Author(s): Takatoshi Ito, Andrew K. Rose (eds.)
Publisher: The University of Chicago Press
Reviewed by Eva Isabella Schmitt, Paris
Global Imbalances, monetary and exchange rate policy and the liberalization of capital accounts are the three major topics discussed in the present volume, which is the printed result of the 17th East Asian Seminar on Economics in 2006. The contributors come from business schools and governmental institutions in Southeast Asia, Japan, the United Kingdom and the U.S.A. Given their diverse cultural backgrounds and outlooks, they stress different aspects of the above mentioned areas and analyse them from a wide variety of angles. Each contribution is elaborated by commentaries and amended by charts.
The authors of the first chapter (pp. 13-37) argue that the current account imbalances between the three major economic regions, Asia, ‘Euroland’ and the U.S.A. will continue for some time, due to managed exchanged rates in Asia and the low American interest rates. Sterilized intervention would not be an appropriate tool to alter the situation of undervalued Asian currencies. Only an unexpected homeland bias of investors, or the allocating of foreign reserves in oil exporting countries, will change the present imbalances. The new arrangement is dubbed Bretton Woods II, even though the original Bretton Woods was an official agreement and not a tacit acceptance of reality.
The following chapter (pp. 39-70) is a variation of the first one. After the financial crisis, East Asian and Southeast Asian governments and private investors began to hoard US dollar foreign reserves, liquid debts and kept their exchange rates low against the Us dollar. The authors imply that the present current account deficit in the USA is partly due to the savings rush of developing countries and not only to the low saving rates of US American government and private investors. They do not provide any hint as to why there is a US dollar bias nor do they make any comment on the investment rate of those countries.
The last chapter of this section (pp. 71-105) is a very traditional answer to the international demand to appreciate the Renminbi (RMB). Shi Jianhua, applying a VAR model hypothesis, proves that any appreciation of the RMB will inevitably lead to contractions in export. The commentators criticize the too simplistic and predictive interpretations of the results. Shi leaves the reader alone with his remarks about the impact of internal and external imbalances on the monetary system and the decision-makers.
The second part of the volume, chapters four to seven) is headlined ‘Monetary Policy and Exchange Rates’. The causal relationship between domestic policy and global imbalances is a key goal of macroeconomists.
In chapter four (pp. 109-137) Wu Chungshu and Lin Jinlung investigate the relationship between openness and inflation. They use a panel data set of six Newly Industrialized Economies (NIEs) , e.g. Korea, Mexico, Philippines and G7 countries. Their conclusion is rather indifferent. If the constant terms of the time consistency theory are applied strictly, then openness comes inevitably with inflation. If not, openness will not necessarily be accompanied by inflation. Reader and commentators ask for more elaboration on the topic.
Linda S. Goldberg and Jose Manuel Campa (139-176) ask what effects pass-through of exchange rates have on consumption prices. The pass through effect is defined by industry (exception energy sector) than by country (exception USA). Price sensitivity of imported goods is rising not as fast as domestically-produced tradables due to globalisation. The commentators miss a more detailed investigations of the pass through effect in production networks and the mark-up of local traders.
Chapter six (pp. 177-219) is an innovative approach to the predictability of exchange rate movements. Takatoshi Ito and Yuko Hashimoto analyse the forecasting power of order flows on future exchange rate movements at various frequencies (one to thirty minutes window). They found strong evidence that deals have prediction power for the price movement within the first five minutes. Thereafter, the price impact diminishes.
The last chapter of this section ( pp.219-237) investigates the possibilities of adopting a common currency basket peg arrangement into ASEAN+3 from a viewpoint of Optimal Currency Area (OCA), examining monthly data from 1987 to 2005 for the East Asian, US, and Euro area currencies. Their conclusion is that ASEAN + 5 +Japan reached a similar degree of development to establish an OCA in terms of the G-PPP model. Dooley rightfully raises the question if the countries are actually willing to agree on the same rate of price inflation and how the governments will finance the OCA.
The liberalization of capital accounts is the main topic of the last five chapters. Chapter eight (pp.241-265) proves that there is no systematic correlation between fast growing economies and stock returns. Average real returns remain lower than in Latin America.
Using the IMF Coordinated Portfolio Investment Survey (CPIS), the authors of chapter nine (pp.267-315) scrutinize the development and acceptance of bonds issued in Asia. Bond markets in Asia are doing better than the ones in Latin America, but are still in their infancy due to a dearth in appropriate assets.
Intriguing is the contribution of chapter 10 (pp. 315-347), where the measurement of financial liberalization is evaluated by the degree of commitments in the GATS. The authors of chapter 10 (pp. 315-347) pursue a twofold purpose: Firstly, to extend and improve the method suggested by Hoekman in calculating the financial indices and secondly, to study the effect of liberalization on economic growth. Their study is based WTO commitment of 93 countries in relation to financial services and covers a rather short span of time, 1994 to 2006. The results of their regression analyses are that mode 1 (cross-border supply of services), mode 2 (consumption abroad) and mode 3 (commercial presence) are positively correlated with the income level. Mode 4, the movement of natural persons, is not affected by rising income levels or good governance. Shin-ichi Fukuda and Roberto S. Mariano, who comment on this chapter, criticize that the sample period is too short and that the most important variable ‘investment rate’ is missing.
The last two chapters, eleven and twelve, describe the effects of FDI on Japanese firms and the opening of the Korean stock market to foreigners. Foreign investment improved the performance of Japanese companies because they were hand-picked by foreign investors. The yields of the Korean stock market decreased after opening it to foreigners after the financial crisis. The picture might be different today.
The collection of papers are recommendable to graduate students of Economics and Asian studies. Any published conference papers should adopt the present format, article and comments, to deepen the understanding of these very diverse topics. The only negative aspect of this volume and format is that the readers have to wait for too long to read intriguing analyses of the present global financial crisis.