Essays on Current Account Imbalances in European Countries

This dissertation consists of three chapters in exploring the current account imbalances in the European countries. The first chapter investigates the effect of household indebtedness on the Twin Deficits phenomenon in European countries. Annual data from 1981 to 2012 for 28 European countries are used. Panel regression with fixed effects and General Method of Moments (GMM) approaches are adopted to examine the standard determinants of the current account imbalances and the effect of household indebtedness on the Twin Deficits hypothesis. Empirical findings indicate the existence of positive co-movement between the fiscal balance and current account balance, thus indicating the presence of the Twin Deficits phenomenon in the European region. Meanwhile, there is a negative association between gross household debt and the current account balance. This inverse relationship implies consistent behavior with the Twin Deficits between fiscal balance and current account balance, where increase in the gross household debt contribute to the growth of the current account deficit. Thus, the household debt may marginally exacerbate the Twin Deficits phenomenon. These results can be observed particularly in the countries with low fiscal deficits, public debt and household debt. The second chapter explores the behavior of the current account deficit and fiscal deficit from the view of thresholds to provide additional understanding on the Twin Deficits phenomenon. Annual data of eleven Euro Area countries from 2000 to 2012 are adopted in this study. This paper examines endogenous thresholds namely public debt, fiscal deficit, household debt, trade openness and financial development as threshold variables, using the sample splitting method (Hansen, 2000). The aim is to examine the Twin Deficits behavior from the perspective of countries above or below the threshold levels. This is due to the fact that households may behave in differently in term of consumption and risk preference in the countries above or below the threshold levels. Empirical findings indicate that there is evidence of Twin Deficits phenomenon in the baseline model without threshold effects. In terms of the threshold effects, there is a significant positive association between the current account balance and the fiscal balance in the countries with public debt, household debt, fiscal deficit, trade openness and financial development below their respective threshold levels. On the other hand, there is no or weak evidence of the Twin Deficits phenomenon in the countries with public debt, household debt, fiscal deficit, trade openness and financial development above the threshold levels. Intuitively, household behavior may indicate Ricardian Equivalence as the effect of the fiscal policy is offset by the opposite behavior from households, such that as the government borrows more (fiscal deficit increase), households may save more. This means that Ricardian Equivalence behavior is more likely observed in the countries with high levels of public debt, household debt, fiscal deficit, trade openness and financial development. The third chapter investigates the current account sustainability in eleven European (EU) countries using annual data of exports and imports from 1980 to 2013. Im et al. (2003) panel unit root and Pedroni (1999) panel cointegration are employed to identify the stationarity of the variables and existence of a long-run relationship between the parameters of interest, which are exports and imports. The pooled mean group estimator proposed by Pesaran et al. (1999) is used to estimate the magnitude of the interaction of the exports and imports from the long-run and short-run perspective and at the individual country level, based on a series of sub-periods. The determination of the current account sustainability is based on existence of significant long-run association between exports and imports. If the interaction coefficient is within the equilibrium of one, then there is no violation of the long-run budget constraint and current account is sustainable. In addition, significant negative error-correction terms also indicate that existence of convergence in the long-run and current account is consider as sustainable. In terms of the short-run perspective, current account may be unsustainable if the deviation of the short-run coefficient from equilibrium of one is large. Empirical results show no violation of the long-run budget constraint in the eleven EU countries in the long-run, which implies a sustainable current account over time. However, the sustainability of the current account may shift towards unsustainable when taking into consideration different time frames, namely the effect of formation of the EU in 1992 and debt crisis starting in 2008. The short-run results at the individual country level provide different insight as compared to the results of the error-correction terms. Large short-run imbalances may lead to indications of unsustainable current accounts even though there is no evidence of violation of the long-run budget constraint

THE IMPLICATIONS OF EMERGENCE OF CHINA TOWARDS ASEAN-5: FDI-GDP PERSPECTIVE

The relationship between Foreign Direct Investment (FDI) and Gross Domestic Products (GDP) had become the centre piece of recent researches in identifying the short run and long run implications between the two variables. Using the hypotheses of FDI led GDP and GDP led FDI as theoretical framework, this study intends to analyze the implications of the rise of China towards the ASEAN-5 countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand from the perspective of FDI and GDP. The cointegration and vector error correlation estimate test results showed that there is a significant positive long run relationship between FDI of China and GDP of ASEAN-5. However, we failed to detect any short run causal relationship among the variables under study.Cointegration; Granger causality; FDI; ASEAN-5

Outward FDI of Malaysia: An Empirical Examination from Macroeconomic Perspective

Outward FDI of Malaysia was nearly non-existent prior to 1970s. Nonetheless, recently Malaysia has not only been able to sustain FDI inflows position, but also emerged as the fifth largest investor among the developing economies in Asia region (UNTACD, 2005). This study aims to investigate the selected macroeconomic determinants of outward FDI of Malaysia, namely income, exchange rate and openness. The Johansen and Juselius cointegration test and the vector error correction model are applied in this study to analyze the quarterly data from 1991:Q1 to 2004:Q4. The findings verified that the outward FDI of Malaysia is determined by income, exchange rate and openness of the economy in both the short- and long-run.

THE IMPLICATIONS OF EMERGENCE OF CHINA TOWARDS ASEAN-5: FDI-GDP PERSPECTIVE

The relationship between Foreign Direct Investment (FDI) and Gross Domestic Products (GDP) had become the centre piece of recent researches in identifying the short run and long run implications between the two variables. Using the hypotheses of FDI led GDP and GDP led FDI as theoretical framework, this study intends to analyze the implications of the rise of China towards the ASEAN-5 countries, namely Indonesia, Malaysia, the Philippines, Singapore and Thailand from the perspective of FDI and GDP. The cointegration and vector error correlation estimate test results showed that there is a significant positive long run relationship between FDI of China and GDP of ASEAN-5. However, we failed to detect any short run causal relationship among the variables under study.Foreign Direct Investment; Gross Domestic Product; ASEAN-5; China

Selected Macroeconomic Determinants of Foreign Direct Investment Outflow of Singapore

The role of Foreign Direct Investment (FDI) outflow has become significant and essential for sustainable economic growth in Southeast Asia region particularly Singapore. The saturation of the domestic resources accumulation and as export-led regime, the government of Singapore introduced the regionalization policy in the 1990s to encourage abroad investment. Due to that, this study aims to investigate the determinants of Singapore FDI outflows from the perspective of selected macroeconomics variables namely income, trade openness, interest rate and exchange rate. This study adopted the Johansen and Juselius cointegration test and Granger causality based on vector error correction model to investigate the annually data from 1975 to 2007. Empirical results indicated that FDI outflow of Singapore is positively associated with income while inverse linkage with trade openness, interest rate and exchange rate in the long run. Moreover, exchange rate has the tendency to have greater influence towards the FDI outflow of Singapore in relative to the other determinants. Meanwhile, income, trade openness and interest rate portrayed causality linkage towards FDI outflow of Singapore, except for exchange rate in the short run. The continuous commitment towards economic integration in the East Asia region via the Free Trade Area has further contributed to the expansion of FDI outflow of Singapore in the future.FDI outflow, trade openness, vector error correction model

Bounds Estimation for Trade Openness and Government Expenditure Nexus of ASEAN-4 Countries

Southeast Asia countries are encountering several challenges as they are moving towards the globalization and trade liberalization era. Due to that, government intervention is essential in ensuring that the economy is resilience against the severe implications of trade openness. Therefore, this study aims to examine the relationship between trade openness and government expenditure of ASEAN-4 countries using the Autoregressive Distributed Lag [ARDL] bounds testing approach that covers a sample period of annually data from 1974-2006. Empirical results indicate that there is an existence of a significant positive long-run linkage between trade openness and government expenditure of all the ASEAN-4 countries under study. This means that government intervention in an open economy is crucial as to cushion the risks associated with trade liberalization.ARDL, ASEAN-4, openness, government expenditure

Economic Integration between ASEAN+5 Countries: Comparison of GDP

This study aims to investigate the causality direction of economic integration among ASEAN countries together with five other neighboring countries, namely Australia, China, Japan, New Zealand and South Korea. The analysis is based on the economic integration of GDP covering the sample period from 1967 to 2007. Empirical results from the Toda and Yamomoto (1995) Granger non-causality tests depicted the existence of bi-directional causality relationships between the GDP of ASEAN and China; GDP of ASEAN and Japan; GDP ASEAN and South Korea, and also GDP of ASEAN and New Zealand. This indicates that there is a great potential for ASEAN countries moving towards higher degree of economic integration via strengthening the relationship with those countries within the region.Toda and Yamomoto; Economic Integration; ASEAN+5

Selected Macroeconomic Determinants of Foreign Direct Investment Outflow of Singapore

The role of Foreign Direct Investment (FDI) outflow has become significant and essential for sustainable economic growth in Southeast Asia region particularly Singapore. The saturation of the domestic resources accumulation and as export-led regime, the government of Singapore introduced the regionalization policy in the 1990s to encourage abroad investment. Due to that, this study aims to investigate the determinants of Singapore FDI outflows from the perspective of selected macroeconomics variables namely income, trade openness, interest rate and exchange rate. This study adopted the Johansen and Juselius cointegration test and Granger causality based on vector error correction model to investigate the annually data from 1975 to 2007. Empirical results indicated that FDI outflow of Singapore is positively associated with income while inverse linkage with trade openness, interest rate and exchange rate in the long run. Moreover, exchange rate has the tendency to have greater influence towards the FDI outflow of Singapore in relative to the other determinants. Meanwhile, income, trade openness and interest rate portrayed causality linkage towards FDI outflow of Singapore, except for exchange rate in the short run. The continuous commitment towards economic integration in the East Asia region via the Free Trade Area has further contributed to the expansion of FDI outflow of Singapore in the future.FDI outflow, trade openness, vector error correction model

FDI-trade nexus: empirical analysis on ASEAN-5

This paper investigates the dynamic linkages between FDI and trade of ASEAN-5 countries using the Autoregressive Distributed Lag (ARDL) bounds testing approach. Empirical results suggest that FDI and import are complement to each other in long run but import tends to substitute FDI in short run. Conversely, export tends to substitute FDI in long run, however, complementary linkage was found between FDI and export in short run.FDI; Trade; Autoregressive Distributed Lag (ARDL)

Macroeconomics Determinations of Gold Price in United States

Nowadays, gold prices have been volatile, and the wealth of gold investors depend on the movement of gold prices. The purpose of this study is to examine the relationship between gold prices, crude oil prices, inflation rate, real interest rate and stock prices in United States. This study uses monthly data covering the period ranging from January 1990 to August 2018. The Johansen and Juselius (JJ) Cointegration test and Vector Error Correction Model (VECM) are conducted in this study. The result shows that there is a long-run relationship among gold prices, crude oil prices, inflation rate, real interest rate and stock prices. The results show that inflation rate and crude oil prices are significance and positively related to gold prices, while stock prices and real interest rate are negatively affecting gold prices. There are three unidirectional Granger causality and one bidirectional Granger causality in the short run. Only inflation rate Granger cause gold price, which means that inflation rate directly affects the gold prices. This study allows community such as central bank, government, financial institution, economist, investor and policy makers in manipulating and controlling the movement of the gold prices so that they have a better decision making to diversify their risks