nep-sea New Economics Papers
on South East Asia
Issue of 2014‒03‒15
25 papers chosen by
Kavita Iyengar
Asian Development Bank

  2. Volatility Transmission between Exchange Rates and Stock Prices in Indonesia post 1997 Asia Crisis By Anhar Fauzan Priyono; Arief Bustaman
  3. The Institution of Macroeconomic Measurement in Indonesia Before the 1980s By Pierre van der Eng
  4. Regional Financial Regulation in Asia By Masahiro Kawai; Peter J. Morgan
  5. Is There Really a Renminbi Bloc in Asia? By Kawai, Masahiro; Pontines, Victor
  6. The impact of early childhood education on early achievement gaps : evidence from the Indonesia early childhood education and development (ECED) project By Jung, Haeil; Hasan, Amer
  7. Decentralization and Spatial Allocation Policy of Public Investment in Indonesia and Japan By Mitsuhiko Kataoka; Kodrat Wibowo
  8. SAM Multiplier and its Application to Total Poverty Gap By durongkaveroj, wannaphong
  9. CGE modeling of the impact of skilled labor movements in ASEAN Economic Community focusing on telecommunication industry By Sudtasan, Tatcha; Suriya, Komsan
  10. Rising Inequality in Asia and Policy Implications By Juzhong Zhuang; Ravi Kanbur; Changyong Rhee
  11. Wage growth, landholding, and mechanization in agriculture : evidence from Indonesia By Yamauchi, Futoshi
  12. The Impact of Internal Migration on Local Labour Markets in Thailand By Eliane El Badaoui; Eric Strobl; Frank Walsh
  13. Reforming Korea's Migration Policy By Kim, Soojin
  14. Regional Settlement Infrastructure and Currency Internationalization : The Case of Asia and the Renminbi By Changyong Rhee; Lea Sumulong
  15. The Evolution of Risk Premiums in Emerging Stock Markets: The Case of Latin America and Asia Region By Salma Fattoum; Khaled Guesmi; Bruno-Laurent Moschetto
  16. Rulemaking in Super-RTAs: Implications for China and India By Suparna Karmakar
  17. Euro-Crisis and Spillover Effects on the Emerging Economies By Hamidreza Tabarraei
  18. A Simulation of the Illegal Coal Mining in Quang Ninh Province, Vietnam using Vensim By Phan, Tuan
  19. The Missing "Missing Middle" By Chang-Tai Hsieh; Benjamin A. Olken
  20. Dynamic Poverty Decomposition Analysis: An Application to the Philippines By Fujii, Tomoki
  21. Corporate Debt Market in India: Issues and Challenges By Sengupta, Rajeswari; Anand, Vaibhav
  22. Asian crisis equals American opportunity By John H. Makin
  23. How Far Can Renminbi Internationalization Go? By Yu Yongding
  24. An Empirical Test of Money Demand in Thailand from 1993 to 2012 By Jiranyakul, Komain; Opiela, Timothy
  25. Issues for Renminbi Internationalization : An Overview By Barry Eichengreen; Masahiro Kawai

    Date: 2014
  2. By: Anhar Fauzan Priyono (Department of Economics, Padjadjaran University); Arief Bustaman (Department of Economics, Padjadjaran University)
    Abstract: Volatility of Indonesia Rupiah and Jakarta Composite Index remain one of main issues in Indonesia economy after 1997 Asian crisis. The objectives of this research are (1) determining the volatility of Indonesia Rupiah to US Dollar exchange rates and Jakarta Composite Index (JCI) and (2) analysing the dynamic volatility transmission between exchange rates and JCI. Exchange rate and JCI volatility were measured using GJR-GARCH approach. Estimated using VAR model, this study found that current volatility of exchange rate (ER) respond significantly to the change of volatility of Jakarta Composite Index (JCI) in the previous month. On the other hand, change in previous exchange rate volatility did not affect current JCI volatility.
    Keywords: Indonesia financial market, volatility, GJR-GARCH, VAR
    JEL: G0
    Date: 2014–02
  3. By: Pierre van der Eng
    Abstract: Macro-economic measurement goes back to the 17th century and became common practice in Western countries since the late-19th century. Since then, the growth and composition of some of the largest economies in Asia, particularly India and Japan, was also probed. And since the 1940s government agencies in many Asian countries were given responsibility for the development and implementation of consistent national accounting practices to assist in the planning of economic development. While this was in principle also the case in Indonesia in the 1950s, it took into the 1970s before consistent processes of macroeconomic measurement were put in place that facilitated the analysis of long-term economic growth. This paper asks why there was a delay. It finds that institutional discontinuities and limited resources prevented the establishment of consistent and well defined national accounting practices until the late-1970s.
    Keywords: national accounts, economic growth, Indonesia
    JEL: B41 E01 N15 O11 O47
    Date: 2014–02
  4. By: Masahiro Kawai (Asian Development Bank Institute (ADBI)); Peter J. Morgan
    Abstract: The Asian financial crisis (1997–1998) and the global financial crisis (2007–2009) highlighted the potential value of financial regionalism, i.e., regional-level cooperation in financial policy. This paper argues that there is a mediating role for regional-level institutions of financial regulation between national regulators in Asia and global-level institutions such as the International Monetary Fund and the Financial Stability Board. This potential role includes : (i) monitoring financial markets and capital flows to identify regional systemic risks such as capital flows; (ii) coordinating financial sector surveillance and regulation to promote regional financial stability; and (iii) cooperating with global-level institutions in rule formulation, surveillance and crisis management. This is particularly important in an environment of increasing financial integration and harmonization in the region. The paper considers experiences of the European Union (EU) and Asia in regional financial cooperation and regulation and draws lessons for Asia. The EU represents the most advanced stage of regional financial integration and regulation in the world today, and can provide valuable lessons for Asia. Asia’s greater diversity of financial development and openness requires a more nuanced approach to integration. Despite its shortcomings and slow pace, the Association of Southeast Asian Nations (ASEAN) Economic Community process probably provides the most feasible and relevant model for regulatory cooperation on a voluntary basis. It would be desirable to extend this framework further in Asia, say to the ASEAN+3 countries for a start. Asian economies can also strengthen existing surveillance processes; enhance and diversify the resources, functions and membership of the Chiang Mai Initiative Multilateralization and the Macroeconomic Research Office for surveillance and provision of a financial safety net; and create an Asian financial stability dialogue to monitor regional financial markets, facilitate policy dialogue and cooperation, and secure regional financial stability.
    Keywords: global financial crisis, Asian financial crisis, financial regionalism, financial regulation, regional financial integration, surveillance processe, financial safety net, Chiang Mai Initiative
    JEL: F33 F36 G15 G18 G28
    Date: 2014–02
  5. By: Kawai, Masahiro (Asian Development Bank Institute); Pontines, Victor (Asian Development Bank Institute)
    Abstract: This paper examines whether the renminbi (RMB) has supplanted the US dollar as the major anchor currency in the currency baskets of East Asian economies. It systematically demonstrates that existing techniques to address the problem of severe multicollinearity in estimations of the Frankel¬–Wei regression model, with the movements in both the RMB and the US dollar included on the right-hand side of the equation, remain limited in providing stable and robust results. The paper proposes a simple modification of the Frankel–Wei regression model to estimate the RMB weight in an economy’s currency basket. Using this new approach, findings show there is not yet an RMB bloc in East Asia, contrary to claims made by some recent studies, with the US dollar continuing to be the dominant anchor currency in the region. The RMB has taken on some importance in the currency baskets of many East Asian economies in recent years and this appears to have occurred at the expense of the yen. In short, despite the rising importance of the RMB, it has not eclipsed the US dollar as the dominant anchor currency in East Asia.
    Keywords: RMB; renminbi bloc; Frankel–Wei regression model; anchor currency; East Asia; currency baskets
    JEL: F15 F31 F36 F41 O24
    Date: 2014–03–07
  6. By: Jung, Haeil; Hasan, Amer
    Abstract: This paper assesses whether the Indonesia Early Childhood Education and Development project had an impact on early achievement gaps as measured by an array of child development outcomes and enrollment. The analysis is based on longitudinal data collected in 2009 and 2010 on approximately 3,000 four-year-old children residing in 310 villages located in nine districts across Indonesia. The study begins by documenting the intent-to-treat impact of the project. It then compares the achievement gaps between richer and poorer children living in project villages with those of richer and poorer children living in non-project villages. There is clear evidence that in project villages, the achievement gap between richer and poorer children decreased on many dimensions. By contrast, in non-project villages, this gap either increased or stayed constant. Given Indonesia's interest in increasing access to early childhood services for all children, and the need to ensure more efficient spending on education, the paper discusses how three existing policies and programs could be leveraged to ensure that Indonesia's vision for holistic, integrated early childhood services becomes a reality. The lessons from Indonesia's experience apply more broadly to countries seeking to reduce early achievement gaps and expand access to pre-primary education.
    Keywords: Primary Education,Educational Sciences,Youth and Governance,Street Children,Housing&Human Habitats
    Date: 2014–02–01
  7. By: Mitsuhiko Kataoka (Department of Economics, Chiba Keizai University, Chiba, Japan); Kodrat Wibowo (Department of Economics, Padjadjaran University)
    Abstract: Public investment is a fundamental response of government to the existing imbalances between subnational regions. Especially, the question concerning the allocation policy of public investment more receives a great deal of public attentions along with the decentralization process, because economic growth is inevitably uneven in its subnational impacts and decentralization has effects on the change in the allocations across the subnational governments and regions. This study explores the public investment allocation policy that either emphasizes efficiency, equity, or redistribution or strives to strike a balance between these three policy directions under the trade-off restrictions. We employ a new benchmark index, “equity–growth allocation share,” defining regional public investment allocation, given equal public capital growth across regions. We apply this method to Indonesia’s and Japan’s pre- and post-decentralization eras, beset by efficiency–equity trade-offs between uneven regional development and balanced growth policy. We found two major observations that contrast between two countries. First, as excessive economic activity regions in two countries, the capital region in Japan mostly shows the highest returns on public capital where the Java-Bali region does not. Second, Indonesia shows a structural change investment concentration in the Java-Bali region before and after decartelization regime while the Japan’s government pursues the pro-efficiency allocation policy under the decentralization process.
    Keywords: Public investment, Decentralization, Efficiency–equity trade-off,Indonesia, Japan
    JEL: N95 O23 R11 R53
    Date: 2014–02
  8. By: durongkaveroj, wannaphong
    Abstract: The purpose of this study was to present an application of SAM multiplier to Total Poverty Gap using simulation and speculation method. Also, an appropriate trade policy was derived in each region aimed at reducing poverty. The results revealed that income level and exogenous macroeconomic shock were an important factor in getting the poor out of destitution. Moreover, to reduce poverty, meat sector should be strongly supported to be exported commodity in North America, Latin America, and EU25. Additionally, processed food sector should be encouraged in Oceania, Southeast Asia, and South Asia. Light manufacturing products should be promoted in East Asia and Sub-Saharan Africa. And Middle East and North Africa can reduce its poverty through an increase in heavy manufacturing sector
    Keywords: sam multiplier, multiplier, poverty, total poverty gap
    JEL: C6 C67 C68 D31 I32 O15 O24 O5 O57
    Date: 2014–02–27
  9. By: Sudtasan, Tatcha; Suriya, Komsan
    Abstract: This paper investigates the impact of skilled labor movements in ASEAN Economic Community (AEC) on nationwide economy of Thailand using Computable General Equilibrium model. The paper mainly focuses on the labor movement in telecommunication industry. The model consists of three steps. First, it simulates the impact of raising minimum wage to THB300 and raising salary of bachelor graduates to THB15,000 across-the-board and over the country according to the Raising Income Policy (RIP) of the Thai government. Second, it figures out the impact of the skilled labor movement in telecommunication sector among AEC member countries. Last, it includes the impact of skilled labor movements in 8 occupations that are allowed by the AEC agreement. The results reveal that the RIP causes negative impact to the Thai economy due to the rising costs of production that cannot be compensated by the increasing consumption. Inward skilled labor movement to Thailand in the telecommunication sector leads to the increasing income of engineers and related skilled workers in the country. This yields the positive impact to the economy due to the increasing income of the middle-class people while costs of production do not increase much. The inward skilled labor movements in all 8 occupations will even yield more positive impacts to the Thai economy. However, the positive impacts of the skilled labor movements in AEC cannot compensate the negative impacts of the RIP applied earlier. Therefore, Thailand cannot expect that AEC will boost its economy up to the level before the implementation of RIP.
    Keywords: Computable general equilibrium model; telecommunication industry; ASEAN Economic Community; labor movement; wage policy
    JEL: C68 F15 L96
    Date: 2014–02–24
  10. By: Juzhong Zhuang (Asian Development Bank Institute (ADBI)); Ravi Kanbur; Changyong Rhee
    Abstract: This paper looks at the recent trends of rising inequality in developing Asia, asks why inequality matters, examines the driving forces of rising inequality, and proposes policy options for tackling high and rising inequality. Technological change, globalization, and market-oriented reform have driven Asia’s rapid growth, but have also had significant distributional consequences. These factors have favored owners of capital over labor, skilled over unskilled workers, and urban and coastal areas over rural and inland regions. Furthermore, unequal access to opportunity, caused by institutional weaknesses and social exclusion, has compounded the impacts of these forces. All these combined have led to a falling share of labor income in national income, increasing premiums on human capital, and growing spatial disparity—all contributing to rising inequality. The three drivers of rising inequality cannot and should not be blocked, because they are the same forces that drive productivity and income growth. This paper outlines a number of policy options for Asian policy makers to consider in addressing rising inequality. These options, aiming to equalize opportunities and, thereby, reduce inequality, include efficient fiscal measures that reduce inequality in human capital, policies that work toward increasing the number and quality of jobs, interventions that narrow spatial disparity, and reforms that strengthen governance, level the playing field, and eliminate social exclusion.
    Keywords: Inequality, developing Asia, market-oriented reform, unequal access to opportunity, institutional weaknesses, social exclusion
    JEL: D63 O15 O53
    Date: 2014–02
  11. By: Yamauchi, Futoshi
    Abstract: This paper uses farm panel data from Indonesia to examine dynamic patterns of land use, capital investments, and wages in agriculture. The empirical analysis shows that an increase in real wages has induced the substitution of labor by machines among relatively large farmers. Large farmers tend to increase the scale of operation by renting in more land when real wages increase. Machines and land are complementary if the scale of operation is greater than a threshold size. In contrast, such a dynamic change was not observed among relatively small holders, which implies a divergence in the movement of the production frontier between Java and off-Java regions given that the majority of small farmers are concentrated in Java.
    Keywords: Rural Development Knowledge&Information Systems,Regional Economic Development,Rural Poverty Reduction,Labor Policies,Crops and Crop Management Systems
    Date: 2014–02–01
  12. By: Eliane El Badaoui; Eric Strobl; Frank Walsh
    Abstract: We estimate the impact of internal migration on local labour markets in Thailand.Using an instrumental variable approach based on weather and distance we estimate an exogenous measure of the net migration in ow into each region. Our results show that instrumenting for the possible endogeneity of net inward migration is crucial to the analysis. The results suggest substantial adjustments in hours worked and weekly wages in response to short term changes in labour supply for low skilled males. We find no effect on high skilled workers. A theoretical section shows that a reduction in hours per worker in response to an increase in inward migration is consistent with the predictions of a standard search model.
    Keywords: Internal migration, Labour markets, Thailand
    JEL: O15 J10
    Date: 2014
  13. By: Kim, Soojin
    Abstract: In the era of globalization, the notion of the migrant worker is not an unfamiliar one, albeit not a welcomed notion by countries intent on maintaining the semblance of a homogeneous society. As one of the earlier industrialized countries in East Asia, the Republic of Korea experienced firsthand the benefits of having migrant workers. It would certainly not be an understatement to state that the migrant worker has played an integral role in helping the Korean economy recover from the Asian economic crisis in the late 1990s and sustain itself in recent years. With the number of migrant workers only expected to grow in years to come, the impact of the migrant worker on Korean society will no longer be economical, but also social, political, and cultural. No longer is the migrant worker a temporary solution to overcome labor shortages but rather, it is, and has become a permanent part of today's Korean society. It would therefore seem imperative that the Korean government devise long-term strategies as to how it will address these issues. This paper seeks to highlight the emergence and evolution of the migrant worker in the Republic of Korea, discuss consequences and implications for Korea's continued migration policy, and make recommendations for reforming Korea's migration policy.
    Keywords: Migration; Reformation; Korea; Migrant Worker; Labor; Human Resources Development
    JEL: J4 J40 J61
    Date: 2014–02–15
  14. By: Changyong Rhee (Asian Development Bank Institute (ADBI)); Lea Sumulong
    Abstract: The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China; Hong Kong, China; and Macao, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the United States dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement could also have large synergy effects without substantial extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.
    Keywords: global financial system, global financial crisis, Currency Internationalization, Asia, Remminbi, financial infrastructure, caputal account liberalization
    JEL: F33 F34 F42
    Date: 2014–02
  15. By: Salma Fattoum; Khaled Guesmi; Bruno-Laurent Moschetto
    Abstract: This paper employs a conditional version of the International Capital Asset Pricing Model (ICAPM) to investigate the determinants of regional integration of stock markets in the Latin America and Asia over the period 1996-2008. This model allows for three sources of time-varying risks: common international market risk, exchange rate risk and regional market risk. At the empirical level, we make use of the asymmetric multivariate BEKK-GARCH of Baba et al. (1990) process to simultaneously estimate the ICAPM. Our results show that the currency risk premium is the most important component of the total premium followed by the global market premium. As for the regional risk, our findings show that it is significantly priced for our studied emerging regions but its contribution to the total risk premium is weak.
    Keywords: ICAPM, stock market integration, exchange rate risk
    JEL: G12 F31 C3
    Date: 2014–02–25
  16. By: Suparna Karmakar
    Abstract: The faltering Doha round has led to a renewed focus on large regional trade agreements. There are two super-RTAs in the making in the Asia-Pacific and one in the Atlantic, all with rather ambitious negotiation targets, and presented as alternate means to reset global trade rules and take the multilateral trade liberalisation agenda forward. So what does this development mean for large emerging markets such as China and India that are on the fringes of these regional trade negotiations? Can these agreements become alternate means of pressuring these Asian economies to follow new trade rules set by industrialised countries, especially given the progressive erosion of the policy dominance of industrialised countries and the strong dissenting voice of developing countries in the Doha Round? This paper examines how super-RTAs may emerge as game changers in the multilateral trading system as promulgated by the WTO, and the implications for China and India. The paper analyses the new economic governance system that is likely to emerge given the renewed interest in regionalism, and argues that while the super-RTAs will not be entirely benign in their impact on China and India, rather than forcing these economies to accept the higher new regulatory standards enshrined in the super-RTAs, a distinct possibility in the medium-term is the emergence and entrenchment of a dual regulatory regime in these economies.
    Date: 2014–03
  17. By: Hamidreza Tabarraei (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris - Institut national de la recherche agronomique (INRA), EEP-PSE - Ecole d'Économie de Paris - Paris School of Economics - Ecole d'Économie de Paris)
    Abstract: I present some evidence showing that the advanced economies' banks were contributing in spreading the Euro-crisis to the emerging economies. For this purpose, I test the common lender channel among other channels of contagion, by using international banking flows data. Based on a constructed crisis-index for the Euro area, I find that countries with higher level of exposure to GIIPS, deleveraged more in riskier periods, i.e. during periods with high crisis index. Among all emerging economies in our sample, the Latin American countries were not affected as much as the emerging economies Asia and Europe, despite their high exposures to Spain. While the impact of the Euro-crisis stopped to show sign in Asia after 2011, it continued to affect the emerging Europe. The Euro-area banks were deleveraging more in the Emerging Europe than their peers in non-Euro advanced economies, whereas most of their deleveraging in Asia happened in 2010. Although the results present evidence in favour of local impacts of the Euro-crisis, they show the importance of spillover through multinational banks.
    Keywords: Sovereign risk ; Contagion ; euro crisis ; emerging economies
    Date: 2014–02
  18. By: Phan, Tuan
    Abstract: Using Vensim PLE, this paper provides a simulation of the illegal coal mining in Quang Ninh province, Vietnam. Examining the three main loops including need for income effect, government enforcement and coal management effects and other effects (illegal density, technology, community and psychological effects), the paper sketches several scenarios under different levels of the key variables. Obtaining these results, the paper suggests a better scene in terms of socio-economic and environmental sustainability basing on the two major components. First, the government authorities should urge the enforcement and revise the coal management. Second, the community should have more active activities to abolish the illegal mining trend and raise effectively warnings about the danger of the illegal mining. Those parallel implementations shall create a surprisingly positive effect on the reduction of illegal coal mining in the province.
    Keywords: illegal coal mining, simulation, Vietnam
    JEL: Q32 Q38
    Date: 2008–06–06
  19. By: Chang-Tai Hsieh; Benjamin A. Olken
    Abstract: Although a large literature seeks to explain the “missing middle” of mid-sized firms in developing countries, there is surprisingly little empirical backing for existence of the missing middle. Using microdata on the full distribution of both formal and informal sector manufacturing firms in India, Indonesia, and Mexico, we document three facts. First, while there are a very large number of small firms, there is no “missing middle” in the sense of a bimodal distribution: mid-sized firms are missing, but large firms are missing too, and the fraction of firms of a given size is smoothly declining in firm size. Second, we show that the distribution of average products of capital and labor is unimodal, and that large firms, not small firms, have higher average products. This is inconsistent with many models in which small firms with high returns are constrained from expanding. Third, we examine regulatory and tax notches in India, Indonesia, and Mexico of the sort often thought to discourage firm growth, and find no economically meaningful bunching of firms near the notch points. We show that existing beliefs about the missing middle are largely due to arbitrary transformations that were made to the data in previous studies.
    JEL: E23 H25 O11 O47
    Date: 2014–03
  20. By: Fujii, Tomoki (Asian Development Bank Institute)
    Abstract: This paper proposes a new method of poverty decomposition. The method remedies the shortcomings of existing methods and has some desirable properties such as time-reversion consistency and subperiod additivity. It integrates the existing methods of growth-redistribution decomposition and sector-based decomposition, because it allows poverty change to be decomposed into growth and redistribution components for each group (e.g., regions or sectors) in the economy. The method is extended to have six components and is empirically applied to the Philippines for the period 1985–2009.
    Keywords: economic growth; foster-greer-thorbecke (fgt) measure; inequality; inflation; poverty profile; watts measure
    JEL: I32 O10
    Date: 2014–03–03
  21. By: Sengupta, Rajeswari; Anand, Vaibhav
    Abstract: At the current time, when India is endeavoring to sustain its high growth rate, it is imperative that financing constraints in any form be removed and alternative financing channels be developed in a systematic manner for supplementing traditional bank credit. While the equity market in India has been quite active, the size of the corporate debt market is very small in comparison with not only developed markets, but also some of the emerging market economies in Asia such as Malaysia, Thailand and China. A liquid corporate bond market can play a critical role by supplementing the banking system to meet the requirements of the corporate sector for long-term capital investment and asset creation. While it is true that the Indian corporate debt market has transformed itself into a much more vibrant trading field for debt instruments from the elementary market about a decade ago, yet there is still along way to go. In this brief note, we systematically study the issues and challenges facing the corporate debt market in India, throw light upon the steps already taken by regulatory authorities to give fillip to this debt market and also provide our own recommendations.
    Keywords: Corporate bond market, Government Securities, Secondary market, Interest rate futures, Private placement
    JEL: G1 G2
    Date: 2014–02–18
  22. By: John H. Makin (American Enterprise Institute)
    Abstract: The United States and Japan should make pledges to protect each other's interests in the event of conflict. This rearticulated US-Japan alliance need not threaten China, but rather serve as a reminder that actions to advance Chinese interests at the expense of US-Japan interests will not be tolerated.
    Keywords: U.S.-Chinese economic relations,U.S. - Japanese relations,japan-china relations,geopolitics
    JEL: A F
    Date: 2014–03
  23. By: Yu Yongding (Asian Development Bank Institute (ADBI))
    Abstract: Since the formal launch of the renminbi trade settlement scheme in 2009, renminbi internationalization has made impressive inroads. The progress in renminbi trade settlement is especially impressive. However, Hong Kong, China’s offshore renminbi deposits failed to make significant progress as expected. The question of how far renminbi internationalization can go has become a common concern in the international financial community. This paper argues that while a contributing factor is the sheer size of the People’s Republic of China’s (PRC) trade and the convenience of using the renminbi for transaction settlements, exchange rate arbitrage and interest rate arbitrage matter also. Profits from arbitrages are the major driving forces of, but do not constitute a sustainable basis for, internationalization. A fundamental constraint for renminbi internationalization is the PRC’s capital controls. Before fully opening up its capital account and making the renminbi freely convertible, however, the PRC needs first to put its own house in order. Macroeconomic stability has to be achieved; the high ratio of financial leverage should be reduced; a rational and flexible interest rate structure must be created; and risk management capacity across industries should be established. Most importantly, the PRC must make the renminbi exchange rate flexible to reflect demand for and supply of foreign exchange in the market. The renminbi can and will become a major international currency eventually, but the road to internationalization is bound to be long and bumpy.
    Keywords: renminbi internationalization, renminbi trade settlement scheme, renminbi trade settlement, exchange rate and interest rate arbitrage
    JEL: F31 F33
    Date: 2014–02
  24. By: Jiranyakul, Komain; Opiela, Timothy
    Abstract: The present study uses the most recent time series data obtained from the Bank of Thailand during the first quarter of 1993 and the fourth quarter of 2012 to investigate the long-run relationship between M1, M2, and M3 money demands and the two determinants (real GDP and interest rate). We use the model specification of Stock and Watson (1993) and Ball (2001). Our estimation techniques include Johansen cointegration test and the dynamic ordinary least squares (DOLS). We find that the DOLS procedure is not applicable for our data set. However, our results from Johansen cointegration test reveal that there is only a long-run relationship between M1 money demand, real GDP and interest rate. In the short run, only a change in real GDP affects M1 money holding. The instability of M1 money demand function makes it difficult for monetary authority to pursuit meaningful conducts of monetary policy.
    Keywords: Money Demand, Real Income, Interest Rate, Cointegration, Dynamic OLS
    JEL: C2 C22 E41
    Date: 2014–03
  25. By: Barry Eichengreen (Asian Development Bank Institute (ADBI)); Masahiro Kawai
    Abstract: The growing weight of the People’s Republic of China (PRC) in the world economy, measured by gross domestic product (GDP) and trade volume, has intensified debate on the potential international role of its currency—the renminbi (RMB). This paper provides an overview of RMB internationalization issues. Reviewing the current state of RMB internationalization, the paper finds that much progress has been made on RMB settlements for trade involving the PRC and on RMB-denominated bond issuance in Hong Kong, China, but that RMB internationalization is still limited due to capital account controls. The paper argues that a high degree of RMB internationalization requires significant capital account liberalization—supported by financial market liberalization including market-determined interest rates, and by effective financial regulation and supervision—which in turn would call for greater exchange rate flexibility so that the People’s Bank of China (PBOC) can enjoy monetary policy autonomy. This, however, would pose a challenge for PRC authorities as hasty capital account liberalization could expose PRC financial markets to the risk of crisis. The paper also emphasizes the importance of institutional reforms—such as making the PBOC independent from political processes, improving the judicial system to implement rule of law, raising transparency and accountability of policy making, and democratizing the political regime—to make the RMB a truly international reserve currency. Finally, the paper explores the implications of RMB internationalization for the international monetary system.
    Keywords: renminbi (RMB), internationalization, PRC, China, capital account internationalization, financial market liberalization, monetary policy autonomy
    JEL: F31 F32 F33 F41
    Date: 2014–01

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