The Exchange Value of the Renminbi and China's Balance of Trade: An Emp irical Study

This paper aims at assessing the relationship between the exchange value of the Chinese Renminbi (RMG) and China's trade balance by means of some recent econometric techniques designed to evaluate the existence and the direction of causality. We find strong evidence suggesting that changes in the trade balance and each of its components Granger-cause changes in the exchange rate but no evidence indicating a causal link running from the exchange rate to the trade balance. Our results seem to be rather supportive of the accommodative role of the exchange rate proposed by the modern theory of the trade balance determination and not supportive of the existence of a J-curve in China's trade balance. Our finding of a bidirectional causal relationship between the real exchange rate and the price variables confirms the presence of a vicious circle hypothesis following currency devaluation. This has important implications for the discussions of impacts of the RMB devaluation on China's trade balance.

PRODUCTIVITY AND ECONOMIC GROWTH: AN EMPIRICAL ASSESSMENT OF THE CONTRIBUTION OF FDI TO THE CHINESE ECONOMY

We estimate the contribution of FDI to the efficiency and productivity growth in a cross-region regression framework, utilising China¡¯s provincial data from 1984 to 1997. We find a bidirectional causal linkage between FDI and productivity growth across the regions in China, suggesting that changes in FDI intensity Granger-cause changes in productivity, and vice versa. China¡¯s economic growth is found largely due to the rapid expansion of investment in fixed assets. Human capital development becomes increasingly important to the labour productivity growth, and FDI has certain effects on labour productivity but not so strong and significant. Thus, the contribution of FDI to China¡¯s technological progress through technology transfer is still not noticeable, and many regions in China still experience inefficiency. This raised the concern over the issue of how to improve economic efficiency and technology transfer in order to sustain China¡¯s rapid growth in the long run. It also concerns what kinds of development strategy and industrial policy toward FDI that China is to form.China, Growth, Productivity, FDI, Human Capital

Whither Currency Union in Greater China?

The paper attempts to evaluate the prospect of creating a currency union in the "Greater China" economic area including Mainland China, Hong Kong and Taiwan. Despite of the political deadlock and military confrontation in the Taiwan Strait, the Greater China area has experienced rapid and spontaneous regional integration in the past decades as a result of increasingly cross-border trade, foreign direct investment (FDI), technology contracts, and other arrangements in accordance with changes in comparative advantage and industrial upgrading in these economies. In this study, we focus on the symmetry in shocks that is perceived as one of the major preconditions of a currency union. In contrast to the previous studies, we investigate the time-varying correlation of supply and demand shocks by using the Kalman filter technique in order to reveal whether the Greater China economies show a convergence trend. We also examine the costs of forming a currency union in the area that are caused by the loss of monetary autonomy in each economy. Our results emphasize an increasing symmetry in demand shocks and, to a lesser extent, in supply shocks, implying that these economies would not suffer too much from abandoning their monetary policy as an instrument of absorbing shocks. Acknowledgements: An earlier version of the paper was presented at the 9th International Convention of the East Asian Economic Association in Hong Kong and the CITS Research Workshop at Yokohama National University, Japan. The authors wish to thank Rasmus Rffer, Masahito Kobayashi, Hiroyasu Uemura, Craig Parsons, Masaru Inaba, and participants in the conference and seminar for their helpful comments and suggestions. The authors wish to acknowledge the financial support of the JSPS through the Grant-in-Aid for Scientific Research (B), 116330059.Optimum currency area, structural shocks, vector autoregression, Kalman filter, output losses, Greater China

Identifying Shocks in Regionally Integrated East Asian Economies with Structural VAR and Block Exogeneity

In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented.Structural vector autoregression; Block exogeneity; Monetary union; External shocks; East Asia

Towards an East Asian Monetary Union: An Econometrics Analysis of Shocks

This paper examines the viability of regional monetary integration in East Asia by focusing on the symmetry of shocks, which is one of the preconditions for forming an optimum currency area (OCA). We extend the conventional 2-variable structural VAR model by incorporating foreign (namely, US) variables, as well as real effective exchange rates to capture country-specific shocks in estimation. We also obtain similar estimates for European countries to check for robustness. Impulse response function analysis is conducted to measure the size of shocks and the speed of adjustment to shocks. The empirical results reveal that it is less feasible for East Asian economies to form an OCA than is suggested in previous studies, but they do imply that some sub-groups of the economies, such as some Asian NIEs and ASEAN economies, are more appropriate candidates as their underlying shocks are correlated and symmetric, and the speed of their adjustment to shocks is faster. Acknowledgements: The authors wish to thank Eiji Ogawa, Akira Kohsaka, Shin-ichi Fukuda, Yuko Hashimoto, Etsuro Shioji, Takatoshi Ito and Shujiro Urata for helpful comments. The first and second author thanks the JSPS for financial support through the Grant-in-Aid for Scientific Research (B), 116330059. The third author is most grateful for the financial support of the Australian Research Council.Optimum currency area, monetary integration, structural vector autoregression, East Asia

"Identifying Shocks in Regionally Integrated East Asian Economies with Structural VAR and Block Exogeneity"

In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented.

Exchange rate pass-through and inflation in Australia, China and India: a comparative study with disaggregated data

This article analyses the exchange rate shocks and its pass-through to various level of prices in two emerging economies and one developed country by employing a structural VAR framework over the period 1990-2011. We assess the pass-through into import, export, producer and consumer prices in Australia, China and India in industries including mining, agriculture and manufacturing. We test whether the exchange rate pass-through to import prices is more complete in any particular sector and estimate the pass-through to consumer prices to investigate whether there is any linkage between the pass-through and the average inflation rate across these countries. The impulse responses indicate that exchange rates have less effect in the rising mining and natural resources prices in Australia than China and India. Moreover, pass-through of exchange rate to aggregate consumer prices is greater in China and India than Australia. This will have important policy implication for the monetary authorities

Measuring Asymmetry and Persistence in Conditional Volatility in Real Output: Evidence from Three East Asian Tigers Using a Multivariate GARCH approach

We search for evidence of conditional volatility in the quarterly real GDP growth rates of three East Asian tigers: Singapore, Hong Kong and Taiwan. The widely accepted exponential GARCH-type model is used to capture the existence of asymmetric volatility and the potential structural break points in the volatility. We find evidence of asymmetry and persistence in the volatility of GDP growth rates. It is noted that the identified structural breakpoints of volatility correspond reasonably well to the historical economic and political events in these economies. Policy implications are discussed.East Asia, Real Output, GARCH, structural changes, asymmetric volatility