IMF Bailouts and Moral Hazard

This paper empirically investigates the extent of investor moral hazard associated with IMF bailouts by analyzing the responses of sovereign bond spreads to the changes in the perceived probability of IMF bailouts of countries undergoing financial crisis. We do not find strong evidence that the extent of investor moral hazard changed after the non-bailout of Russia in August 1998 that signaled a modification to IMF intervention policy. In contrast, we find evidence that investor moral hazard is intensified for those countries that have stronger political connections to the IMF and that are thereby more likely to be bailed out by the IMF. This pattern prevailed even after the Russian crisis.IMF, moral hazard, sovereign bond spreads, international financial architecture

Does Regionalism Lead to More Global Trade Integration in East Asia?

Since early 1999, global trade liberalization has moved to the wayside as regional preferentialtrade agreements have become the preferred choice in East Asia. Does this shift toward regional trade agreements (RTA) suggest that global trade and welfare levels will be raised? Regional preferential trade arrangements, in contrast to unilateral trade liberalization, may well cause both 'trade creation’ and ‘trade diversion’. If an RTA raises trade and welfare among its members but hurts the welfare of non-members, its net effect on global trade and welfare becomes ambiguous. The hypothesis of ‘natural trading partners’ suggests that RTAs comprising natural trading partners are more likely to create trade between member countries, and less likely to divert trade from non-member countries, and thus leading to large improvements of economic welfare. Based on the existing RTAs in the world, we find that if an RTA forms between geographically proximate countries (measured either by distance or border), trade significantly increases between member countries. At the same time, we find that geographical proximity also contributes to increasing trade between a member and the rest of the world. We apply our findings to East Asia and examine how the existing or proposed East Asian trading blocs affect intra-bloc and extra-bloc trade, and thereby global trade. We find the East Asian RTAs are likely to create more trade among members without diverting trade from non-members.Regionalism; Global trade integration; Trade creation; Trade diversion

Exchange Rate Regimes and Economic Linkages

We investigate how the exchange rate regime influences economic linkages across countries. We divide the exchange rate regime into three classifications: currency union, peg and floating exchange rates. Unlike most studies solely focusing on the relationship between anchor and client countries, the exchange rate regime between any two countries is inferred based on their relationship to the common anchor currency. Then we empirically explore how the various exchange rate regimes impact on bilateral trade, output co-movement and financial integration. Financial integration is measured by the degree of risk sharing reflected in consumption co-movement relative to output co-movement. We find that, while currency union has the greatest effect, the peg regime also significantly boosts trade. We also find that, while the peg regime contributes to both output and consumption co-movements, the currency union strengthens only consumption co-movement and possibly lowers output co-movement. These findings are interpreted that the currency union, the strictest form of pegged regimes, leads to higher industry specialization and better risk sharing opportunities than the less strict peg regime.Exchage Rate Regime, Economic Linkage, Trade, Output Co- movement, Cosumption Co-movement, Risk Sharing

Proliferating Regional Trade Arrangements: Why and Whither?

This paper investigates why regional trade arrangements (RTAs) are proliferating extensively and how the effects of multiple RTAs, by interacting with each other, evolve over time. Our empirical analysis, based on an extended gravity model utilizing a large panel data set of 175 countries from 1948 to 1999, shows that RTAs on average increase global trade by raising intra-bloc trade without damaging extra-bloc trade. The net trade effects, however, heavily depend on the types of RTA strategic evolution over time, which we group as ¡°expansionary¡± RTAs, ¡°duplicate¡± RTAs or ¡°overlapping¡± RTAs. We find that countries excluded from an RTA can benefit more from duplicating a separate RTA than from joining an existing RTA. This result explains why the number of bilateral trade blocs, rather than the membership size of existing RTAs, is currently exploding. We also find that the net trade creation effects of RTAs are substantially lower for countries participating in overlapping RTAs. This result suggests that it is less likely that the currently proliferating RTAs will completely merge and lead the world economy to global free trade. Our empirical results are robust to controlling for the characteristics of countries that may influence the impact of RTAs.RTA, Global Trade, Regional Trade, Trade Creation, Trade Diversion

Regional and Global Financial Integration in East Asia

We examine the degree of regional vs. global financial integration of East Asian countries in three ways; (1) comparing the size of cross-border assets such as securities and bank claims, (2) estimating the gravity model of bilateral financial asset holdings, and (3) estimating consumption risk sharing model. The results suggest that East Asian financial markets, particularly compared to the European ones, are relatively less integrated with each other than to global markets. We also find relatively more evidence of regional financial integration in bank claim markets than portfolio asset markets. The low financial integration within East Asia is attributed to the low incentives for portfolio diversification within the region, the low degree of development and deregulation of financial markets, and the instability in monetary and exchange rate regime.Regional financial integration; Global financial integration; East Asia

A Currency Union in East Asia

This paper investigates prospects of a currency union in East Asia, focusing on trade and financial integration occurring in the region. We find, based on a dynamic factor model, regional common shocks have been quantitatively important for output variations in the Asian economies. We expect that continuing trade integration in the region will lead to further synchronization of business cycles, thereby encouraging East Asian countries to create a currency union in the region. In contrast to trade, however, financial liberalization in East Asia tends to lead to more global integration, rather than regional integration, of the financial systems, and thereby is not likely to develop favorable conditions for forming a regional currency union among East Asian countries.

Emerging Threats to International Security: Environment, Refugees, and Conflict

This paper is to anticipate emerging issues that challenge the international community. Borrowing from the concept of bipolarity between communist and capitalist system during the Cold War, the interacting dynamics of environmental change, refugee flows, and conflicts were here labeled as tripolarity, a destructive set of interactions which increases global insecurity. The end of the Cold War seemed to promise peace, but countries soon fell prey to the violence of renewed ethnic rivalries, nationalism, and self-determination. These violent conflicts perhaps have caused more environmental destruction and human suffering (e.g. death or refugee flows) than the old, ideological conflicts. Moreover, such environmental change and refugee flows have come to the fore in global politics, not only as a consequence but also as an emerging source of violent conflicts