Twin deficit or twin divergence? Fiscal policy, current account, and real exchange rate in the U.S.

In spite of concerns about “twin deficits” (fiscal and the current account deficits) for the United States economy, empirical evidence suggests that “twin divergence” is a more usual feature of the historical data, i.e., when fiscal accounts worsen, the current account improves and vice versa. This paper empirically studies the effects of fiscal policy (government budget deficit shocks) on the current account and the real exchange rate, during the flexible exchange rate regime period. Based on VAR (Vector Auto-Regression) models, we identified “exogenous” fiscal policy shocks after controlling for business cycle effects on fiscal balances. In contrast to the predictions of most theoretical models, the U.S. results suggest that an expansionary fiscal policy shock, or a government budget deficit shock, improve the current account and depreciate the real exchange rate. Increases in private savings and declines in investment contribute to the current account improvement while a nominal exchange rate depreciation, as opposed to a relative price level change, is mainly responsible for the real exchange rate depreciation. The “twin divergence” of fiscal balances and current account balances is also explained by the prevalence of output shocks, i.e. output shocks — more than fiscal shocks — appear to drive the co-movements of the current account and the fiscal balance.     

The Impact of Capital Inflows on Asset Prices in Emerging Asian Economies: Is Too Much Money Chasing Too Little Good?

In recent years, emerging Asian economies have experienced (i) large capital inflows, especially a surge in portfolio inflows, and (ii) an appreciation of asset prices such as stocks, land, and nominal and real exchange rates. We empirically investigate the effects of capital inflows on asset prices by employing a panel VAR model. The empirical results suggest that capital inflows indeed have contributed to asset price appreciation in the region, although capital inflow shocks explain a relatively small part of asset price fluctuations.     

International monetary transmission in East Asia: Floaters,non-floaters,and capital controls

This paper analyzes the impacts of the United States (US) monetary shocks on East Asian countries using structural vector-autoregression (VAR) model. We find that the impacts of the US monetary shocks on East Asian domestic interest rates and exchange rates contradict conventional wisdom. The conventional exchange rate channel is unlikely to play much role in the transmission of the US monetary policy shocks to floaters in East Asian countries, excluding Japan. In these countries, the domestic interest rates respond strongly to the US interest rate changes, by giving up monetary autonomy, probably because of fear of floating. However, the domestic interest rate does not respond much in countries with fixed exchange rate regimes and capital account restrictions, such as China and Malaysia. This may suggest that the countries with fixed exchange rate regimes enjoy a higher degree of monetary autonomy, most likely with the help of capital account restrictions.     

Does fiscal decentralization affect local governments' strategic behaviours? Evidence from South Korea

Local governments tend to show strategic behaviours when making their spending decisions. However, few studies have examined strategic behaviours when promoting fiscal decentralization. Thus, this study empirically examines the presence of strategic interactions in expenditure decisions in South Korea as well as how fiscal decentralization affects those interactions, using a panel data set from 2010 to 2017. The results demonstrate that a local government mimics other governments' spending when those governments' residents share similar age demographics. Moreover, local governments in South Korea engage in strategic interactions as their expenditure side becomes more decentralized. However, local governments tend to demonstrate less isomorphic behaviour in welfare spending decisions when they have higher revenue decentralization. This is because local governments have no motive to emulate other welfare policies, as the central government delegates the provision of social services to local governments by providing grants with strings attached.