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• 1. [Article] What Matters for Financial Development? Capital Controls, Institutions, and Interactions

  We extend our earlier work, focusing on the links between capital account liberalization, legal and institutional development, and financial development, especially that in equity markets. In a panel data ...

  Citation × Citation Citation Abstract Copy Title: What Matters for Financial Development? Capital Controls, Institutions, and Interactions Author: Chinn, Menzie David, Ito, Hiro Year: 2005 We extend our earlier work, focusing on the links between capital account liberalization, legal and institutional development, and financial development, especially that in equity markets. In a panel data analysis encompassing 108 countries and twenty years ranging from 1980 to 2000, we explore several dimensions of the financial sector. First, we test whether financial openness can lead to equity market development when we control for the level of legal and institutional development. Then, we examine whether the opening of the goods sector is a precondition for financial opening. Finally, we investigate whether a well-developed banking sector is a precondition for financial liberalization to lead to equity market development and also whether bank and equity market development complements or substitutes. Our empirical results suggest that a higher level of financial openness contributes to the development of equity markets only if a threshold level of general legal systems and institutions is attained, which is more prevalent among emerging market countries. Among emerging market countries, a higher level of bureaucratic quality and law and order, as well as the lower levels of corruption, increases the effect of financial opening in fostering the development of equity markets. We also find that the finance-related legal/institutional variables do not enhance the effect of capital account opening as strongly as the general legal/institutional variables. In examining the issue of the sequencing, we find that the liberalization in cross-border goods transactions is found to be a precondition for capital account liberalization. Our findings also indicate that the development in the banking sector is a precondition for equity market development, and that the developments in these two types of financial markets have synergistic effects. Title: What Matters for Financial Development? Capital Controls, Institutions, and Interactions Author: Chinn, Menzie David, Ito, Hiro Year: 2005 We extend our earlier work, focusing on the links between capital account liberalization, legal and institutional development, and financial development, especially that in equity markets. In a panel data analysis encompassing 108 countries and twenty years ranging from 1980 to 2000, we explore several dimensions of the financial sector. First, we test whether financial openness can lead to equity market development when we control for the level of legal and institutional development. Then, we examine whether the opening of the goods sector is a precondition for financial opening. Finally, we investigate whether a well-developed banking sector is a precondition for financial liberalization to lead to equity market development and also whether bank and equity market development complements or substitutes. Our empirical results suggest that a higher level of financial openness contributes to the development of equity markets only if a threshold level of general legal systems and institutions is attained, which is more prevalent among emerging market countries. Among emerging market countries, a higher level of bureaucratic quality and law and order, as well as the lower levels of corruption, increases the effect of financial opening in fostering the development of equity markets. We also find that the finance-related legal/institutional variables do not enhance the effect of capital account opening as strongly as the general legal/institutional variables. In examining the issue of the sequencing, we find that the liberalization in cross-border goods transactions is found to be a precondition for capital account liberalization. Our findings also indicate that the development in the banking sector is a precondition for equity market development, and that the developments in these two types of financial markets have synergistic effects. Close

• 2. [Article] A Cross-Country Empirical Analysis of International Reserves

  Using data from more than 100 economies for the period of 1975 to 2005, we conduct an extensive empirical analysis of the determinants of international reserve holdings. Four groups of determinants, namely, ...

  Citation × Citation Citation Abstract Copy Title: A Cross-Country Empirical Analysis of International Reserves Author: Cheung, Yin-Wong, Ito, Hiro Year: 2009 Using data from more than 100 economies for the period of 1975 to 2005, we conduct an extensive empirical analysis of the determinants of international reserve holdings. Four groups of determinants, namely, traditional macro variables, financial variables, institutional variables, and dummy variables that control for individual economies’ characteristics are considered. We find that the relationship between international reserves and their determinants is significantly different between developed and developing economies and is not stable over time. The estimation results indicate that, especially during the recent period, a developed economy tends to hold a lower level of international reserves than a developing one. Title: A Cross-Country Empirical Analysis of International Reserves Author: Cheung, Yin-Wong, Ito, Hiro Year: 2009 Using data from more than 100 economies for the period of 1975 to 2005, we conduct an extensive empirical analysis of the determinants of international reserve holdings. Four groups of determinants, namely, traditional macro variables, financial variables, institutional variables, and dummy variables that control for individual economies’ characteristics are considered. We find that the relationship between international reserves and their determinants is significantly different between developed and developing economies and is not stable over time. The estimation results indicate that, especially during the recent period, a developed economy tends to hold a lower level of international reserves than a developing one. Close

• 3. [Article] Price-based Measurement of Financial Globalization: A Cross-Country Study of Interest Rate Parity

  We characterize the relationship between ex post exchange rate depreciation and the interest differential for a set of countries that spans both developed and emerging market economies. The measured ex ...

  Citation × Citation Citation Abstract Copy Title: Price-based Measurement of Financial Globalization: A Cross-Country Study of Interest Rate Parity Author: Ito, Hiro, Chinn, Menzie David Year: 2007 We characterize the relationship between ex post exchange rate depreciation and the interest differential for a set of countries that spans both developed and emerging market economies. The measured ex post uncovered interest differentials in terms of both levels and absolute values are then related to measures of trade and financial openness, financial development, government budget balances, institutional development, and exchange rate regimes. We find that there is wide diversity in the coefficient relating depreciations and interest differentials. Some of these differing results can be attributed to differences in inflation volatility, financial development, trade openness, capital account openness, legal development, and the nature of the exchange rate regimes. The robust results are mainly found in the developing/emerging market country grouping. Title: Price-based Measurement of Financial Globalization: A Cross-Country Study of Interest Rate Parity Author: Ito, Hiro, Chinn, Menzie David Year: 2007 We characterize the relationship between ex post exchange rate depreciation and the interest differential for a set of countries that spans both developed and emerging market economies. The measured ex post uncovered interest differentials in terms of both levels and absolute values are then related to measures of trade and financial openness, financial development, government budget balances, institutional development, and exchange rate regimes. We find that there is wide diversity in the coefficient relating depreciations and interest differentials. Some of these differing results can be attributed to differences in inflation volatility, financial development, trade openness, capital account openness, legal development, and the nature of the exchange rate regimes. The robust results are mainly found in the developing/emerging market country grouping. Close

• 4. [Article] What Makes Developing Asia Resilient in a Financially Globalized World?

  The pullbacks of capital inflows to developing Asia following the onset of the global financial crisis in 2008 have brought renewed attention to the role and benefits of financial globalization. A number ...

  Citation × Citation Citation Abstract Copy Title: What Makes Developing Asia Resilient in a Financially Globalized World? Author: Ito, Hiro, Jongwanich, Juthathip, Terada-Hagiwara, Akiko Year: 2009 The pullbacks of capital inflows to developing Asia following the onset of the global financial crisis in 2008 have brought renewed attention to the role and benefits of financial globalization. A number of notable distinctions between the current global crisis and the Asian financial crisis have become evident. Solid domestic institutions, especially in the financial sector; swift policy responses; and a sound macroeconomic environment with adequate reserves have helped the region to manage well the adverse impacts of the global crisis. Empirical analysis examining the link between capital account openness and output volatility reveals that a developing country with a more open capital market tends to experience lower output volatility, contrary to what might be expected. It is also found that countries can mitigate the destabilizing effect of pursuing greater exchange rate stability by holding a sufficiently high level of foreign reserves. Furthermore, if they want to reap the benefit of financial liberalization to reduce output volatility, highly integrated economies need to be equipped with highly developed financial markets, particularly of banking and stock markets. Title: What Makes Developing Asia Resilient in a Financially Globalized World? Author: Ito, Hiro, Jongwanich, Juthathip, Terada-Hagiwara, Akiko Year: 2009 The pullbacks of capital inflows to developing Asia following the onset of the global financial crisis in 2008 have brought renewed attention to the role and benefits of financial globalization. A number of notable distinctions between the current global crisis and the Asian financial crisis have become evident. Solid domestic institutions, especially in the financial sector; swift policy responses; and a sound macroeconomic environment with adequate reserves have helped the region to manage well the adverse impacts of the global crisis. Empirical analysis examining the link between capital account openness and output volatility reveals that a developing country with a more open capital market tends to experience lower output volatility, contrary to what might be expected. It is also found that countries can mitigate the destabilizing effect of pursuing greater exchange rate stability by holding a sufficiently high level of foreign reserves. Furthermore, if they want to reap the benefit of financial liberalization to reduce output volatility, highly integrated economies need to be equipped with highly developed financial markets, particularly of banking and stock markets. Close

• 5. [Article] Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries

  This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence ...

  Citation × Citation Citation Abstract Copy Title: Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries Author: Aizenman, Joshua, Ito, Hiro Year: 2014 This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence among the three trilemma policy choices, namely monetary independence, exchange rate stability, and financial openness, we find that emerging market countries have adopted trilemma policy combinations with the least degree of relative policy divergence in the last fifteen years. We find that a developing or emerging market country with a higher degree of relative policy divergence is more likely to experience a currency or debt crisis. However, a developing or emerging market country with a higher degree of relative policy divergence tends to experience smaller output losses when it experiences a currency or banking crisis. Latin American crisis countries tended to reduce their financial integration in the aftermath of a crisis, while this is not the case for the Asian crisis countries. The Asian crisis countries tended to reduce the degree of relative policy divergence in the aftermath of the crisis, probably aiming at macroeconomic policies that are less prone to crises. The degree of relative policy divergence is affected by past crisis experiences -- countries that experienced currency crisis or a currency-banking twin crisis tend to adopt a policy combination with a smaller degree of policy divergence. Title: Living with the Trilemma Constraint: Relative Trilemma Policy Divergence, Crises, and Output Losses for Developing Countries Author: Aizenman, Joshua, Ito, Hiro Year: 2014 This paper investigates the potential impacts of the degree of divergence in open macroeconomic policies in the context of the trilemma hypothesis. Using an index that measures the relative policy divergence among the three trilemma policy choices, namely monetary independence, exchange rate stability, and financial openness, we find that emerging market countries have adopted trilemma policy combinations with the least degree of relative policy divergence in the last fifteen years. We find that a developing or emerging market country with a higher degree of relative policy divergence is more likely to experience a currency or debt crisis. However, a developing or emerging market country with a higher degree of relative policy divergence tends to experience smaller output losses when it experiences a currency or banking crisis. Latin American crisis countries tended to reduce their financial integration in the aftermath of a crisis, while this is not the case for the Asian crisis countries. The Asian crisis countries tended to reduce the degree of relative policy divergence in the aftermath of the crisis, probably aiming at macroeconomic policies that are less prone to crises. The degree of relative policy divergence is affected by past crisis experiences -- countries that experienced currency crisis or a currency-banking twin crisis tend to adopt a policy combination with a smaller degree of policy divergence. Close

• 6. [Article] The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma

  This paper extends our previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, we examine the channels through which the trilemma policy configurations affect ...

  Citation × Citation Citation Abstract Copy Title: The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma Author: Aizenman, Joshua, Chinn, Menzie David, Ito, Hiro Year: 2010 This paper extends our previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, we examine the channels through which the trilemma policy configurations affect output volatility. Secondly, we investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, we look into how trilemma configurations have evolved in the aftermath of economic crises in the past. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of international reserves (IR). Greater financial openness helps reduce real exchange rate volatility. These results indicate that policymakers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. We also find that the “crisis economies” could end up with smaller output losses if they entered the crisis situation with more stable exchange rates or if they continue to hold a high level of IR and maintain greater exchange rate stability during the crisis period. Lastly, we find that developing countries are often found to have decreased the level of monetary independence and financial openness, but increased the level of exchange rate stability in the aftermath of a crisis, especially for the last two decades. This finding indicates how vulnerable developing countries, especially emerging market ones, are to volatile capital flows as a result of global financial liberalization. Title: The Financial Crisis, Rethinking of the Global Financial Architecture, and the Trilemma Author: Aizenman, Joshua, Chinn, Menzie David, Ito, Hiro Year: 2010 This paper extends our previous paper (Aizenman, Chinn, and Ito 2008) and explores some of the unexplored questions. First, we examine the channels through which the trilemma policy configurations affect output volatility. Secondly, we investigate how trilemma policy configurations affect the output performance of the economies under severe crisis situations. Thirdly, we look into how trilemma configurations have evolved in the aftermath of economic crises in the past. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of international reserves (IR). Greater financial openness helps reduce real exchange rate volatility. These results indicate that policymakers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. We also find that the “crisis economies” could end up with smaller output losses if they entered the crisis situation with more stable exchange rates or if they continue to hold a high level of IR and maintain greater exchange rate stability during the crisis period. Lastly, we find that developing countries are often found to have decreased the level of monetary independence and financial openness, but increased the level of exchange rate stability in the aftermath of a crisis, especially for the last two decades. This finding indicates how vulnerable developing countries, especially emerging market ones, are to volatile capital flows as a result of global financial liberalization. Close

• 7. [Article] Trade Invoicing in Major Currencies in the 1970s-1990s: Lessons for Renminbi Internationalization

  In this paper, we investigate how much a major currency is used for trade invoicing by focusing primarily on the experiences of the U.S. dollar, the Japanese yen, and the Deutsche mark (DM) in the 1970s ...

  Citation × Citation Citation Abstract Copy Title: Trade Invoicing in Major Currencies in the 1970s-1990s: Lessons for Renminbi Internationalization Author: Ito, Hiro, Masahiro, Kawai Year: 2016 In this paper, we investigate how much a major currency is used for trade invoicing by focusing primarily on the experiences of the U.S. dollar, the Japanese yen, and the Deutsche mark (DM) in the 1970s through the 1990s. We then attempt to draw lessons for China’s renminbi (RMB) internationalization. Our data on the shares of the three major currencies in export invoicing show that the dollar was unequivocally a global invoicing currency, and that the DM was the most important regional currency in Europe while the yen was never a global or a regional currency. DM invoicing was driven by European countries’ trade ties with Germany. In contrast, the yen was not widely used for trade invoicing by Asia-Oceania countries despite the latter’s strong trade ties with Japan. Our regression analysis on the determinants of the major currency share in trade invoicing (also including UK pound sterling, the French franc, the Italian lira, and the Swiss franc) in the 1970-1998 period shows that the invoicing share of a major currency tended to be positively affected by the degree of other economies’ trade ties with the major currency country and negatively affected by the degree of their financial development or openness. Also, the major currency share in trade invoicing was affected by both other economies' assigned weights of the major currency in their implicit currency baskets and these economies’ trade shares with major-currency zone countries. Economies belonging to the U.S. dollar (or DM) zone tended to invoice their trade more in the dollar (or DM) and less in the DM (or dollar). The use of yen for trade invoicing was not much affected by these factors. European countries largely belonged to the DM zone and tended to use the DM for trade invoicing, whereas Asia-Oceania countries belonged mainly to the U.S. dollar zone, leading to a high degree of dollar use. We also find that major currency countries tended to invoice their trade in their own currencies when they had a large presence in international trade, high levels of per capita income, and financial markets that were developed and open. For China, its low level of per capita income, limited financial openness, and the presence of U.S. dollar zone countries in Asia stand as a challenge to the nation’s ambition to promote the RMB as a major trade-invoicing currency. Title: Trade Invoicing in Major Currencies in the 1970s-1990s: Lessons for Renminbi Internationalization Author: Ito, Hiro, Masahiro, Kawai Year: 2016 In this paper, we investigate how much a major currency is used for trade invoicing by focusing primarily on the experiences of the U.S. dollar, the Japanese yen, and the Deutsche mark (DM) in the 1970s through the 1990s. We then attempt to draw lessons for China’s renminbi (RMB) internationalization. Our data on the shares of the three major currencies in export invoicing show that the dollar was unequivocally a global invoicing currency, and that the DM was the most important regional currency in Europe while the yen was never a global or a regional currency. DM invoicing was driven by European countries’ trade ties with Germany. In contrast, the yen was not widely used for trade invoicing by Asia-Oceania countries despite the latter’s strong trade ties with Japan. Our regression analysis on the determinants of the major currency share in trade invoicing (also including UK pound sterling, the French franc, the Italian lira, and the Swiss franc) in the 1970-1998 period shows that the invoicing share of a major currency tended to be positively affected by the degree of other economies’ trade ties with the major currency country and negatively affected by the degree of their financial development or openness. Also, the major currency share in trade invoicing was affected by both other economies' assigned weights of the major currency in their implicit currency baskets and these economies’ trade shares with major-currency zone countries. Economies belonging to the U.S. dollar (or DM) zone tended to invoice their trade more in the dollar (or DM) and less in the DM (or dollar). The use of yen for trade invoicing was not much affected by these factors. European countries largely belonged to the DM zone and tended to use the DM for trade invoicing, whereas Asia-Oceania countries belonged mainly to the U.S. dollar zone, leading to a high degree of dollar use. We also find that major currency countries tended to invoice their trade in their own currencies when they had a large presence in international trade, high levels of per capita income, and financial markets that were developed and open. For China, its low level of per capita income, limited financial openness, and the presence of U.S. dollar zone countries in Asia stand as a challenge to the nation’s ambition to promote the RMB as a major trade-invoicing currency. Close

• 8. [Article] Clamoring for Greenbacks: Explaining the Resurgence of the U.S. Dollar in International Debt

  This paper investigates the determinants of currency denomination in international debt. Using data on currency shares for international debt securities for 82 countries from 1995 through 2013, we find ...

  Citation × Citation Citation Abstract Copy Title: Clamoring for Greenbacks: Explaining the Resurgence of the U.S. Dollar in International Debt Author: Ito, Hiro, Rodriguez, Cesar M. Year: 2015 This paper investigates the determinants of currency denomination in international debt. Using data on currency shares for international debt securities for 82 countries from 1995 through 2013, we find that while the extent of foreign currency issuance has not changed much since the 1990s, especially for developing countries, the currency composition has shifted, especially between the U.S. dollar and the euro. Before the Global Financial Crisis (GFC) of 2008, the share of the U.S. dollar has been on a downward trend while that of the euro had been on a steady rising trend, but since the crisis, the U.S. dollar share rebounded. With these findings, we estimate the determinants for the shares of the U.S. dollar, the euro, and the total of foreign currencies in international debt denomination. Our empirical analysis yields the following findings. First, not only does economic size matter, but also a country’s monetary, financial and fiscal stance. Second, countries seem to increase their reliance on the euro first before increasing their issuance of debt in domestic currency. Third, financial opening has a persistent, effective influence on both the extent of foreign currency denomination and the shares of individual major currencies. Lastly, by applying the baseline estimation model only to the data before 2007, we conduct a counterfactual analysis to examine what would have happened to the shares of the major currencies had it not been for the GFC. Our results show that without the occurrence of the GFC, the share of the euro in international debt in 2013 would have been 9 percentage points higher at 24%, while the share of the dollar would have been 13 percentage points lower at 54%. Considering a conservative scenario for the near future, the dollar will likely continue dominating the denomination of international debt. In 2020 the share of the dollar in international debt could be at 63% while the share of the euro could be 18%. Title: Clamoring for Greenbacks: Explaining the Resurgence of the U.S. Dollar in International Debt Author: Ito, Hiro, Rodriguez, Cesar M. Year: 2015 This paper investigates the determinants of currency denomination in international debt. Using data on currency shares for international debt securities for 82 countries from 1995 through 2013, we find that while the extent of foreign currency issuance has not changed much since the 1990s, especially for developing countries, the currency composition has shifted, especially between the U.S. dollar and the euro. Before the Global Financial Crisis (GFC) of 2008, the share of the U.S. dollar has been on a downward trend while that of the euro had been on a steady rising trend, but since the crisis, the U.S. dollar share rebounded. With these findings, we estimate the determinants for the shares of the U.S. dollar, the euro, and the total of foreign currencies in international debt denomination. Our empirical analysis yields the following findings. First, not only does economic size matter, but also a country’s monetary, financial and fiscal stance. Second, countries seem to increase their reliance on the euro first before increasing their issuance of debt in domestic currency. Third, financial opening has a persistent, effective influence on both the extent of foreign currency denomination and the shares of individual major currencies. Lastly, by applying the baseline estimation model only to the data before 2007, we conduct a counterfactual analysis to examine what would have happened to the shares of the major currencies had it not been for the GFC. Our results show that without the occurrence of the GFC, the share of the euro in international debt in 2013 would have been 9 percentage points higher at 24%, while the share of the dollar would have been 13 percentage points lower at 54%. Considering a conservative scenario for the near future, the dollar will likely continue dominating the denomination of international debt. In 2020 the share of the dollar in international debt could be at 63% while the share of the euro could be 18%. Close

• 9. [Article] Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of Trilemma

  Using the "trilemma indexes" developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, ...

  Citation × Citation Citation Abstract Copy Title: Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of Trilemma Author: Aizenman, Joshua, Chinn, Menzie David, Ito, Hiro Year: 2009 Using the "trilemma indexes" developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region. Title: Surfing the Waves of Globalization: Asia and Financial Globalization in the Context of Trilemma Author: Aizenman, Joshua, Chinn, Menzie David, Ito, Hiro Year: 2009 Using the "trilemma indexes" developed by Aizenman et al. (2008) that measure the extent of achievement in each of the three policy goals in the trilemma—monetary independence, exchange rate stability, and financial openness—this paper examines how policy configurations affect macroeconomic performances with focus on the Asian economies. We find that the three policy choices do not matter for per capita economic growth. However, they do matter for output volatility and the medium-term level of inflation. Greater monetary independence is associated with lower output volatility while greater exchange rate stability implies greater output volatility, which can be mitigated if a country holds international reserves (IR) at a higher level than a threshold (about 20% of gross domestic product). Greater monetary autonomy is associated with a higher level of inflation while greater exchange rate stability and greater financial openness could lower the inflation level. We find that trilemma policy configurations and external finances affect output volatility mainly through the investment channel. While a higher degree of exchange rate stability could stabilize the real exchange rate movement, it could also make investment volatile, though the volatility-enhancing effect of exchange rate stability on investment can be cancelled by holding higher levels of IR. Greater financial openness helps reduce real exchange rate volatility. These results indicate that policy makers in a more open economy would prefer pursuing greater exchange rate stability and greater financial openness while holding a massive amount of IR. Asian emerging market economies are found to be equipped with macroeconomic policy configurations that help the economies to dampen the volatilities in both investment and real exchange rate. These economies’ sizeable amount of international reserves holding appears to help enhance the stabilizing effect of the trilemma policy choices, which explains the recent phenomenal buildup of international reserves in the region. Close

• 10. [Article] U.S. Current Account Debate with Japan Then, with China Now

  This paper examines two U.S. current account deficit episodes, one in the 1980s and the other in the current 2000s, in which Japan and China, respectively, are the current account surplus countries that ...

  Citation × Citation Citation Abstract Copy Title: U.S. Current Account Debate with Japan Then, with China Now Author: Ito, Hiro Year: 2009 This paper examines two U.S. current account deficit episodes, one in the 1980s and the other in the current 2000s, in which Japan and China, respectively, are the current account surplus countries that are criticized for contributing to the deficits. In both periods, U.S. policy makers pointed out the underdeveloped and closed financial markets of the current account surplus countries and advocated for these countries to fix the deficiencies, a position akin to the current “saving glut” argument. In both episodes, the current account surplus countries have criticized the United States for its low saving, especially public saving (the “Twin Deficit” argument). This paper presents empirical findings that are consistent with the Twin Deficit hypothesis; A one percentage point increase in the budget balance raises the current account balance by 0.10-0.49 percentage point for industrialized countries. The saving glut argument seems to be applicable only for countries with highly-developed legal systems and open financial markets. While the United States has been experiencing a savings drought in both episodes, the Japanese current account surplus was driven by underinvestment in the 1980s and by over-saving during the 2000s. Furthermore, although the current Chinese current account surplus is driven by its oversaving, there is no evidence of excess domestic saving in the Asian emerging market countries; rather, they seem to have suffered from depressed investment in the wake of the 1997 financial crises. Title: U.S. Current Account Debate with Japan Then, with China Now Author: Ito, Hiro Year: 2009 This paper examines two U.S. current account deficit episodes, one in the 1980s and the other in the current 2000s, in which Japan and China, respectively, are the current account surplus countries that are criticized for contributing to the deficits. In both periods, U.S. policy makers pointed out the underdeveloped and closed financial markets of the current account surplus countries and advocated for these countries to fix the deficiencies, a position akin to the current “saving glut” argument. In both episodes, the current account surplus countries have criticized the United States for its low saving, especially public saving (the “Twin Deficit” argument). This paper presents empirical findings that are consistent with the Twin Deficit hypothesis; A one percentage point increase in the budget balance raises the current account balance by 0.10-0.49 percentage point for industrialized countries. The saving glut argument seems to be applicable only for countries with highly-developed legal systems and open financial markets. While the United States has been experiencing a savings drought in both episodes, the Japanese current account surplus was driven by underinvestment in the 1980s and by over-saving during the 2000s. Furthermore, although the current Chinese current account surplus is driven by its oversaving, there is no evidence of excess domestic saving in the Asian emerging market countries; rather, they seem to have suffered from depressed investment in the wake of the 1997 financial crises. Close