nep-sea New Economics Papers
on South East Asia
Issue of 2006‒07‒28
twelve papers chosen by
Kavita Iyengar
Asian Development Bank

  1. A structural break in the effects of Japanese foreign exchange intervention on yen/dollar exchange rate volatility. By Eric Hillebrand; Gunther Schnabl
  2. Low inflation, a high net savings surplus and institutional restrictions keep the Japanese long-term interest rate low By Jansen, Pieter W.
  3. Estimating The Impacts of Demographic and Policy Changes On Pension Deficit A Simple Method and Application to China By Zeng Yi
  4. Sustainability, Debt Management, and Public Debt Policy in Japan By Takero Doi; Toshihiro Ihori; Kiyoshi Mitsui
  5. Impacts of Tourism and Fiscal Expenditure on Remote Islands in Japan: A Panel Data Analysis By Noriko Ishikawa; Mototsugu Fukushige
  7. A factor risk model with reference returns for the US dollar and Japanese yen bond markets. By Carlos Bernadell; Joachim Coche; Ken Nyholm
  8. Exchange rate stabilization in developed and underdeveloped capital markets. By Viera Chemlarova; Gunter Schnabl
  9. Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration By Joshua Aizenman; Daniel Riera-Crichton
  10. Private investment and financial development in a globalized world By Yongfu Huang
  11. Aging and Economic Growth: Issues Relevant to Singapore By Shandre Thangavelu; Yong Aik Wei
  12. Ecological Labelling in North-South Trade By Wilhelm Althammer; Susanne Dröge

  1. By: Eric Hillebrand (Department of Economics, Louisiana State University, Baton Rouge, LA 70803, USA.); Gunther Schnabl (Department of Economics and Business Administration, Leipzig University, Marschenerstr. 31, 04109 Leipzig, Germany.)
    Abstract: While up to the late 1990s Japanese foreign exchange intervention was fully sterilized, Japanese monetary authorities left foreign exchange intervention unsterilized when Japan entered the liquidity trap in 1999. According to previous research on foreign exchange intervention, unsterilized intervention has a higher probability of success than sterilized intervention. Based on a GARCH framework and change point detection, we test for a structural break in the effectiveness of Japanese foreign exchange intervention. We find a changing impact of Japanese foreign exchange intervention on exchange rate volatility at the turn of the millennium when Japanese foreign exchange intervention started to remain unsterilized. JEL Classification: E58; F31; F33; G15.
    Keywords: Japan; foreign exchange intervention; exchange rate volatility; GARCH; change point detection; structural breaks.
    Date: 2006–06
  2. By: Jansen, Pieter W. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
    Abstract: This paper explains that the interest rate on long-term Japanese government bonds is low in comparison with other industrialised countries for four main reasons: lower inflation, net savings surplus, institutional restrictions and home bias. Monetary policy and institutionalised purchases of government bonds by semi-government agencies keep the market demand for bonds high. We find that since the 1970s Japanese interest rate movements are better explained by the current account balance than in other industrialised countries. This is caused by sizeable net oversavings and institutional reasons increased the impact of oversavings as such on the long-term interest rate for Japan. Hence, the institutional reasons increase the coefficient value of the savings-investment balance. A reason for the existence of the high national net savings surplus could be that unsustainable budgetary deficits in Japan called for a Ricardian response. We doubt whether Ricardian equivalence is here the driving factor: household savings have actually fallen over the nineties. Corporate savings, in response to overcapacity and poor investment outlook, have risen more strongly. This has kept the private and national savings balance positive. There is also some indication that ageing has contributed to the structural current account surplus for Japan.
    Keywords: Long-term interest rate; Current account balance; Japan; Ricardian equivalence; Ageing
    JEL: E43
    Date: 2006
  3. By: Zeng Yi (Center for Demographic Studies and Department of Sociology, Duke University China Center for Economic Research, Peking University)
    Abstract: This article derives a simple method for projecting pension deficit as percent of GDP in future years based on commonly available population forecasting and a few predictable economic and policy variables. Compared with the classic basic equilibrium equation of pension funds, our new formula decomposes the retirees-workers ratio which mixes various kinds of impacts into three more-easily-predictable variables – the elderly dependent ratio, the prevalence of pension coverage, and the employment rate. Our illustrative application to China shows that gradually increasing the current low minimum age of retirement will largely reduce the pension deficit, under various demographic regimes. The pension deficit as % of GDP in the low fertility scenarios (which corresponds with keeping the current rigid fertility control policy unchanged in the longrun)would be 5.6-11.1, 3.8-6.3, and 9.0-13.8 times as high as that in the Medium Fertility & Medium Mortality scenarios in 2040, 2060, and 2080
  4. By: Takero Doi; Toshihiro Ihori; Kiyoshi Mitsui
    Abstract: The purpose of this paper is to analyze sustainability issues of Japan’s fiscal policy and then to discuss the debt management policy using the theoretical models and numerical studies. We also investigate the desirable coordination of fiscal and monetary authorities toward fiscal reconstruction. We include a potential possibilities of the government bonds in our theoretical model. The public bonds, therefore, cannot be sold when the issuance leads the amount of debt outstanding to be more than a certain level. In this respect, the fiscal authority has to take into account the upper limit of stocks of public debt. This possibility of debt default provides the fiscal authority to issue public bonds strategically in an earlier period. A strategic behavior of fiscal authority induces the monetary authority, in a later period, to boost output and raise seigniorage revenues to eliminate the distortion of resource allocation due to the limitation on debt issuance. Therefore, the monetary policy in a later period suffers from an inflation bias from the ax ante point of view. There are two ways to eliminate this distortion toward successful fiscal restoration. One of them is to make the monetary authority more conservative than society in the sense that the price stability weight of monetary authority is higher than that of society. The other way of eliminating the distortion of the resource allocation is to design an institutional ceiling on the debt issuance. The direct ceiling can provide a binding constraint of the public bond issuance for the fiscal authority of Japan because it has accumulated the debt outstanding much more than other countries.
    JEL: H63 H21 E63
    Date: 2006–07
  5. By: Noriko Ishikawa (Graduate School of Science and Technology, Kobe Universit); Mototsugu Fukushige (Graduate School of Economics, Osaka University)
    Abstract: Japan consists of many small inhabited islands in addition to four main islands. We examine the impact of fiscal expenditure and the number of tourists on per capita taxable income in remote islands using panel data analysis. The results show that both fiscal expenditure and population size have significant positive impacts on per capita taxable income, whereas the number of tourists does not have statistically significant impact. They indicate that tourism development would not work as a substitute for financial support from the government. In other words, continuous financial support may be needed to maintain the islandsf economies.
    Keywords: Tourism Multiplier, Fiscal Multiplier, Remote Islands, Panel Data Analysis
    JEL: O23 R58 Q56 L83
    Date: 2006
  6. By: Kazuhiko Nishina (Graduate School of Economics, Osaka University, Japan); Nabil Maghrebi (Graduate School of Economics, Wakayama, Japan University)
    Abstract: This paper examines nonlinearities in the dynamics of volatility expectations using benchmarks of implied volatility for the US and Japanese markets. The evidence from Markov regime-switching models suggests that volatility expectations are likely to be governed by regimes featuring a long memory process and significant leverage effects. Market volatility is expected to increase in bear periods and decrease in bull periods. Leverage effects constitute thus an important source of nonlinearities in volatility expectations. There is no evidence of long swings associated with financial crises, which do not have the potential of shifting volatility expectations from one regime to another for long protracted periods.
    Keywords: Markov Regime Switching, Implied Volatility Index, Nonlinear Modelling.
    JEL: C32 C51 G13 G15
    Date: 2006–07
  7. By: Carlos Bernadell (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Joachim Coche (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ken Nyholm (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This paper develops a new methodology for simulating fixed-income return distributions. It is shown that a traditional factor risk model, when augmented with reference returns, is capable of generating visually consistent return distributions for a broad range of fixed income instruments such as government and nongovernment instruments in the US dollar and Japanese yen bond markets. The reference returns result from a regime-switching Nelson-Siegel yield curve model following Bernadell, Coche and Nyholm (2005). Empirical results are encouraging: simulated distributions exhibit most characteristics observed in the fixed income markets such as non-normal right-skewed distributions for short maturity instrument while instruments with longer maturity are closer to being normally distributed. JEL Classification: C15; C32; C53; G11; G15.
    Keywords: Regime switching; scenario analysis; factor risk model.
    Date: 2006–06
  8. By: Viera Chemlarova (Sam Houston State University - Department of Economics and International Business, SHSU Box 2118, Huntsville , TX 77341-2118, United States.); Gunter Schnabl (University of Leipzig - Faculty of Economics and Business Administration, Marschnerstrasse 31, D-04109 Leipzig, Germany.)
    Abstract: The target zone model by Krugman (1991) assumes that foreign exchange intervention targets exchange rate levels. We argue that the fit of this model depends on the stage of development of capital markets. Foreign exchange intervention of countries with highly developed capital markets is in line with Krugman's (1991) model as the exchange rate level is targeted (mostly to sustain the competitiveness of exports) and the volatility of day-to-day exchange rate changes are left to market forces. In contrast, countries with underdeveloped capital markets control both volatility of day-to-day exchange rate changes as well as long-term fluctuations of the exchange rate levels to sustain the competitiveness of exports as well as to reduce the risk for short-term and long-term payment flows. Estimations of foreign exchange intervention reaction functions for Japan and Croatia trace the asymmetric pattern of foreign exchange intervention in countries with developed and underdeveloped capital markets. JEL Classification: F31.
    Keywords: Foreign exchange intervention; target zones; underdeveloped capital markets.
    Date: 2006–06
  9. By: Joshua Aizenman; Daniel Riera-Crichton
    Abstract: This paper evaluates the impact of international reserves, terms of trade (TOT) shocks and capital flows on the real exchange rate (REER). We observe that international reserves (IR) cushions the impact of TOT shocks on REER, and that this effect is important for developing but not for industrial countries. This buffer effect is especially significant for Asian countries, and for countries exporting natural resources. As suggested by theory, financial depth reduces the buffer role of IR in developing countries. The role of shock absorber for IR remains robust to the addition of various controls, dealing with capital flows (FDI, hot money, etc.), exchange rate management and monetary policy, as well as trade openness. We also find that short term capital inflows (Other Investment, Portfolio Investment) and increases in foreign reserves are associated with appreciated real exchange rate. Developing countries REER seem to be more sensitive to changes in reserve assets; whereas industrial countries display a significant relationship between hot money and REER and no effect on REER due to changes in reserve assets.
    JEL: F15 F21 F32 F36
    Date: 2006–07
  10. By: Yongfu Huang
    Abstract: Using recently developed panel data techniques on data for 43 developing countries over the period 1970-98, this paper provides an exhaustive analysis of causality between aggregate private investment and financial development. GMM estimation on averaged data, and a common factor approach on annual data allowing for global interdependence and heterogeneity across countries suggest positive causal effects going in both directions. The finding has rich implications for the development of financial markets and the conduct of macroeconomic policies in developing countries in an integrated global economy.
    Keywords: Private Investment, Financial Development, Global Interdependence, Common Factor Analysis, Panel Unit Root Test, Panel Cointegration Test
    JEL: F36 F41 E22 E44
    Date: 2006–07
  11. By: Shandre Thangavelu (Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore); Yong Aik Wei (Singapore Centre for Applied and Policy Economics, Department of Economics, National University of Singapore)
    Abstract: The paper studies the effects of the changing age and education composition of the labour force on productivity growth in Singapore. The quality change of workers from aging and education is measured through a quality index. Quality change through education is the key driving force for the productive performance of the labour force. On the other hand, the growth in the labour quality of workers by age, and hence, its contribution to labour productivity growth is falling. To moderate the impact of the aging labour force on productivity growth, greater efforts to raise the educational profile of the labour force and to re-train older workers are required.
    JEL: J24 O40
  12. By: Wilhelm Althammer; Susanne Dröge
    Abstract: We investigate in a horizontal product differentiation model with North-South trade the implications of a home bias in consumers' demand for labelled goods. We compare mutual recognition and international harmonisation of ecological labels with respect to firms' profits and welfare. Northern consumers perceive a warm glow from buying green, but have information problems with imported labelled products. Firms differ in labelling costs which could help a Southern firm to compensate for the home bias under mutual recognition. Under harmonisation the home bias disappears. Welfare analysis of harmonised labelling shows that a Southern firm gains from adopting a harmonised label - even if there is "eco-imperialism". Given the specific trade structure in our model, harmonisation is a beneficial regime except for the case that labelling costs reach a specific treshold.
    Keywords: Ecological Labels; Product Differentiation; North-South Trade; WTO Rules
    JEL: F13 F18 L13 Q56
    Date: 2006

This nep-sea issue is ©2006 by Kavita Iyengar. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.