Puzzles in the Chinese stock market

Many companies on China’s stock markets have separate, restricted classes of shares for domestic residents and foreigners. These shares are identical other than who can own them, but foreigners pay only about one-quarter the price paid by domestic residents. We argue that the generally higher level (and volatility) of domestic share prices is consistent with the simplest asset pricing model, assuming plausible differences-about 4 percentage-points-in expected rates of return by foreign and domestic investors. We attribute low Chinese expected returns to the limited alternative investments available in China. We then estimate how various company characteristics affect the relative price paid by foreigners in a panel of companies. We find, for example, that foreigners pay a lower relative price for companies with a higher proportion owned by the state--reflecting, surprisingly, a higher absolute price paid by both foreigners and domestic residents.Stock market ; China

The U.S. current account deficit and the expected share of world output

We investigate the possibility that the large current account deficits of the U.S. are the outcome of optimizing behavior. We develop a simple long-run world equilibrium model in which the current account is determined by the expected discounted present value of its future share of world GDP relative to its current share of world GDP. The model suggests that under some reasonable assumptions about future U.S. GDP growth relative to the rest of the advanced countries--more modest than the growth over the past 20 years--the current account deficit is near optimal levels. We then explore the implications for the real exchange rate. Under some plausible assumptions, the model implies little change in the real exchange rate over the adjustment path, though the conclusion is sensitive to assumptions about tastes and technology. Then we turn to empirical evidence. A test of current account sustainability suggests that the U.S. is not keeping on a long-run sustainable path. A direct test of our model finds that the dynamics of the U.S. current account--the increasing deficits over the past decade--are difficult to explain under a particular statistical model (Markov-switching) of expectations of future U.S. growth. But, if we use survey data on forecasted GDP growth in the G7, our very simple model appears to explain the evolution of the U.S. current account remarkably well. We conclude that expectations of robust performance of the U.S. economy relative to the rest of the advanced countries is a contender--though not the only legitimate contender--for explaining the U.S. current account deficit.Budget deficits ; Balance of trade

High inflation: causes and consequences

Using evidence from seven hyperinflationary episodes in four Latin American countries in the second half of the 1980s, John Rogers and Ping Wang examine the causes and consequences of high inflation. The article emphasizes four issues: the welfare costs of inflation and real costs of stabilization, the common features of the chronically high inflations experienced in Latin American countries, the main causes of high inflation, and the widely different outcomes of several stabilization programs. ; Rogers and Wang find that the welfare costs of even moderate periods of inflation may not be negligible, whereas the adverse macroeconomic effects of stabilization efforts are mostly temporary. The authors show that the spiral-like adjustment of the government budget and monetary growth may result in a high-inflation trap. The main causes of chronically high inflation include continuous fiscal-monetary extension, productivity slowdown, systematic undervaluation of the domestic currency, and diminished credibility of anti-inflation policies. Successful stabilization, in essence, results from budgetary adjustment, market liberalization, and the adoption of a nominal anchor (such as the nominal exchange rate), all of which ensure credibility of the public authorities.Inflation (Finance)

Violating the Law of One Price: Should We Make a Federal Case Out of It?

We use new disaggregated data on consumer prices to determine why there is variability in prices of similar goods across U.S. cities. We address questions similar to those that have arisen in the international context: is this variability purely a result of market segmentation or do sticky nominal prices play a role? We also examine how the degree of tradability of a good influences price variability. Surprisingly, we find that variability is larger for traded-goods. We attribute this finding to greater price stickiness for non-traded goods. Distance between cities accounts for a significant amount of the variation in prices between pairs of cities. But we also find that nominal price stickiness plays an even more significant role.

Relative Returns on Equities in Pacific Basin Countries

We examine the factors that determine the differences in ex ante returns on equities in eleven Pacific Basin countries. Our concern is whether real return differentials are primarily caused by nominal return differentials or expected changes in real exchange rates. We find that nominal return differentials account for most of the difference, which suggests that either there is not free mobility of capital between the countries of our study or that there are significant differences in the riskiness of returns across countries. We do not find a significant relationship between the size of the return differentials and the flexibility of the nominal exchange rate.