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Chapter 7 introduces students to the monetary and financial dimensions of East Asian international relations, which are fragmented regionally while tied closely with the Western-dominated monetary order. Monetary power is arguably as important as military power, but it is not well understood and not commonly included in an IR textbook. As a social construction, monetary and financial power are related to but not equivalent to productive power. East Asia does not stand in isolation, because its contemporary monetary and financial practices and theories are integrated into the global system. Thus, this chapter examines U.S. dollar hegemony. Following a broader discussion of the exchange-rate regimes adopted by East Asian nations, the chapter discusses the 1997–1998 Asian Financial Crisis, a monumental event in post-war East Asian international relations triggered by a currency crisis. The chapter ends with a discussion of the 2008 Great Recession.
The South Korean economy began to grow rapidly in the 1960s, enabling it to converge with the advanced countries in per capita product. It did so as the leadership change enhanced state capacity. The government intervened pervasively in the economy, making sure that firms receiving the favors used them properly. The size of the government itself was small, but the macroeconomic policy was inflationary. The resultant inflation affected the way financial policy, the most important policy at the time, worked. The export promotion policy degenerated as the government employed non-price measures while the price incentives fell in spite of the 1964 exchange rate reform because of inflation, whereas the reform helped to check import growth. Nonetheless, exports grew rapidly, providing important dynamism for the economy. South Korea coped with the emerging balance of payments problem by normalizing its diplomatic relationship with Japan and sending troops to Vietnam.
Although the positive socio-economic effects of remittances for recipient countries in the short term are unmistakable, inflows of remittances may at the same time exert adverse effects on the trade competitiveness of an economy, by appreciating the real exchange rate. This phenomenon is characterised as an instance of the ‘Dutch disease’ – the negative impact of windfall revenue inflows on the competitiveness of other tradable sectors and hence on overall economic growth. While the real effect of workers’ remittances on real exchange rates in a recipient economy is still a controversial issue, several studies have analysed evidence for the existence of the ‘Dutch disease’ phenomenon in various sets of countries. The main objective of this study is to examine whether remittance flows have had any adverse effect on the international trade competitiveness of a selected group of developing countries during the period from 1995 to 2014. Using a one-step system Generalised Method of Moments specification within a simultaneous equation approach, it shows that remittance flows depreciate the real exchange rate at their levels and that the lagged value of remittances create the Dutch disease for this country group. In addition, we confirm that while trade openness and world real interest rates contribute to a depreciation in real exchange rates, gross domestic product per capita and net Official Development Aid inflows tend to appreciate real exchange rates. A policy implication is that trade liberalisation policies that lower tariff rates on capital imports and new export-oriented incentive programmes should be accompanied by measures designed to prevent appreciation in the real exchange rate: steps in this direction such as recent macroeconomic and prudential capital flow management initiatives are briefly referenced.
This article reconstructs the history of direct interventions in exchange rate markets performed by the leading Italian banks of issue: the Banca Nazionale until 1893, then the Banca d'Italia between 1894 and 1913. The article shows that this type of operation represented a constant and relevant commitment for both institutions; interventions were made in the bills and/or the bonds market, sometimes also in conjunction with increases in the discount rate. Although often successful in the initial stages, until 1904 institutional provisions severely constrained the accumulation of foreign assets in the banks’ portfolios therefore reducing the viability, and hence the overall effectiveness, of these interventions.
Monetary policy aims at stabilizing an economy through central bank management of the money supply to influence aggregate demand. Constraints on the policy framework are imposed by the Trilemma which holds that policymakers cannot have all three of: open capital markets; an independent monetary policy; and a pegged exchange rate. Exercise of options varies within the Emerging East Asia region. Hong Kong with its globally integrated financial market pegs its exchange rate to the US dollar giving up discretion over monetary policy. China with its state-dominated economy imposes controls on foreign capital flows allowing separation of monetary and exchange rate policies. Mostly though, the region’s capital markets are open enough that the interest rate and the exchange rate intertwine as instruments of policy. Against external shock, central banks lean against currency volatility, with monetary policy following along. Sterilization of foreign exchange market intervention operates within limited space lest speculative capital flows bet against the central bank. Singapore makes for an interesting case study of exchange rate–based monetary policy.
Macroeconomics for Emerging East Asia presents a distinctive approach to the study of macroeconomic theory and policy. The author develops a unique analytical framework that incorporates: (1) both internal and external balance as aspects of macroeconomic stability; (2) both the exchange rate and the interest rate as monetary policy instruments, (3) government debt sustainability as a concern of fiscal policy, and (4) global capital flows as a force to be reckoned with. The framework provides students with the foundational knowledge to analyze macroeconomic issues common to emerging economies. Concepts are illustrated using the latest empirical data and extensive case study analysis for thirteen economies of Northeast and Southeast Asia (Cambodia, China, Hong Kong, Indonesia, Korea, Laos, Myanmar, Malaysia, the Philippines, Singapore, Taiwan, Thailand, and Vietnam). The book's lucid exposition accommodates students of differing levels of preparation.
The digitalised medical and health records of citizens are stored in the Electronic Health Records (EHR) of hospitals or clinics, and Personal Healthcare Records (PHR). The quality of medical care is improved when physicians can access the past records of patients. A user-friendly service that enables individual citizens to share their health and medical records in PHR with their physicians is essential to achieve this. In order to encourage patients and physicians to share medical records utilising PHR, while avoiding conflict with the recent trend demanding that citizens have autonomous control of their own personal information, governments have to develop legal measures to encourage individual citizens to take the initiative to record their medical and health data in their PHR and to give their physicians access to it. The author proposes mathematical schemes that can be implemented in the legal incentives deemed suitable for such encouragement.
Using “average" indicators is simply misleading in most occasions, and firm-level analysis allows a much more targeted set of policies. Firm-level analysis is an essential tool to complement and integrate the macro assessment and related policy response across the whole range of productivity drivers – from labour to trade, from finance to competition. The great advantage of the CompNet dataset is that is built in such a fashion to be able to be used – as it is and directly – to derive at the very least a first set of granular stylised facts to inform policy considerations. Users can use the dataset to assess competitiveness, financial constraints and sensitivity to exchange rate fluctuations. The book has also presented a wide variety of applications of firm-level-based analysis which goes over and above the mere presentation of stylised facts and joint distributions coming directly out of the dataset, including zombie firms impacts, export and participation in global value chains and concentration and market power.
This chapter examines how industry-level markups evolved over the period of Abenomics. Prior to Abenomics during the global financial crisis, the aggregate markups in the manufacturing sector declined by 3.6 percent from 2006 to 2009 and bounced back by 3.2 percent from 2009 to 2012. The fall and rise of productivities contributed the most to the U-shape recovery of manufacturing markups. Over the Abenomics period (2012–2015), markups increased more in the manufacturing sector than in the service sector, and the rise in output prices was responsible for this trend. We discuss some suggestive implications why the first arrow of Abenomics – aggressive monetary policy – effectively improved manufacturing industries’ markups. In a global economic environment where Japanese firms compete with foreign firms, depreciation of the yen eases global price competition and improves their profitability in terms of the yen.
Israel’s balance of payments changed dramatically between 1995 and 2015. These years mark a period of transition from deficits to surpluses in the current account. Among the factors behind this reversal were a sound macroeconomic policy, the global boom in high-tech industries, and the discovery of natural gas on Israel’s coast in the Mediterranean Sea. The transition reflects an increase in the national saving rate and a decline in the rate of national investment. While these important changes were taking place, the financial account of the balance of payments also shifted due to various structural changes, such as the completion of foreign exchange market liberalization and a shift to a floating exchange rate regime. Owing to the foregoing developments, Israel has become a net lender to the rest of the world. In this chapter we analyze and quantify these major changes and assess the extent to which the existence of current account surpluses be considered as a sustainable phenomenon.
The Brazilian developmental state changed significantly after 1985, with new rhetoric about equality, a commitment to fighting inflation, and a three-pronged policy set combining fiscal responsibility, a floating exchange rate, and inflation targeting. Yet many elements of the “old” developmental state remained intact, including a large state role, a complex monetary regime, muscular industrial policies, low economic integration, and a segmented labor market. The fight against inflation generated incentives for politicians to employ “fiscally opaque” policy instruments drawn from the tool kit of the developmental state. The fiscal imperative combined with fiscally opaque instruments contributed to the high cost of credit and low investment, driving firms to demand state succor. The fiscal imperative and the power of interest groups meant that the burden of balancing the fiscal accounts fell disproportionately on the less well-off. The ensuing demand for social spending meant that economic growth, by default, became a residual.
This paper studies the evolution of China’s exchange rate policy using real options theory. With intervention costs and ongoing uncertainty, intervention involves the exercise of an option. Increased uncertainty increases the value of this option. This “wait and see” effect leads the Central Bank to widen its intervention band. However, increased volatility also produces larger fluctuations in welfare, which creates a “fear of floating.” This induces the Central Bank to set a tighter band. To study this trade-off, our paper incorporates stochastic volatility into a new Keynesian target zone model and then calibrates it to data from China. We find that increased uncertainty leads to a tighter intervention band, both in the data and in the model. Hence, in China, “fear of floating” appears to dominate the “wait and see” effect.
Each Contracting Party shall guarantee that all payments relating to an investment by an investor of the other Contracting Party may be freely transferred into and out of its territory without delay.
This paper offers a framework for measuring global growth and inflation, built on standard index number theory, national accounts principles, and the concepts and methods for international macro-economic comparisons. Our approach provides a sound basis for purchasing power parity (PPP)- and exchange rate (XR)-based global growth and inflation measures. The Sato–Vartia index number system advocated here offers very similar results to a Fisher system but has the added advantage of allowing a complete decomposition with PPP or XR effects. For illustrative purposes, we present estimates of global growth and inflation for 141 countries over the years 2005 and 2011. The contribution of movements in XRs and PPPs to global inflation are presented. The aggregation properties of the method are also discussed.
From April 2018 to August 2019, the Yuan has declined in value relative to the US dollar by 12.6%, and the effects of this decline have not been studied. This study analyzes the effects of this fall in Yuan value, in isolation of tariffs, on US, Chinese, and world cotton markets. The results show that the adverse effects of the decline in Yuan value reverberate throughout world cotton markets and exacerbate the detrimental effects of the Chinese cotton tariff.
Like the bittersweet drama of tango dancers performing on Calle Florida for shoppers leaving Buenos Aires’ posh Galerías Pacífico shopping center, Argentina’s political and economic leaders stepped out of Latin America’s sorrowful “lost decade” of the 1980s with a series of dramatic policy changes that led the country through grand successes, devastating failures and postcrisis resurgences. Like the dancers shifting to changes in musical tempo, Argentine presidents and ministers of the economy responded to fluctuations in global markets and domestic politics with dips and twirls, driving forward and occasionally reversing direction with great fanfare. Their moves generated both praise and scorn, winning Argentina the diverse imprimaturs – at different moments in time – of “poster child” of the Washington Consensus, “defaulting pariah” of international bondholders, “vanguard” of Latin American populism and the “victim of vulture investors” that threatened to undermine debt restructuring agreements around the globe.
This paper presents a new testing method for the scapegoat model of exchange rates. A number of steps are implemented to determine whether macro-fundamentals are scapegoats for the evolution of exchange rates. Estimation is conducted using a Bayesian Gibbs sampling approach applied to eight countries (five developed and three emerging) versus the USA over the period 2002Q1–2014Q4. The macro-fundamentals that we consider are real GDP growth, the inflation rate, the long-run nominal interest rate, and the current account to GDP ratio. We calculate the posterior probabilities that these macro-fundamentals are scapegoats. For the inflation rate, these probabilities are considerably higher than the imposed prior probabilities of ½ in five out of eight countries (in particular, the Anglo-Saxon economies).
This short note gives an overview of recent research on topics concerning Financial, Housing, and Monetary markets. In particular, I introduce a special issue that includes a selection of papers presented at the second International Workshop on Financial Markets and Nonlinear Dynamics (FMND) held in Paris in June 2015 (www.fmnd.fr). The papers investigate various issues and discuss hypotheses that help us to understand asset price dynamics and their impact on real activity, as well as the new rules governing financial markets. Furthermore, their conclusions can help us to improve the forecasting of market trends in the future.