THE MEXICAN PESO AND THE KOREAN WON REAL EXCHANGE RATES: EVIDENCE FROM PRODUCTIVITY MODELS

Using the U.S. as benchmark country, Korean data from 1970:1 to 2000:4 and Mexican data from 1983:1 to 2000:4 are decomposed into traded and non-traded sectors. We find that the traditional purchasing power parity (PPP) model performs remarkably well for the Peso and that the productivity model appears adequate for the Peso but not for the Won. As Mexican relative traded goods productivity rises, the nominal Peso appreciates (coefficients between -2.03 and -2.16). Conversely, as U.S. relative traded goods productivity rises, the Peso depreciates (coefficients between 2.06 and 2.48). Although predicting correctly the direction of change, such large magnitudes suggest only partial support for the theoretical mechanism in Mexico. Coefficients with contrary signs obtained in Korea may indicate competing models (neoclassical or Ricardian) are more appropriate to capture the relationship between productivity and exchange rates.Cointegration, Non-traded Goods, Traded Goods, Traditional PPP, Productivity Models

Does Inflation Targeting Matter for Output Growth? Evidence from Industrial and Emerging Economies

This paper examines the effects of inflation targeting on industrial and emerging economies' output growth over the "globalization years" of 1986-2004. Controlling for trade openness and two indicators of financial globalization, the authors find systematic positive and significant effects of inflation targeting on real output growth. In dynamic models, the findings show strong output persistence in industrial economies, in which partial and full inflation targeting regimes have a positive long-run impact on growth. In emerging markets, only full inflation targeting policies have any output effect in the long-run. The results suggest that strict inflation targeting is needed to make the discipline effect of the disinflation process outweigh the output costs of promoting high interest rates to attract capital flows in a global world. These findings are robust to the treatment of endogenous globalization measures.Economic Growth; Globalization; Inflation Targeting; Panel Data Methods

Crisis and Volatility in Asian Versus Latin American Real Exchange Rates

Examining quarterly real exchange rates (RER) from 1976 to 2006 in panels of Asian and Latin American countries, shows that crisis-battered Asian currencies incur a higher speed of adjustment towards purchasing power parity (PPP). The degree of mean reversion of the three most volatile Asian currencies is very fast (about 1.8 quarters) during the floating regime compared to 40 quarters in the pre-crisis period. Panel cointegration tests confirm that the rejection of the null of no-cointegration between exchange rates and relative prices is more prevalent for Asian currencies (than for Latin American currencies) in the post-crisis period (than in the pre-crisis period).Currency crisis; half-lives; PPP; real exchange rates; volatility

The Rise of the Skill Premium in Mexican Maquiladoras

The wage premium between skilled and unskilled workers in Mexican maquiladoras has moved up, from 4.14 in January 1990 to 4.79 in March 2006. This 16 per cent increase in wage differentials favouring skilled workers is contrasted to a measure of relative labour supplies within a model of skill-biased technical change (SBTC). Estimating how this skill premium responds to technology (captured by either a time trend or the capital-expenditure share) and to relative labour supplies, we find support for theoretical models in which the skill premium increases in the long-run under strong technology effects. Error correction models confirm fast adjustment to long-run equilibrium, within about four months.

Relative wages, labor supplies and trade in Mexican manufacturing: Evidence from two samples

How do relative wages (between skilled and unskilled workers) respond to technical progress and to relative supply shifts? An empirical model of the wage premium for Mexican manufacturing is employed on two monthly data samples: one, from 1987 to 1995, displays the well-documented rising trend in wages right after Mexico joined GATT; the other, from 1994 to 2007, suggests slightly decreasing wages. The model provides support for skill-biased technical change (SBTC) and yields plausible elasticity of substitution for the first sample (σ = 1.03) and higher elasticity for the second (σ = 1.71). Allowing export intensity and the real exchange rate to modify the factor augmenting technology ratio, negative relationships are found for the earlier sample: the higher the export intensity or real exchange rate the lower relative wages. The error correction methodology and the bounds approach confirm these results. Combining trade and SBTC, this study supports the view that trade considerations have an impact on wage premiums at the very beginning of trade liberalization. In contrast, the benchmark model seems a more adequate representation when NAFTA and a market-oriented peso help consolidate Mexico in its path towards sustainable growth.export intensity, Mexico, real exchange rate, relative wages, SBTC, wage premium,

Currency crisis and the forward discount bias: Evidence from emerging economies under breaks

This paper investigates the effects of two financial crises (the 1997 Asian currency crisis and the 2000 Turkish financial crisis) on the forward discount bias in 14 emerging-market economies using a robust two-stage procedure. This unique sample of less researched currencies displays: (i) high persistence in forward discount equations; and (ii) varying variance ratios between changes in exchange rates and the forward premium. The findings provide new insights into the forward discount puzzle: financial crises exert considerable power on the forward discount bias and uphold the forward rate unbiasedness hypothesis (FRUH) by reverting the negative sign into positive.Currency crisis Forward discount bias Emerging economies Multiple structural breaks

The Impact of the Japanese Purchases of U.S. Treasuries on the Dollar/Yen Exchange Rate

This article connects net Japanese purchases of U.S. Treasury securities and the U.S. 10-year Treasury bond yields to the yen/dollar exchange rate. VAR estimations suggest that a one-time increase in net Japanese purchases has an immediate negative effect on U.S. long bond yields but a short-lived delayed yen depreciation. Further, a one-time increase in the U.S. long yield leads to an immediate yen depreciation. Our results support the hypothesis that Japanese investors, who are major holders of U.S. debt and face extremely low interest rates domestically, influence the dollar/yen rate in a financially integrated world.

Urbanization, economic growth, and welfare

This paper studies the process of city growth motivated by the tax differentials charged upon the city and the hinterland. Welfare implications for consumption and urbanization suggest a rather instantaneous, one shot-like, migration adjustment