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3311. The Present-Value Model of the Current Account Has Been Rejected: Round Up the Usual Suspects

Author:
John H. Rogers and James M. Nason
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Tests of the present-value model of the current account are frequently rejected by the data. Standard explanations rely on the “usual suspects” of non-separable preferences, shocks to fiscal policy and the world real interest rate, and imperfect international capital mobility. We con firm these rejections on post-war Canadian data, then investigate their source by calibrating and simulating alternative versions of a small open economy, real business cycle model. Monte Carlo experiments reveal that, although each of the suspects matters in some way, a “canonical” RBC model moves closest to the data when it features exogenous world real interest rate shocks.
Topic:
Conflict Resolution, International Relations, Economics, and International Trade and Finance

3312. Diversification, Original Sin, and International Bond Portfolios

Author:
Francis E. Warnock and John D. Burger
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
While there is a severe home bias in U.S. investors' foreign bond portfolios, we find that portfolio weights are greater for countries with more open capital accounts and whose bond returns are less correlated with U.S. returns. Positions in local-currency-denominated bonds are particularly sensitive to past and prospective returns volatility. An analysis of changes in portfolio weights over time indicates that U.S. investors have recently moved out of smaller markets and those with low and declining credit ratings. Our data also allow for an analysis of the size and currency composition of international bond markets. We find that countries with stronger institutions and better inflation performance have larger local currency bond markets. An implication for developing countries is that creditor friendly policies, such as vigilance on the inflation front and the development of strong institutions, can enable local bond market development and may in turn attract global investors.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

3313. Uncovered Interest Parity: It Works, But Not For Long

Author:
Jonathan H. Wright and Alain P. Chaboud
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The failure of uncovered interest parity can be ascribed to the existence of a risk premium. The size of this risk premium may shrink to zero over sufficiently small intervals of time. In contrast, because no interest is paid on intradaily positions and interest is instead paid discretely at the point when a position is rolled over from one day to the next, the size of the interest differential remains fixed over any interval that covers the time of the discrete interest payment. This is true no matter how short that interval is. Using a large dataset of high frequency exchange rate data, we run uncovered interest parity regression over different time intervals. We replicate the rejection of the uncovered interest parity hypothesis with daily data, but find results that are consistently much more supportive of the uncovered interest parity hypothesis over short windows of intradaily data that span the time of the discrete interest payment.
Topic:
Conflict Prevention, International Relations, Economics, and International Trade and Finance

3314. Long-Run Supply Effects and the Elasticities Approach to Trade

Author:
Joseph E. Gagnon
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Krugman (1989) argued that differences across countries in estimated income elasticities of import demand are due to omission of an exporter supply effect. He showed that such an effect can be derived in a theoretical model with economies of scale in production and a taste for variety in consumption. In his model, countries grow by producing new varieties of goods, and they are able to export these goods without suffering any deterioration in their terms of trade. This paper analyzes U.S. import demand from different source countries and finds strong evidence of a supply effect of roughly half the magnitude (0.75) of the income elasticity (1.5). Price elasticities for the most part are estimated close to -1, which is typical for the literature. Exclusion of the supply effect leads to overestimation of the income elasticity. Results based on U.S. exports to different destinations are less robust, but largely corroborate these findings.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
United States

3315. Firm-Level Access To International Capital Markets: Evidence From Chilean Equities

Author:
Francis E. Warnock and Sara B. Holland
Publication Date:
01-2003
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
High growth, liquid Chilean firms have greater relative weights in U.S. equity portfolios, but the most important determinant of a firm's portfolio weight is whether it is listed on a U.S. exchange. Cross-listing does not, however, appear to have permanent benefits: Weights in U.S. portfolios of firms that cross-listed in the mid-1990s increased at the expense of firms that cross-listed earlier. Put another way, firms appear to be able to access international capital at the time of the cross-listing, but this access may well be short-lived.
Topic:
International Relations, Economics, and International Trade and Finance
Political Geography:
South America

3316. The ROK—U.S. Alliance: Where Is It Headed?

Author:
Kim Dong Shin
Publication Date:
04-2003
Content Type:
Working Paper
Abstract:
The National Security Strategy of the United States of America (September 2002) provides an important framework from which to examine the current crisis on the Korean Peninsula and other challenges in Northeast Asia. With its focus on terrorism and weapons of mass destruction (WMD), this strategy is concerned with North Korea as much as, if not more than, any other state. In particular, North Korea poses a unique set of challenges in regard to WMD. North Korea stands in sharp contrast to the Republic of Korea (ROK) on issues such as human rights, democracy, and market economies. The National Security Strategy suggests that the United States should revitalize its alliance with South Korea, while encouraging North Korea to transform its political and economic system. Yet South Korea and the United States are currently having some difficulties in developing a consensus on how to approach Pyongyang, and appear to have no clear plan to operationalize the strategy to deal with North Korea.
Topic:
International Relations and Security
Political Geography:
United States, America, Asia, and North Korea

3317. China Brief, Sars: Spreading Unrest

Author:
Willy Lam, William R. Hawkins, Harvey Stockwin, and Li Thian-hok
Publication Date:
05-2003
Content Type:
Policy Brief
Institution:
The Jamestown Foundation
Abstract:
The spread of Severe Acute Respiratory Syndrome—the SARS virus—throughout China is a phenomenon that had previously been denied by authorities and had gone unreported. But the penetration of the disease is now being admitted publicly, and efforts to combat it have begun. While the immediate epidemic in Beijing appears to be in decline, the fear remains that the spread of SARS within China will still be difficult—and maybe impossible—to control, let alone to eliminate. World Health Organization (WHO) officials admit that what happens in China will “make or break” the course of the epidemic. China's neighbors, and particularly Hong Kong, worry that a failure to curtail the virus will inevitably result in a fresh round of crossborder infection, further intensifying the already grave economic impact of SARS on the region. At worst, a sustained epidemic could bring China's opening-up to the outside world to a screeching halt.
Topic:
International Relations, Government, and Political Economy
Political Geography:
China, Israel, Beijing, and Hong Kong

3318. China Brief, Taiwan's presidential countdown: what does it mean for the united states?

Author:
Willy Lam, Arnold Zeitlin, John Tkacik, and Jonathan Mirsky
Publication Date:
05-2003
Content Type:
Policy Brief
Institution:
The Jamestown Foundation
Abstract:
Could Taiwan's voters elect a pro-unification candidate in 2004? Can the challenger, Kuomintang chairman Lien Chan, put together an electoral consensus of ethnic mainlanders, Hakkas and ethnic Taiwanese investors in China that will begin the process of moving Taiwan into the embrace of the People's Republic of China? The polls indicate it could be a fifty-fifty proposition, especially if the campaign's focus is the economy—not national identity. Washington should begin to consider its substantial strategic stake in Taiwan, and rethink the message that its diplomats in Taipei are sending Taiwan's public.
Topic:
International Relations, Government, and Political Economy
Political Geography:
China and Israel

3319. China Brief, New Disease, New Leaders, Same Old Regime

Author:
Willy Lam, Harvey Stockwin, Gordon G. Chang, and Richard D. Fisher
Publication Date:
04-2003
Content Type:
Policy Brief
Institution:
The Jamestown Foundation
Abstract:
An epidemic, spread by official deception and indifference, is afflicting the Chinese people. What does this disease mean for the People's Republic of China?
Topic:
International Relations, Government, and Political Economy
Political Geography:
China and Israel

3320. China Brief, Beijing studies the U.S. war in Iraq

Author:
Willy Lam, Gordon G. Chang, Richard D. Fisher, and Wangchuk Meston
Publication Date:
04-2003
Content Type:
Policy Brief
Institution:
The Jamestown Foundation
Abstract:
Chinese strategic and military experts are scrutinizing the U.S. war in Iraq, and for several reasons. First, if American and British forces become bogged down in their effort to liquidate the regime of Saddam Hussein, then it is much less likely that Washington will soon target other rogue regimes with weapons of mass destruction, such as North Korea, a Chinese ally.
Topic:
International Relations, Government, and Political Economy
Political Geography:
China, Iraq, America, Washington, Israel, and North Korea