nep-ifn New Economics Papers
on International Finance
Issue of 2005‒02‒20
six papers chosen by
Yi-Nung Yang
Chung Yuan Christian University

  1. International Comparison in Historical Perspective: Reconstructing the 1934-36 Benchmark Purchasing Power Parity for Japan, Korea and Taiwan By Kyoji Fukao; Debin Ma; Tangjun Yuan
  2. Evaluation of Exchange-Rate, Capital Market, and Dollarization Regimes in the Presence of Sudden Stops By Assaf Razin; Yona Rubinstein
  3. "Exchange Rate Misalignment: A New Test of Long-Run PPP Based on Cross-Country Data" By Pan A. Yotopoulos; Yasuyuki Sawada
  4. The U.S. Current Account and the Dollar By Oliver Blanchard; Francesco Giavazzi; Filipa Sa
  5. Fear of Floating in East Asia By Henry Kim
  6. Judging Japan's FDI: The verdict from a dartboard model By Keith Head; John Ries

  1. By: Kyoji Fukao; Debin Ma; Tangjun Yuan
    Abstract: This article provides the first expenditure approach estimate of purchasing power parity (PPP) converters for 1934-36 Japan, Korea and Taiwan. We matched all together 70 to 80 types of goods and services for private consumption, government expenditure and investment using three levels of weights derived from actual expenditure surveys. We find that the 1934-6 average prices of Korea for private consumption, investment and government expenditure were about 0.86, 0.89 and 0.98 times that of Japan respectively; and for Taiwan 0.84, 0.87 and 0.95 respectively. This gives the 1934-6 Korea and Taiwan overall GDE average price levels of 0.87 and 0.86 respectively that of Japan. Our new benchmark estimate is an improvement over existing converters based either on exchange rates or the 1990 backward projection method, which was embedded with index number biases. It provides a vital link for a long-term overview of structural change, ethnic income distribution and the historical convergence or divergence for these three economies in the past century.
    Date: 2005–01
  2. By: Assaf Razin; Yona Rubinstein
    Abstract: The literature has not being able to identify clear-cut real effects of exchange-rate regimes on output growth. Similarly, no definitive view emerges from the literature in regard to the effects of open capital markets on macroeconomic performance. The paper attributes the failure of the literature to fundamental flaws, consisting of ignoring non-linearities in the effects of exchange rate and capital-market liberalization regimes, on the macroeconomic performance. The paper develops a methodology consisting of accounting for the "crisis-prone state of the economy", summarized by a projected probability of crisis, due to sudden stops in international capital inflows. We apply the new methodology to a cross-country panel of 100 low and middle-income countries. Findings indicate that the effects of exchange rate regimes, and liberalization regimes, on macroeconomic performance go through two distinct channels: a direct channel via the real side of the economy, and an indirect channel via the financial side, which influences the probability of sudden stops. We also analyze how the projected probability of sudden stops affects the level of dollarization, and provide estimates for the effect of dollarization on growth.
    JEL: F4
    Date: 2005–02
  3. By: Pan A. Yotopoulos (University of Florence and (emeritus) Stanford University); Yasuyuki Sawada (Faculty of Economics, University of Tokyo)
    Abstract: We formulate and implement a new empirical procedure to examine the validity of PPP in the long-run for 153 countries by using the familiar cross-country data set of Heston, Summers, and Aten (2002). Unlike the existing studies that rely on mean reversion of real exchange rates, we explicitly examine country-specificity in the deviations of the nominal exchange rate from PPP. We find, first, that out of a total of 153 countries, 132 countries have achieved PPP within twenty years, 1980-2000 and 105 countries have attained PPP over ten years, 1990-2000. Second, according to the results, our method can be accepted as a workable shortcut of the direct, fullinformation approach of Yotopoulos (1996) that tests for long-run PPP utilizing micro-ICP data. This becomes an important characteristic of this paper since comprehensive micro-ICP data are no longer easily available. As a by-product, of the empirical validation of our shortcut approach, our empirical results are in favor of the Ricardo-Balassa-Samuelson effect.
    Date: 2005–02
  4. By: Oliver Blanchard; Francesco Giavazzi; Filipa Sa
    Abstract: There are two main forces behind the large U.S. current account deficits. First, an increase in the U.S. demand for foreign goods. Second, an increase in the foreign demand for U.S. assets. Both forces have contributed to steadily increasing current account deficits since the mid--1990s. This increase has been accompanied by a real dollar appreciation until late 2001, and a real depreciation since. The depreciation has accelerated recently, raising the questions of whether and how much more is to come, and if so, against which currencies, the euro, the yen, or the renminbi. Our purpose in this paper is to explore these issues. Our theoretical contribution is to develop a simple portfolio model of exchange rate and current account determination, and to use it to interpret the past and explore alternative scenarios for the future. Our practical conclusions are that substantially more depreciation is to come, surely against the yen and the renminbi, and probably against the euro.
    JEL: E3 F21 F32 F41
    Date: 2005–02
  5. By: Henry Kim
    Abstract: We examine the de facto exchange rate arrangements in East Asia by applying the methods suggested by Calvo and Reinhart (2002) and Kim (2004). Estimation results suggest that three East Asian countries in our sample adopted a hard peg or a peg with capital account restrictions in the post-crisis period. Five East Asian countries in our sample moved toward a more flexible exchange rate arrangement in the post-crisis period. At least three of these five countries (Korea, Indonesia and Thailand) achieved the level of exchange rate flexibility that is close to the level accomplished in the free floater such as Australia. These results suggest that “Fear of Floating” of East Asian countries is not prevalent in the post-crisis period and that the bi-polar view has some support in East Asian samples.
    Keywords: Bi-polar View, De Facto Exchange Rate Arrangements, De Jure Exchange Rate Arrangements, East Asia, Fear of Floating
    JEL: F02 F36 F41
  6. By: Keith Head; John Ries
    Abstract: We evaluate Japan's inward and outward FDI performance using theoretical benchmarks based on the premise that management teams headquartered around the world bid for the production facilities located in each country. Our model incorporates the assumption that bids are inversely proportionate to distance. It accurately predicts the multilateral shares of FDI stocks for most important countries. The theory predicts lower shares of FDI for Japan than its share of the world economy. Japan's actual share of outward FDI exceeds its inward share -as the model predicts- but both currently lie below the benchmark predictions.
    Keywords: Foreign direct investment, gravity, mergers and acquisitions, openness
    JEL: F21 F23
    Date: 2004–12

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