates and voters in elections.     

Nonlinear dependence in exchange rate returns: How do emerging Asian currencies compare with major currencies?

This paper provides a comparative review of the dynamic characteristics of monthly exchange rate changes for five major currencies relative to those of five emerging Asian economies over the last four decades. Using the British pound sterling as the numeraire currency, the data support nonlinear dependence in exchange rates for the less-liquid Asian currencies, while results for the major currencies are mixed. The more recent data indicate rejection of nonlinear dependence in major currencies.     

Exchange rate volatility and ASEAN-4’s trade flows: is there a third country effect?

This paper investigates the impact of exchange rate volatility on the trade flows among ASEAN-4 countries (Indonesia, Malaysia, Singapore and Thailand) as well as to their five main trading partners. External volatility is included in the models to study the ‘third country’ effect on the trade flows. We employ annual import and export data over the period of 1980–2012. The results from the bounds testing approach to cointegration and error-correction model reveal that the real exchange rate volatility does play a significant role in 15 export and four import models in short-run and long-run. Moreover, in both import and export models, the effects of exchange rate volatility on trade flows are negative rather than positive. Finally, the effects of volatility from the ASEAN-4’s currency/yuan rate dominate the third country effect on the ASEAN-4’s trade.     

Do flexible exchange rates facilitate external adjustment? A dynamic approach with time-varying and asymmetric volatility

This paper revisits the claim that flexible exchange rates facilitate external adjustment. While previous studies have used exchange rate regime as a proxy for exchange rate flexibility, in this study there is evidence of ARCH effects in exchange rate, and thus GARCH models are employed to estimate volatility. A dynamic panel data model is then specified, and the Arellano-Bond estimator and the Blundell-Bond estimator are employed to estimate the effect of exchange rate flexibility on the speed of adjustment of current account in a panel of 28 emerging and developing economies. There is robust evidence that flexible exchange rates indeed facilitate smoother adjustment of current account imbalances.     

What Do Deviations from Covered Interest Parity and Higher FX Hedging Costs Mean for Asia?

Open Economies Review - Asian countries have high demand for US dollars and are sensitive to US dollar funding costs. An important, but often overlooked, component of these costs is the basis...     

Is an Optimum Currency Area Feasible in East and South East Asia?

Abstract

In the backdrop of the recent economic crisis in the European Union, this study attempts to assess the degree of regional integration and the suitability of a monetary union in the East and South-East Asian (ESEA) region. For this purpose, we analyse the issue in a variety of ways. First, a long-run linkage of real output of the countries is tested using the cointegration analysis. Results suggest that real output of most of the countries in the region is cointegrated and move together in the long-run. To analyse the issue in detail, we focus on the impact of three different shocks, namely global, regional and country-specific, on real output of the countries. Results of impulse response and variance decomposition analysis reveal that regional shocks do not dominate in the sample countries, which is an indication of unfavourable condition to form an optimal currency area (OCA) in the region. These results are further confirmed by the outcome of computation of the modified Bayoumi and Eichengreen's Indices. Finally, we employ the concept of Generalized Purchasing Power Parity (G-PPP), which however reveals that the bilateral real exchange rate of ESEA countries move together in the long-run and share a common stochastic trend, which in turn provides some empirical support for an OCA in the region.     

Do International Sanctions Reduce Household and Government Consumption in Developing Countries?

This paper uses a panel of 30 developing countries over the 1996-2015 period to study the effect that international sanctions have on household and government consumption in target countries. I use a broad set of sanctions covering different aspects of sanctions. The panel model estimates show that sanctions have heterogeneous effect on household and government consumption. Household consumption responds significantly negative to noneconomic sanctions. Government consumption, in contrast, is negatively associated with intensity of sanctions, economic sanctions, plurilaterial sanctions, EU sanctions and U.S. sanctions. Disaggregating government consumption reveals that the intensity of sanctions increases government expenditure on subsidies and transfers, while government expenditure on goods and services is not correlated with sanctions. With regard to health outcomes, there is no clear evidence that sanctions are significantly associated with either life expectancy or infant mortality in target countries.     

Do exchange rate changes have symmetric or asymmetric effects on the trade balance? Evidence from U.S.–Korea commodity trade

Previous studies of the effects of exchange rate changes on Korea’s trade balance have assumed symmetry between currency depreciation and appreciation. In this paper, we distinguish between the two to show that the effects at the industry level are in fact asymmetrical in most industries for Korea’s bilateral trade with the U.S. We employ an auto-regressive distributed lag (ARDL) approach using quarterly data for the period 1989–2014 for the 79 3-digit industries in which trade between Korea and the U.S. took place. Overall, our model incorporating differentiated responses for appreciation versus depreciation reveals a more significant impact of the exchange rate on commodity trade between Korea and the U.S. than a more standard model that imposes symmetry.