Mean Reversion of Real Exchange Rates and Purchasing Power Parity in Turkey

The important concept of purchasing power parity (PPP) has a number of practical implications. Our central objective is to examine the stationarity of Turkey’s real exchange rates to test for the empirical validity of PPP. Our results from conventional univariate unit root tests fail to support PPP. However, when we use the empirical methodology developed by Caner and Hansen (2001), which allows us to jointly consider non-stationarity and non-linearity, we find evidence of non-linear mean reversion in Turkey’s real exchange rates. This implies that PPP holds in one threshold regime but not in another.Turkey, purchasing power parity, real exchange rate, unit root, non-linearity

Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia

East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies.

Foreign Output Shocks and Monetary Policy Regimes in Small Open Economies: A DSGE Evaluation of East Asia

East Asia’s small open economies were hit in varying degrees by the sharp drop in the output of major industrial countries during the global financial and economic crisis of 2008-2009. This highlights the role of monetary policy regimes in cushioning small open economies from adverse external output shocks. To assess the welfare impact of external shocks on key macroeconomic variables under different monetary policy regimes, we numerically solve and calculate the welfare loss function of a dynamic stochastic general equilibrium (DSGE) model. We find that CPI inflation targeting minimizes welfare losses for import-to-GDP ratios from 0.3 to 0.9. However, welfare under the pegged exchange rate regime is almost equivalent to CPI inflation targeting when the import-to-GDP ratio is one while the Taylor-type rule minimizes welfare when the import-to-GDP ratio is 0.1. We calibrate the model and derive welfare implications for eight East Asian small open economies.Trade channel, Import-to-GDP ratio, small open economies, welfare, exchange rate regimes, inflation targeting, Taylor rule, foreign output shock

Determinants of Different Modes of FDI: Firm-Level Evidence from Japanese FDI into the United States

There are four major modes through which firms undertake foreign direct investment (FDI): merger and acquisition (M&A), joint venture, new plant, and others. The four modes of FDI are distinct from each other, and each has its own unique advantages and disadvantages. While a large and growing empirical literature examines the determinants of FDI, very few studies examine the determinants of the different modes. The central objective of this paper is to empirically analyze the extent to which the determinants of FDI such as firm size influence the choice of one mode of FDI over another. Our analysis follows a stylized two-stage investment process. First, we look at the probability of whether a Japanese firm is willing to undertake FDI in the United States. Second, which is the innovation of this paper and its main original contribution to the FDI literature, we analyze which of the four modes of FDI will be chosen by firms that are willing to undertake FDI

Corporate Governance and Merger and Acquisition Foreign Direct Investment: Firm-level Evidence from Japanese Foreign Direct Investment into the US

Merger and acquisition (M&A) is a mechanism for promoting corporate governance suggesting that an improvement in overall corporate governance may have a negative effect on M&A activity. Since M&A foreign direct investment (FDI) is a cross-border variant of M&A, stronger corporate governance may also reduce M&A FDI. Hence, we use firm-level evidence from Japanese FDI into the United States to investigate the effect of US corporate governance on Japanese M&A FDI. Our results indicate that two landmark corporate governance regulations by the US Securities and Exchange Commission in 1992 contributed significantly to the sharp decline in Japanese M&A FDI in the US during the 1990s. Our evidence lends some support to the notion that corporate governance may affect not only domestic M&A activity but also cross-border M&A activity. Our study also sheds light on the puzzle of why Japanese FDI into the US fell during the 1990s despite the depreciation of the US dollar

Effects of Hub-and-Spoke Free Trade Agreements on Trade: Panel Data Analysis

Overlapping free trade agreements (FTAs) have given rise to hub-and-spoke FTAs that may promote trade by giving an export advantage to the FTA hub country. We empirically investigate the effect of hub-and-spoke FTAs on trade using panel data consisting of 99 countries and covering the period 1960–1999. Our empirical analysis of the panel data yields three notable findings. First, FTAs have a significant and positive impact on trade. Second, hub-and-spoke FTAs increase trade above and beyond FTAs, and thus reinforce the trade-boosting effects of FTAs. Third, our results imply an annual growth rate of 4.9% in bilateral trade and hence a doubling of trade after 14½ years between FTA partners. Our results indicate that the hub-and-spoke nature of FTAs has a positive effect on trade, in addition to the direct, trade-liberalizing effect of FTAs. Therefore, in a world of overlapping FTAs, a more accurate empirical analysis of the relationship between FTAs and trade calls for taking into account the hub-and-spoke characteristic of FTAs

Predictability of exchange rates with Taylor rule fundamentals: Evidence from inflation-targeting emerging countries

We investigate the out-of-sample predictability of U.S. dollar exchange rates with Taylor rule fundamentals in thirteen emerging countries with inflation-targeting monetary policy regimes. We find some evidence of out-of-sample exchange rate predictability for Brazil, Czech Republic, Hungary, Philippines, Thailand, and South Africa. Plots of the coefficients of U.S. inflation and Philippine inflation predict the direction of the U.S. dollar-Philippine peso exchange rates to be opposite to that predicted by the Taylor principle

Purchasing power parity and country characteristics: evidence fron panel data tests

Abstract We examine long-run purchasing power parity (PPP) using panel data methods to test for unit roots in US dollar real exchange rates of 84 countries. We find stronger evidence of PPP in countries more open to trade, closer to the United States, with lower inflation and moderate nominal exchange rate volatility, and with similar economic growth rates as the United States. We also show that PPP holds for panels of European and Latin American countries, but not for African and Asian countries. Our findings demonstrate that country characteristics can help explain both adherence to and deviations from long-run PPP. JEL classification: F31, O5

Does wage-inflation targeting complement foreign exchange intervention? An evaluation of a multi-target, two-instrument monetary policy framework

We assess the inclusion of wage inflation as an intermediate target of an emerging central bank using a dynamic stochastic general equilibrium model with sticky wages and prices calibrated for the South Korean economy. The model includes wage inflation as an additional target jointly with domestic price inflation and the output gap in a Taylor- type interest rate rule operating with a sterilized foreign exchange (FX) intervention rule. Our results show a complementary relationship between wage inflation targeting and price inflation targeting. That is, by supplementing price inflation targeting with wage inflation targeting, welfare improves for cases with and without sterilized FX intervention. When intervention is in place, wage inflation targeting has the added advantage of reducing the volatilities of nominal exchange rate and foreign exchange reserves thereby promoting a more sustainable conduct of FX intervention.Accepted versio

Comparison of the CDC Backpack aspirator and the Prokopack aspirator for sampling indoor- and outdoor-resting mosquitoes in southern Tanzania.

BACKGROUND\ud \ud Resting mosquitoes can easily be collected using an aspirating device. The most commonly used mechanical aspirator is the CDC Backpack aspirator. Recently, a simple, and low-cost aspirator called the Prokopack has been devised and proved to have comparable performance. The following study evaluates the Prokopack aspirator compared to the CDC backpack aspirator when sampling resting mosquitoes in rural Tanzania.\ud \ud METHODS\ud \ud Mosquitoes were sampled in- and outdoors of 48 typical rural African households using both aspirators. The aspirators were rotated between collectors and households in a randomized, Latin Square design. Outdoor collections were performed using artificial resting places (large barrel and car tyre), underneath the outdoor kitchen (kibanda) roof and from a drop-net. Data were analysed with generalized linear models.\ud \ud RESULTS\ud \ud The number of mosquitoes collected using the CDC Backpack and the Prokopack aspirator were not significantly different both in- and outdoors (indoors p = 0.735; large barrel p = 0.867; car tyre p = 0.418; kibanda p = 0.519). The Prokopack was superior for sampling of drop-nets due to its smaller size. The number mosquitoes collected per technician was more consistent when using the Prokopack aspirator. The Prokopack was more user-friendly: technicians preferred using the it over the CDC backpack aspirator as it weighs considerably less, retains its charge for longer and is easier to manoeuvre.\ud \ud CONCLUSIONS\ud \ud The Prokopack proved in the field to be more advantageous than the CDC Backpack aspirator. It can be self assembled using simple, low-cost and easily attainable materials. This device is a useful tool for researchers or vector-control surveillance programs operating in rural Africa, as it is far simpler and quicker than traditional means of sampling resting mosquitoes. Further longitudinal evaluations of the Prokopack aspirator versus the gold standard pyrethrum spray catch for indoor resting catches are recommended