Supply capacity, vertical specialisation and trade costs : the implications for aggreagate US trade flow equations

This paper re-examines aggregate and disaggregate import and export demand functions for the United States over the 1975q1-2010q1 period. This re-examination is warranted because (1) income elasticities are too high to be warranted by standard theories, and (2) remain high even when it is assumed that supply factors are important. These findings suggest that the standard models omit important factors. An empirical investigation indicates that the rising importance of vertical specialization combined with changing tariff rates and transportation costs explains some of results. Accounting for these factors yields more plausible estimates of income elasticities

Sectoral Productivity, Government Spending and Real Exchange Rates: Empirical Evidence for OECD Countries

This paper investigates the long- and short-run determinants of the real exchange rate using a panel of data for fourteen OECD countries. The data are analyzed using time series and panel unit root and panel cointegration methods. Two dynamic productivity-based models are used to motivate the empirical exercise. The candidate determinants include productivity levels in the traded and in the nontraded sectors, government spending, the terms of trade, income per capita, and the real price of oil. The empirical results indicate that it is easier to detect cointegration in panel data than in the available time series; moreover, the estimate of the rate of reversion to a cointegrating vector defined by real exchange rates and sectoral productivity differentials is estimated with greater precision as long as homogeneity of parameters is imposed upon the panel. It is more difficult to find evidence for cointegration when allowing for heterogeneity across currencies. The most empirically successful model of the real exchange rate includes sectoral productivity measures in the long run relation and government spending in the short run dynamics.

Doomed to Deficits? Aggregate U.S. Trade Flows Re-Examined

This paper examines the stability of import and export demand functions for the United States over the 1975q1-2001q2 period. Using the Johansen maximum likelihood approach, an export demand function is readily identified. In contrast, there appears to be a structural break in the import demand function in 1995; specifications incorporating this break pass tests for cointegration, although the price elasticity is not statistically significant. Only when excluding computers and parts from the import series is a stable import demand function detected. The resulting point estimates do not exhibit the income asymmetry typically found in other studies of aggregate U.S. trade flows.

The Usual Suspects? Productivity and Demand Shocks and Asia-Pacific Real Exchange Rates

The evidence for a productivity-based explanation for real exchange rate behavior of East Asian currencies is examined. Using sectoral output and employment data, relative prices and relative productivities are calculated for China, Indonesia, Japan, Korea, Malaysia, Philippines, Singapore, Taiwan and Thailand. Time series regressions of the real exchange rate on relative prices indicate a role for relative prices for Indonesia, Japan and Korea. When examining real exchange rates and relative productivity ratios, one finds a relationship for Japan, Malaysia, and the Philippines. Only when augmenting the regressions with real oil prices are significant relationships obtained for Indonesia and Korea. Panel regression results are slightly more supportive of a relative price view of real exchange rates. However, the panel regressions incorporating productivity variables, as well as other demand side factors, are less encouraging, except for a small subset of countries (Indonesia, Japan, Korea, Malaysia and the Philippines). Surprisingly, government spending does not appear to be a determinant of real exchange rates in the region.

Supply Capacity, Vertical Specialization and Tariff Rates: The Implications for Aggregate U.S. Trade Flow Equations

This paper re-examines aggregate and disaggregate import and export demand functions for the United States. This re-examination is warranted because (1) income elasticities are too high to be warranted by standard theories, and (2) remain high even when it is assumed that supply factors are important. These findings suggest that the standard models omit important factors. An empirical investigation indicates that the rising importance of vertical specialization combined with decreasing tariffs rates explains some of results. Accounting for these factors yields more plausible estimates of income elasticities, as well as smaller prediction errors.

Supply Capacity, Vertical Specialisation andTrade Costs: The Implications for Aggreagate US Trade Flow Equations

This paper re-examines aggregate and disaggregate import and export demand functions for the United States over the 1975-2010 period. This re-examination is warranted because (1) income elasticities are too high to be warranted by standard theories, and (2) remain high even when it is assumed that supply factors are important. These findings suggest that the standard models omit important factors. An empirical nvestigation ndicates that the rising importance of vertical specialization combined with changing tariff rates and transportation costs explains some of results. Accounting for these factors ields more plausible estimates of income elasticities.imports; exports; elasticities; vertical specialization; production fragmentation; trade costs.

Will the Euro Eventually Surpass the Dollar as Leading International Reserve Currency?

Might the dollar eventually follow the precedent of the pound and cede its status as leading international reserve currency? Unlike ten years ago, there now exists a credible competitor: the euro. This paper econometrically estimates determinants of the shares of major currencies in the reserve holdings of the world%u2019s central banks. Significant factors include: size of the home country, inflation rate (or lagged depreciation trend), exchange rate variability, and size of the relevant home financial center (as measured by the turnover in its foreign exchange market). We have not found that net international debt position is an important determinant. Network externality theories would predict a tipping phenomenon. Indeed we find that the relationship between currency shares and their determinants is nonlinear (which we try to capture with a logistic function, or else with a dummy %u201Cleader%u201D variable for the largest country). But changes are felt only with a long lag (we estimate a weight on the preceding year%u2019s currency share around .9). The advent of the euro interrupts the continuity of the historical data set. So we estimate parameters on pre-1999 data, and then use them to forecast the EMU era. The equation correctly predicts a (small) narrowing in the gap between the dollar and euro over the period 1999-2004. Whether the euro might in the future rival or surpass the dollar as the world%u2019s leading international reserve currency appears to depend on two things: (1) do the United Kingdom and enough other EU members join euroland so that it becomes larger than the US economy, and (2) does US macroeconomic policy eventually undermine confidence in the value of the dollar, in the form of inflation and depreciation. What we learn about functional form and parameter values helps us forecast, contingent on these two developments, how quickly the euro might rise to challenge the dollar. Under two important scenarios the remaining EU members, including the UK, join EMU by 2020 or else the recent depreciation trend of the dollar persists into the future the euro may surpass the dollar as leading international reserve currency by 2022.

East Asia and Global Imbalances: Saving, Investment, and Financial Development

We investigate the role of budget balances, financial development and openness, in the evolution of global imbalances. Financial development -- or the lack thereof -- has received considerable attention as a possible contributing factor to the development of persistent and expanding current account imbalances. Several observers have argued that the depth and sophistication of US capital markets have caused capital to flow from relatively underdeveloped East Asian financial markets. In this paper, we extend our previous work by examining the effect of different types and aspects of financial development. Our cross-country analysis, encompassing a sample of 19 industrialized countries and 70 developing countries for the period of 1986 through 2005, yields a number of new results. First, we confirm a role for budget balances in industrial countries when bond markets are incorporated. Second, empirically both credit to the private sector and stock market capitalization appear to be equally important determinants of current account behavior. Third, while increases in the size of financial markets induce a decline in the current account balance in industrial countries, the reverse is more often the case for developing countries, especially when other measures of financial development are included. However, because of nonlinearities incorporated into the specifications, this characterization is conditional upon other factors. Fourth, a greater degree of financial openness is typically associated with a smaller current account balance in developing countries.

Real Exchange Rate Levels, Productivity and Demand Shocks: Evidence from a Panel of 14 Countries

This paper investigates the determinants of the real exchange rate using a panel of disaggregated data for the OECD countries. It also marries two literatures - one which uses panel data to measure relationships between changes in exchange rates to changes in the determinants, and the other which uses cointegration techniques to measure the long-run relationship between the level of the exchange rate and the level of the determining factors. The previous panel studies cannot account for deviations from long-run trend levels, while the extant literature using time series cointegration techniques can only intermittently detect and measure posited relationships. Estimating the relationships in levels is an interesting activity because it allows one to calculate trend real exchange rates. After surveying the previous litera- ture, a dynamic model of the real exchange rate is used to motivate the empi- rical exercise. In examining this problem, we exploit recent developments in the econometric analysis of nonstationary variables in panel data. The results indicate that under certain assumptions it is easier to detect cointegration in panel data than in the available time series; moreover, the estimates of reversion to trend are also estimated with greater precision. The most empirically successful models include productivity measures, government spend- ing ratios, and either the terms of trade, or the real price of oil. Using this latter model, we find that the implied equilibrium exchange rates indicate less overvaluation of the dollar than that implied by a naive version of purchasing power parity.