nep-sea New Economics Papers
on South East Asia
Issue of 2005‒04‒09
five papers chosen by
Kavita Iyengar
Asian Development Bank

  1. Reconsidering the Backward Vertical Linkage of Foreign Affiliates: Evidence from Japanese Multinationals By Kozo Kiyota; Toshiyuki Matsuura; Shujiro Urata; Yuhong Wei
  2. Deflation and Monetary Policy in Taiwan By Ya-Hwei Yang; Jia-Dong Shea
  3. Portfolio Choice over the Life-Cycle in the Presence of 'Trickle Down' Labor Income By Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
  4. The Thick Market Effect on Local Unemployment Rate Fluctuations By Li Gan; Qinghua Zhang
  5. Price-Channel Effects of North-South Trade on the Direction of Technological Knowledge and Wage Inequality By Óscar Afonso; Álvaro Aguiar

  1. By: Kozo Kiyota; Toshiyuki Matsuura; Shujiro Urata; Yuhong Wei
    Abstract: This paper examined the determinants of the backward vertical linkages of Japanese foreign affiliates in manufacturing for the period 1994-2000, focusing on the local backward linkages, or local procurements. We found that the experience of the affiliate, which is measured by the length of operation, has positive impacts on local procurements in the affiliates in East and Southeast Asian countries but not so for the affiliates in developed countries. This result is robust even after we control for various factors, including government regulation on the local procurements, agglomeration effects, and unobservable firm heterogeneity.
    Date: 2005–03
  2. By: Ya-Hwei Yang; Jia-Dong Shea
    Abstract: From 1999 to 2003, Taiwan faced a deflationary situation. The reasons for this deflation can be attributed to both domestic and global factors. Domestic changes including local political unrest, tensions with China, outbound investment to China, a weakened financial system, and a deteriorating government financial situation, provided the backdrop for the economic slowdown and corresponding deflation. A number of global factors, especially the bursting of the Internet and IT bubbles in late 2000 and the rise of China%u2019s economy, also heavily influenced both global and Taiwanese prices. This paper adopts a simplified aggregate demand and aggregate supply model to derive a deterministic equation of the GDP deflator (PGDP), and then applies quarterly data covering the period from 1982 to 2003 to estimate the PGDP equation using 2SLS. The empirical results are used to identify the sources of PGDP deflation in Taiwan. In addition, the phenomenon of price divergence appears since 2002 where the WPI increased and the CPI decreased. The causes of the WPI-CPI divergence are also investigated in this paper.
    JEL: E0 E3 E5
    Date: 2005–04
  3. By: Luca Benzoni; Pierre Collin-Dufresne; Robert S. Goldstein
    Abstract: Empirical evidence shows that changes in aggregate labor income and stock market returns exhibit only weak correlation at short horizons. As we document below, however, this correlation increases substantially at longer horizons, which provides at least suggestive evidence that stock returns and labor income are cointegrated. In this paper, we investigate the implications of such a cointegrated relation for life-cycle optimal portfolio and consumption decisions of an agent whose non-tradable labor income faces permanent and temporary idiosyncratic shocks. We find that, under economically plausible calibrations, the optimal portfolio choice for the young investor is to take a substantial {\em short} position in the risky portfolio, in spite of the large risk premium associated with it. Intuitively, this occurs because the cointegration effect makes the present value of future labor income flows `stock-like' for the young agent. However, for older agents who have shorter times-to-retirement, the cointegration effect does not have sufficient time to act, and the remaining human capital becomes more `bond-like.' Together, these effects create a hump-shaped optimal portfolio decision for the agent over the life cycle, consistent with empirical observation.
    JEL: G1 E2 E3
    Date: 2005–04
  4. By: Li Gan; Qinghua Zhang
    Abstract: This paper studies how the thick market effect influences local unemployment rate fluctuations. The paper presents a model to demonstrate that the average matching quality improves as the number of workers and firms increases. Unemployed workers accumulate in a city until the local labor market reaches a critical minimum size, which leads to cyclical fluctuations in the local unemployment rates. Since larger cities attain the critical market size more frequently, they have shorter unemployment cycles, lower peak unemployment rates, and lower mean unemployment rates. Our empirical tests are consisten with the predictions of the model. In particular, we find that an increase of two standard deviations in city size shortens the unemployment cycles by about 0.72 months, lowers the peak unemployment rates by 0.33 percentage points, and lowers the mean unemployment rates by 0.16 percentage points.
    JEL: J64 R23
    Date: 2005–04
  5. By: Óscar Afonso (CEMPRE, Faculdade de Economia do Porto); Álvaro Aguiar (CEMPRE, Faculdade de Economia do Porto)
    Abstract: This paper develops a general equilibrium endogenous growth model that emphasizes the mechanisms, other than market size, through which trade-induced North-South technological knowledge diffusion influences the direction of technological progress and, thus, the path of intra and inter-country wage inequality. In contrast with the market-size effect, more common in previous literature on skill-biased technological change, the operation of the price channel, central to this paper, predicts an increasing high-skilled technological bias following openness, which is more in line with the recent trends observed in developed and developing countries.
    Keywords: North-South trade; Technological knowledge diffusion; Direction of technological progress; Wage inequality.
    JEL: F16 F43 O31 O33
    Date: 2005–03

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