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

Demand Uncertainty, Information Processing Ability, and Endogenous Firm: Another Perspective on the Impact of ICT

This paper takes the firm as an information processing unit. It provides a model that involves the division of labour and specialization, and demand uncertainty. It shows that conditionally, a firm with information processing ability comes into being endogenously, with information rent generated. The size of the rent depends on the level of uncertainty, market competition, and the firm’s information processing ability. Information and Communication Technology is assumed to affect the information processing ability, therefore impacting on the rent. Finally, case studies on the wholesale and retail industry and the finance and insurance industry of 10 OECD countries are conducted

Demand Uncertainty, Information Processing Ability, and Endogenous Firm: Another Perspective on the Impact of ICT

This paper takes the firm as an information processing unit. It provides a model that involves the division of labour and specialization, and demand uncertainty. It shows that conditionally, a firm with information processing ability comes into being endogenously, with information rent generated. The size of the rent depends on the level of uncertainty, market competition, and the firm’s information processing ability. Information and Communication Technology is assumed to affect the information processing ability, therefore impacting on the rent. Finally, case studies on the wholesale and retail industry and the finance and insurance industry of 10 OECD countries are conducted

Endogenous Firm and Information Rent Under Demand Uncertainty

Increasing evidence shows that ICT investment improves firm performance. Among the many explanations on why ICT contributed to labor productivity surge since 1990, this is the most promising one. It is thus necessary to take the firm as an information processing organization, putting it in stochastic environment. As perfect information is no longer the assumption, that firms exogenously exist in the economy would no longer be assumed here. With these in mind, the paper provides a model that involves the division of labor and specialization, the production and consumption under demand uncertainty, and the value of information. It shows that under certain business conditions, a firm with certain type of information processing ability comes into being endogenously. A surplus, which could reasonably be argued as information rent, is generated with firm production. The size of this information rent depends on a few key parameters, including the level of uncertainty, the degree of market competition, and the cost of information processing. To test the model, case studies on the financial industry and the wholesale and retail industry are conducted, which corroborate the theoretical predictions of the model

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

Terms-of-trade shocks in a small open economy

104 p.This study concentrates on the effects of terms-of-trade shocks in a small open economy. Generally, studies concerned with terms-of-trade fluctuations focus on a few important issues, best summed up by four key questions : (a) What are the short run and long run impacts of the alleged terms-of-trade shock on primary producers? (b) What are the features of an economy that determine the relationship between terms-of-trade shocks and the current account fluctuations? (c) What is the role of exchange rate regimes in mitigating the effects of terms-of-trade shocks? (d) What is the effect of terms-of-trade shocks on economic growth under alternative exchange rate regimes?DOCTOR OF PHILOSOPHY (HSS

Economic intergration between South Asia and East Asia : a perception survey of asian opinion leaders

Economic integration, which was deepening among the East Asian countries, is now broadening to cover the South Asian region as well. While we are starting to witness the emergence of Pan-Asian integration, a few distinct and yet related questions arise. What are the benefits and costs of South Asia and East Asia (SA-EA) integration? What are the respective roles of market-led vs. regional cooperation policies that South Asian countries should adopt under their “Look East” polices to link themselves to production networks in East Asia? What is the role of infrastructure and connectivity? What are the factors that have led to the revival of land connectivity or old South-western Silk Road in Asia? Should efforts to promote ASEAN-India connectivity be supported? Should the membership of East Asian institutions be expanded to cover South Asian countries at an appropriate level? In particular, should India be invited to join the various ASEAN+3 initiatives? Should South Asian countries (other than India) be invited to join the negotiations for the Regional Comprehensive Economic Partnership (RCEP)? Can the integration of the two regions re-invigorate economic integration in south Asia? This paper assesses the views of South Asian and East Asian opinion leaders through a perception survey conducted in 2013. 390 respondents from academia, business, and various government offices participated in the survey. In general, the opinion leaders in both regions generally feel positive about the integration of the two regions and they feel that it could receive economic integration in South Asia. They also feel that South Asian countries should be given a role in various East Asian initiatives

The linkage between international financial integration and income inequality

Following the trend of financial globalization since the 1980s, more and more tropical economies have embraced financial openness as one of the drivers of economic growth, allowing foreign investments to pour into their countries. While FDI capital flows are often associated with higher economic growth, fickle non-FDI flows are blamed for exposing developing economies to the risk of ‘Sudden Stop’ and economic instability. Financial openness associated with different types of foreign investment is likely to make differential impacts across different income groups within an economy, which has implications for a nation’s income inequality. Since most of the tropical economies are in a relatively early phase of financial openness compared to their developed counterparts, it would be meaningful to investigate the relationship between financial openness and income inequality, allowing for possible nonlinear linkage dependent on stages of financial openness