The Effect of Exchange Rate Volatility on International Trade: The Implication for Production Networks in East Asia

This paper is an empirical investigation of the relationship between exchange rate volatility and international trade, focusing on East Asia. It finds that intra-East Asian trade is discouraged by exchange rate volatility more seriously than trade in other regions because intermediate goods trade in production networks, which is quite sensitive to exchange rate volatility compared with other types of trade, occupies a significant fraction of trade. In addition, this negative effect of volatility is mainly induced by the unanticipated volatility and has an even greater impact than that of tariffs.

Exchange Rate Stabilization and IMF High Interest Rate Policy: A Critical Reconsideration Using a Dynamic Model

This paper examines whether the IMF high interest rate policy was suitable for crisis-ridden East Asian economies. Using an "overshoot" model similar to that of Dornbusch's (1976), it shows that this sort of policy might cause an unnecessary deflationary adjusting process and have no effect on containing the real depreciation of exchange rates in the long run. The study also demonstrates that Thai economic data coincides quite well with the model presented here. Finally, it points out that the high interest policy itself might provoke high risk-premium, the existence of which, in turn, justifies the policy. This means that the policy has a self-fulfilling property. In conclusion, a "one-size-fits-all" adaptation of high interest rate policy in a currency crisis is very dangerous in general, and was inappropriate for East Asia. The desirable policy would have been to let currencies depreciate and keep interest rates stable.

Trade, Exchange Rates, and Macroeconomic Dynamics in East Asia: Why the Electronics Cycle Matters

Against the background of increasing regional trade and investment, there is growing interest in monetary and macroeconomic policy coordination in East Asia. Although there is a sizable literature on macroeconomic linkages among East Asian countries and the potential merit of policy coordination in the region, the existing studies tend to examine these issues exclusively in terms of macroeconomic variables and do not consider how these aggregate variables are influenced by one prominent feature of a number of East Asian economies: their heavy dependence on the electronics industry. Although active engagement in the global electronics industry has been a powerful growth engine for the Asian countries, it has also left their economies vulnerable to cyclical fluctuations in the world electronics market. As the cycle of the global electronics industry exerts profound impacts on the medium-term dynamics of the Asian economies, it is imperative to take an explicit account of its influence when studying the way in which the regional economies are linked to one another and how this relationship can be altered by a specific policy initiative. We illustrate the importance of this point by examining recent studies on: (1) trade competition between China andother Asian countries and the role of the Chinese renminbi therein; and (2) the effect offluctuations in the yen/dollar exchange rate on the regional economies.

Skilled emigration and exchange rate : theory and empirics

In this paper we build a theoretical model on the wage effect of skilled emigration to the fluctuations in real exchange rate through the relative prices of nontradables. Our theoretical model predicts that skilled emigration is associated with an increase in the prices of nontradable, which in turn appreciates the exchange rate. We provide robust empirical support to a higher skilled emigration associated with higher prices in nontradables and appreciation of the real effective exchange rate. Based on two samples of countries with 51 and 67 observations, in 1990 and 2000 respectively, we find robust empirical support to a higher skilled emigration associated with higher prices in nontradables and appreciation of the REER. In addition, the support for the remittance-channel of the Dutch disease is also significant; overall, our findings corroborate the remittance-based Dutch disease phenomenon by providing an additional channel through which the labor mobility across borders affects the real exchange rate volatility.

A unified framework of trade in value added : physical, monetary, exchange rates, and GHG emissions

Koopman et al. (2014) developed a method to consistently decompose gross exports in value-added terms that accommodate infinite repercussions of international and inter-sector transactions. This provides a better understanding of trade in value added in global value chains than does the conventional gross exports method, which is affected by double-counting problems. However, the new framework is based on monetary input--output (IO) tables and cannot distinguish prices from quantities; thus, it is unable to consider financial adjustments through the exchange market. In this paper, we propose a framework based on a physical IO system, characterized by its linear programming equivalent that can clarify the various complexities relevant to the existing indicators and is proved to be consistent with Koopman's results when the physical decompositions are evaluated in monetary terms. While international monetary tables are typically described in current U.S. dollars, the physical framework can elucidate the impact of price adjustments through the exchange market. An iterative procedure to calculate the exchange rates is proposed, and we also show that the physical framework is also convenient for considering indicators associated with greenhouse gas (GHG) emissions.