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on International Finance |
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Issue of 2010‒07‒10
eleven papers chosen by Ajay Shah National Institute of Public Finance and Policy |
| By: | Willem Thorbecke |
| Abstract: | Enormous trade surpluses are problematic for the People’s Republic of China (PRC) and the rest of the world. They primarily stem from processing trade. This paper investigates how exchange rate changes would affect the PRC’s imports for processing and processed exports. The results indicate that an appreciation throughout East Asian supply chain countries would reduce the PRC’s surplus in processing trade, while an appreciation of the yuan alone might not. Even for an appreciation throughout East Asia, however, the sum of the exchange rate elasticities is not large. Thus, to rebalance the PRC’s trade, exchange rate appreciations must be accompanied by other changes such as factor market liberalization and greater enforcement of environmental regulations.[ Working Paper 219] |
| Keywords: | trade surpluses, People’s Republic of China, exchange rate changes, East Asian, environmental regulations, liberalization |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:ess:wpaper:id:2621&r=ifn |
| By: | Baldwin, John R.; Yan, Beiling |
| Abstract: | This paper examines how trade liberalization and fluctuations in real exchange rates affect export-market entry/exit and plant-level productivity. It uses the experience of Canadian manufacturing plants over three separate periods that featuring different rates of bilateral tariff reduction and differing movements in bilateral real exchange rates. The patterns of entry and exit responses as well as the productivity outcomes differ markedly in the three periods. Consistent with much of the recent literature, the paper finds that plants self-select into export markets-that is, more efficient plants are more likely to enter and less likely to exit export markets. The reverse also occurs: entrants to export markets improve their productivity performance relative to the population from which they originated and plants that stay in export markets do better than comparable plants that exited, lending support to the thesis that exporting boosts productivity. Finally, we find that overall market access conditions, including real exchange rate trends, significantly affect the extent of productivity gains to be derived from participating in export markets. In particular, the increase in the value of the Canadian dollar during the post-2002 period almost completely offset the productivity growth advantages that new export-market participants would otherwise have enjoyed. |
| Keywords: | International trade, Business performance and ownership, Economic accounts, Business adaptation and adjustment, Productivity accounts |
| Date: | 2010–06–25 |
| URL: | http://d.repec.org/n?u=RePEc:stc:stcp5e:2010063e&r=ifn |
| By: | Amil Dasgupta; Leon-Gonzalez; Roberto; Anja Shortland |
| Abstract: | What determines the direction of spread of currency crises? We examine data on waves of currency crises in 1992, 1994, 1997, and 1998 to evaluate several hypotheses on the determinants of contagion. We simultaneously consider trade competition, financial links, and institutional similarity to the "ground-zero" country as potential drivers of contagion. To overcome data limitations and account for model uncertainty, we utilize Bayesian methodologies hitherto unused in the empirical literature on contagion. In particular, we use the Bayesian averaging of binary models which allows us to take into account the uncertainty regarding the appropriate set of regressors. We find that institutional similarity to the ground-zero country plays an important role in determining the direction of contagion in all the emerging market currency crises in our dataset. We thus provide persuasive evidence in favour of the "wake up call" hypothesis for financial contagion. Trade and financial links may also play a role in determining the direction of contagion, but their importance varies amongst the crisis periods. |
| Keywords: | Financial contagion, exchange rate, institutions, Bayesian model averaging |
| JEL: | F31 F32 C11 |
| Date: | 2010 |
| URL: | http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1023&r=ifn |
| By: | Gala, Paulo; Libanio, Gilberto |
| Abstract: | The objectives of this paper are twofold. First, it intends to provide theoretical elements toanalyze the relation between real exchange rates and economic development. Our mainhypothesis is very much in line with the Dutch disease literature, and states that competitivecurrencies contribute to the existence and maintenance of the manufacturing sector in theeconomy. This, in turn, brings about higher growth rates in the long run, given the existenceof increasing returns in the industrial sector, and its importance in generating technologicalchange and increasing productivity in the overall economy. The second objective of this paperis empirical. It intends to analyze examples of successful exchange rate policies, such as Chileand Indonesia in the eighties, as a benchmark for comparison with countries where currencyovervaluation has taken place, such as Brazil. In the latter case, the local currency is beinginflated by large capital inflows, due to high domestic interest rates and to a boom in demandand prices of commodities in the international markets. It will be argued that the industrialsector bears most of the burden when the currency appreciates, and that Brazil risks at deindustrializationif there are no changes in the exchange rate regime. |
| Date: | 2010–07–02 |
| URL: | http://d.repec.org/n?u=RePEc:fgv:eesptd:211&r=ifn |
| By: | J. M. C. Santos Silva; Silvana Tenreyro |
| Abstract: | We critically review the recent literature on currency unions, and discuss the methodologicalchallenges posed by the empirical assessment of their costs and benefits. In the process, weprovide evidence on the economic effects of the euro. In particular, and in contrast withestimates of the trade effect of other currency unions, we find that the impact of the euro ontrade has been close to zero. After reviewing the costs and benefits, we conclude with someopen questions on normative and positive aspects of the theory of currency unions,emphasizing the need for a unified welfare-based framework to weigh their costs and gains. |
| Keywords: | Currency union, Integration, Exchange Rage, Trade |
| JEL: | F00 F02 F15 F31 F42 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0986&r=ifn |
| By: | Sérgio Fornazier Meirelles Filho (FACE-UFG, Ciências Econômicas); Frederico Gonzaga Jayme Jr (Cedeplar/UFG) |
| Abstract: | This paper analyses empirically the relationship between economic growth and the openness of the financial account of the balance of payments. It takes into consideration the balance of payments’ constrained growth, as well as the difficulties in the empirical literature in measuring capital mobility. Starting from traditional capital mobility indexes we estimate a panel across 80 countries, both developed and developing between 1979-2003. Results suggest that more capital mobility in developing countries affects growth negatively, whereas it possibly stimulates growth in developed countries. |
| Keywords: | Economic Growth, Capital Mobility, Dynamic Panel. |
| JEL: | F41 F43 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:ufb:wpaper:016&r=ifn |
| By: | Dirk Engel; Vivien Procher |
| Abstract: | ‘Being international’ has nearly become an undisputed aim for firms in a globalized world. Several papers find a positive relationship between foreign direct investment (FDI) and the home performance of firms. In this paper we address the “FDI – export” relationship to better understand this pattern. Furthermore, by presenting first results on firm’s post-divestiture employment growth at home we are able to provide a more comprehensive view on fi rm performance after stepping in and out of foreign markets. We apply a propensity score matching technique in combination with a difference-in-difference estimator to analyze the performance dynamics of French firms that invested abroad or carried out foreign divestitures during the period 2000-2007. FDI has on average a positive home firm eff ect in terms of export share, operating turnover and employment. Industry differences reveal that firms in high-tech industries experience a strong increase in their home performance, whereas firm performance in low-tech industries increases only moderately in post-investment periods. In contrast, the divestiture impact on the post-divestiture performance is rather negligible. |
| Keywords: | Foreign markets; entry and exit; firm performance |
| JEL: | F21 F23 D21 L25 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0193&r=ifn |
| By: | Andrea Cipollini; Iolanda Lo Cascio |
| Abstract: | The aim of the paper is to test for ¯nancial contagion by estimating a simultaneous equation model subject to structural breaks. For this purpose, we use the Maximum Overlapping Discrete Wavelet Transform, MODWT, to decompose the covariance matrix of four asset returns on a scale by scale basis. This decomposition will enable us to identify the structural form model and to test for spillover e®ects between country speci¯c shocks during a crisis period. We distinguish between the case of the structural form model with a single dummy and the one with multiple dummies capturing shifts in the co-movement of asset returns occurring during periods of ¯nancial turmoil. The empirical results for four East Asian emerging stock markets show that, once we account for interdependence through an (unobservable) common factor, there is hardly any evidence of contagion during the 1997-1998 financial turbulence. |
| Keywords: | wavelets; simultaneous equations model; financial contagion |
| JEL: | C30 C51 G15 |
| Date: | 2010–06 |
| URL: | http://d.repec.org/n?u=RePEc:mod:recent:047&r=ifn |
| By: | Facundo Albornoz; Hector Calvo-Pardo; Gregory Corcos; Emanuel Ornelas |
| Abstract: | Firms need to incur substantial sunk costs to break in foreign markets, yet many give up exportingshortly after their first experience, which typically involves very small sales. Conversely, other newexporters shoot up their foreign sales and expand to new destinations. We investigate a simpletheoretical mechanism that can rationalize these patterns. A firm discovers its profitability as anexporter only after actually engaging in exporting. The profitability is positively correlated over timeand across foreign destinations. Accordingly, once the firm learns how good it is as an exporter, itadjusts quantities and decides whether to exit and whether to serve new destinations. Thus, it is thepossibility of profitable expansion at both the intensive and extensive margins what makes incurringthe sunk costs to enter a single foreign market worthwhile despite the high failure rates. Using acensus of Argentinean firm-level manufacturing exports from 2002 to 2007, we find empirical supportfor several implications of our proposed mechanism, indicating that the practice of "sequentialexporting" is pervasive. Sequential exporting has broad but subtle implications for trade policy. Forexample, a reduction in trade barriers in a country has delayed entry effects in its own market, whilealso promoting entry in other markets. This trade externality poses challenges for the quantification ofthe effects of trade liberalization programs, while suggesting neglected but critical implications ofinternational trade agreements. |
| Keywords: | Export dynamics, trade liberalization, experimentation, uncertainty |
| JEL: | F10 D21 F13 |
| Date: | 2010–03 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0974&r=ifn |
| By: | Albrecht Ritschl; Samad Salferaz |
| Abstract: | This paper examines the role of currency and banking in the German financial crisis of 1931for both Germany and the U.S. We specify a structural dynamic factor model to identifyfinancial and monetary factors separately for each of the two economies. We find thatmonetary transmission through the Gold Standard played only a minor role in causing andpropagating the crisis, while financial distress was important. We also find evidence of crisispropagation from Germany to the U.S. via the banking channel. Banking distress in botheconomies was apparently not endogenous to monetary policy. Results confirm Bernanke's(1983) conjecture that an independent, non-monetary financial channel of crisis propagationwas operative in the Great Depression. |
| Keywords: | Great Depression, 1931 financial crisis, international business cycle transmission,Bayesian factor analysis, currency, banking |
| JEL: | N12 N13 E37 E47 C53 |
| Date: | 2010–05 |
| URL: | http://d.repec.org/n?u=RePEc:cep:cepdps:dp0977&r=ifn |
| By: | Dirk Engel; Christoph M. Schmidt; Vivien Procher |
| Abstract: | This paper studies the internationalization behaviour of French companies, using more than 330.000 observations for three two-year intervals. We analyze the role of productivity, organisational and ownership structure, and of financial characteristics for the decision to enter into and exit from foreign markets. High levels of productivity are documented to be characteristic of companies deciding to engage in exporting or foreign direct investment (FDI). However, there does not seem to be a significant correlation between productivity and divestment decisions. Moreover, companies with corporate shareholders are more likely to intensify their international engagement and to retain their cross-border activities. Finally, with some exceptions high levels of short-term and long-term debt tend to make entry into a more intense international engagement more and its reduction less likely. |
| Keywords: | Foreign markets; entry and exit; exporting; FDI |
| JEL: | F23 D21 L21 C25 |
| Date: | 2010–04 |
| URL: | http://d.repec.org/n?u=RePEc:rwi:repape:0192&r=ifn |