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This article provides micro-level evidence for the role of foreign-invested enterprises (FIEs) in the cross-border transmission of global financial uncertainty shocks. Using Chinese firm-level data, we find that rising uncertainty has a significantly larger contractionary effect on real investment for FIEs than their local counterparts. This effect is more pronounced for firms faced with greater investment irreversibility or financial constraints. The contractionary effect is mainly driven by downside uncertainty, whereas upside uncertainty is modestly expansionary. Similar effects are found for other firm-level performances. There is also a spillover effect to local private firms with FIEs concentrated in downstream sectors.

How do firms’ credit constraint affect their export mode choices between direct exporting and indirect exporting through intermediaries? This study explores this issue in a heterogeneous firm model where firms differ not only in productivity but also in credit levels. Our model predicts that more productive and financially less constrained firms tend to choose the more advanced export mode and that for the cutoff firms, there is an overall inverse relation between credit and productivity with diminishing marginal rate of substitution. These theoretical predictions are borne out in a large cross-country firm-level dataset over the period 2002–2012.

This study examines the role of credit constraints in determining the trade effect of exchange rate volatility. We first develop a small open economy general equilibrium model with credit constraints. In our model, constrained firms respond to real depreciations and appreciations in an asymmetric way, and exchange rate volatility reduces their exports on average. The effect of exchange rate volatility on unconstrained firms' exports, however, is ambiguous. Overall, exchange rate volatility has a more negative impact on constrained firms. In a large sector-level bilateral trade dataset, we find robust empirical evidence supporting the predictions of the model. We show that financially more constrained sectors have a more negative exposure of their trade volumes to exchange rate volatility. Moreover, the estimated trade effects of exchange rate volatility vary substantially across sectors and can be either positive or negative depending on the degree of credit constraints.

This study explores a cultural determinant of family ownership concentration of a corporate. Using hand-collected Chinese genealogy information and a panel of Chinese listed family firms, we find robust evidence that clan culture influences are associated with a significantly higher family ownership concentration. By taking advantage of firm owner birthplace information, we are able to separate the impact of inherited clan culture from that of external environmental factors. To further establish causality, we also employ an instrumental variable (IV) regression strategy and explore the underlying mechanisms.

In a large sector-level bilateral trade dataset, we find robust evidence supporting a broad international credit channel of U.S. monetary policy transmission to developing countries. We show that U.S. monetary policy has a significant effect on the sectoral composition of developing countries' exports. Financially more vulnerable sectors have a significantly more negative exposure of their trade to a tight U.S. monetary policy, especially in financially less developed exporting countries or during significant U.S. tightening periods. Moreover, we identify both a monetary policy dependence mechanism and a financial dollarization mechanism through which U.S. monetary policy can influence the sectoral composition of developing countries' exports.

We empirically explore a trade credit channel through which foreign direct investment (FDI) firms can propagate global liquidity shocks to the host country despite its tight controls on portfolio flows. In a large sample of Chinese manufacturing firms, we find robust evidence that FDI firms provide more trade credit than local firms during tight domestic credit periods and that a favorable global liquidity shock amplifies FDI firms’ advantage in trade credit provision. Moreover, the differential responses of FDI and local firms are stronger in financially more dependent industries or in Chinese provinces with less financial depth. Received August 12, 2016; editorial decision May 16, 2017 by Editor David Denis.

Currency carry trade disguised as goods trade can potentially channel external financial shocks to domestic economic environment, despite capital controls. We identify this channel in the context of post-GFC China using variations in product characteristics and a policy shock. We show that trade volumes of cost-efficient products responded significantly more to carry returns. However, such differential responses to carry returns vanished after the government’s clampdown on illicit capital flows. At the aggregate level, we demonstrate further that the surge in disguised carry trades led to a significant expansion of China’s shadow banking credit but not its traditional bank lending credit.

This paper examines whether, and to what extent, the spot LNG markets in different regions (East Asia, Iberia, Northwest Europe, and South America) are integrated and how market integration evolves over time. We first lay out a framework of market integration in the context of global LNG market where the main supplier (e.g. Qatar) may have market power. Estimating a time-varying coefficients model, we find that a varying degree of market integration exists between all four LNG indices particularly after the Fukushima incident in 2011. We complement the time-varying coefficient analysis with a test of price convergence among the LNG indices using the Phillips-Sul (2007) methodology. The results reveal that, there is strong evidence that the spot LNG prices are converging after the Fukushima accident and they are also converging with the price of NBP in the UK. The empirical result is consistent with the change of market power of the main supplier.

This article employs a duration analysis approach to empirically investigate whether political fractionalization leads to delayed fiscal stabilizations. Using a broad sample of both developed and developing countries for the period 1975–2011, we consistently find strong evidence that political fractionalization is significantly associated with longer delays in stabilizing high deficits. In particular, political fractionalization has a greater impact on delays in periods of macroeconomic distress. We also show that, while the fractionalization of government parties delays fiscal stabilization, the fractionalization of opposition parties tends to facilitate fiscal stabilization.

We identify forecasting models using both a traditional, partially judgmental method and the mechanized Autometrics method. We then compare the effectiveness of these two different identification methods for post-sample forecasting, in the context of a relatively large-scale exemplar of macroeconomic post-sample Granger causality testing. This example examines the Granger causal relationships among four macroeconomically important endogenous variables–monthly measures of aggregate income, consumption, consumer prices, and the unemployment rate–embedded in a six-dimensional information set which also includes two interest rates, both of which are taken to be weakly exogenous in this context. We find that models indentified by the traditional method tend to have better post-sample forecasting abilities than analogous models identified using the mechanized method, and that the analysis done using the traditional identification method generates stronger evidence for post-sample Granger causality among the four endogenous variables.

We examine whether adopting an inflation-targeting regime helps reduce financial dollarization as predicted by Ize and Levy Yeyati's (2003) portfolio model. To address the self-selection problem of policy adoption, we apply a variety of propensity score matching methods to a large sample of 106 developing countries for the years 1985–2004. We find strong evidence that inflation targeting has large and significant treatment effects on lowering both actual financial dollarization and the model implied minimum variance portfolio dollarization. Our results are robust to alternative samples and model specifications and also to control for additional factors in postmatching regressions.

I. INTRODUCTION An important question in open economy macroeconomics is whether exchange rate rigidity hinders current account adjustment (also known as the Friedman hypothesis). According to Friedman (1953), a flexible exchange rate regime facilitates current account adjustment while a fixed exchange rate regime delays the adjustment process. This hypothesis has stimulated extensive research on the relationship between exchange rate regimes and current account reversals (e.g., Adalat and Eichengreen 2007; De Haan, Schokker, and Tcherneva 2008; Milesi-Feretti and Razin 2000; Pancaro and Rueffer 2009). While existing studies have made significant contributions to the literature, they largely focus on the determinants of current account reversals rather than the duration of current account deficit spells emphasized in the Friedman hypothesis. Does a country's exchange rate regime really matter to how long it stays in a high current account deficit state? And if so, to what extent does the fixed exchange rate regime delay the adjustment process? This article addresses the above important questions by empirically evaluating the role of exchange rate regimes on the duration of high current account deficit spells in developing countries. Given the prevalence of large and persistent current account deficits across countries over the last few decades, understanding the impact of exchange rate regimes on the duration of high deficit spells is particularly important and pertinent. Specifically, we identify high current account deficit spells and employ hazard models to examine whether a fixed exchange rate regime increases the duration of high deficit spells and thus delays current account adjustment. (1) A novelty of this approach is that, by estimating hazard models, we can explicitly test for the effect of exchange rate regimes on the duration of high current account deficit spells, which is more in the spirit of the Friedman hypothesis. On the basis of a large dataset with annual observations for 95 developing countries over the period 1971-2004, we find strong evidence that, in developing countries, fixed exchange rate regimes are associated with longer duration of high deficit spells and hence significant delays in the adjustment to high current account deficits. This finding is robust to alternative exchange rate regime classifications and different model specifications. Furthermore, we show that fixed exchange rate regimes delay current account adjustment only in the hard peg case but not in the soft peg case. From a policy perspective, this suggests that only the "corner solution" of a very rigid exchange rate regime delays the current account adjustment but not if the regime allows for some flexibility in the exchange rate adjustment. Our findings thus lend strong support to the Friedman hypothesis. The remainder of the article proceeds as follows. After a brief review of the relevant literature in Section II, Section III provides a description of our dataset and defines high deficit spells. In Section IV, we discuss the methodological issues involved in the duration analysis. The empirical results are presented in Section V and Section VI concludes. II. THE LITERATURE ON EXCHANGE RATE REGIMES AND CURRENT ACCOUNT ADJUSTMENT The discussion on the relationship between exchange rate regimes and current account adjustment goes back to Friedman's seminal work in the 1950s. Friedman (1953) argues that nominal exchange rate flexibility expedites current account adjustment while nominal exchange rate rigidity delays the adjustment. Under a flexible exchange rate system, where the exchange rate is allowed to vary freely, a rising current account deficit would induce the depreciation of domestic currency, which, in turn, leads to an increase in exports, a decrease in imports, and a rapid convergence to a balanced current account. In the case of fixed exchange rate regimes, where exchange rates are not allowed to vary, countries have to rely solely on internal price adjustment mechanisms to produce corrective movements in their current accounts. …

The Granger-causal relationship between the size and dispersion of fluctuations in sub-components of the US Consumer Price Index (CPI) is examined using both in-sample and out-of-sample tests and data from January 1968 to December 2008. Strong in-sample evidence is found for feedback between median inflation and price dispersion; the evidence for Granger-causation from median inflation to price dispersion remains strong in out-of-sample testing, but is less strong for Granger-causation in the opposite direction. The implications of these results for the variety of price-level determination models in the literature are discussed.

[Author Affiliation]Shu Lin, , , , shulin75@gmail.comHaichun Ye, , , , haichunye@gmail.com[Acknowledgment]The authors would like to thank Kent Kimbrough and two anonymous referees for valuable comments.1. IntroductionOne of the most important recent innovations in the conduct of monetary policy is inflation targeting, in which a monetary authority makes public an estimated inflation rate (or range) and attempts to steer the actual inflation toward the target using monetary tools. Since its emergence in the early 1990s, inflation targeting has certainly been gaining popularity over the last two decades. By the end of 2006, 27 countries, among which 17 are developing countries, had explicitly adopted this new monetary policy regime.The emergence of inflation targeting has attracted substantial attention from both researchers and policymakers. Numerous studies have empirically evaluated the effects of adopting an explicit inflation-targeting regime on a country's economic performance, especially on inflation and growth. While studies focusing on advanced industrial countries so far have yielded mixed results, the evidence in developing countries seems to be more robust.1 Batini, Kuttner, and Laxton (2005), Goncalves and Salles (2008), and Lin and Ye (2009) all find that inflation targeting significantly lowers inflation in developing countries where the credibility of the central bank has not yet been well established (thus, the credibility gain of adopting an explicit inflation-targeting regime is substantial). In addition, CapistrAn and Ramos-Francia (2010) show that inflation targeting significantly lowers the dispersion of inflation expectations in developing countries. Two recent survey articles, Walsh (2009) and Ball (2010), also concluded that inflation targeting has larger beneficial effects in developing countries than those in advanced industrial countries.Despite the success of inflation targeting in developing countries, the more traditional exchange-rate-targeting framework still remains the dominant monetary policy regime in developing countries. It is so popular that an influential study by Calvo and Reinhart (2002) finds an epidemic case of "fear of floating" in the developing world.2 Furthermore, similar to inflation targeting, an exchange-rate-targeting regime (especially a credibly enforced one) is also viewed as an effective means to achieve price stability in developing countries because it serves as a nominal anchor by allowing a developing central bank to borrow credibility from a foreign monetary authority. In a strict exchange-rate-targeting framework, the targeting country's inflation rate should be equal to that of the country (usually a low-inflation, rich country) to which its exchange rate is pegged.Does an inflation-targeting framework outperform an exchange-rate-targeting regime in achieving price stability in developing countries? If so, does this benefit come at a cost of slower growth? These two important and policy-related questions have not yet been examined in the literature. A common feature of previous studies is that they all compare an inflation-targeting regime with a very broad alternative, namely, a non-inflation-targeting regime, while ignoring the substantial heterogeneity in the monetary policy regimes adopted by non-inflation-targeting countries. A disadvantage of comparing inflation targeting with such a broad alternative is that the results may not be of direct use for policy choices.The objective of this study, therefore, is to make the first attempt in the literature to conduct a direct empirical comparison of the emerging inflation-targeting framework with the popular exchange-rate-targeting regime in developing countries. In particular, we compare the effects of these two monetary policy regimes on two key outcome variables, inflation and economic growth. Our study is built upon three recent empirical works on the effects of inflation targeting in developing countries, including Batini, Kuttner, and Laxton (2005), Goncalves and Salles (2008), and Lin and Ye (2009), but we focus on directly comparing inflation targeting with exchange-rate targeting. …

We make the first attempt in the literature to empirically investigate the role of financial development in the choice of exchange rate regimes. Using a binary choice model, we first show that financially less developed countries are more likely to adopt a fixed exchange rate. To further examine the impact of financial development on the conditional probability of exiting from an existing pegged system to a flexible one, we then employ hazard-based duration analysis. We find strong evidence that countries with higher levels of financial development are more likely to exit a pegged system, and, interestingly, financial development only matters to orderly exits but not disorderly exits. Our results are robust to controlling for endogeneity and sample selection.

This study re-evaluates the treatment effect of dollarization on trade while explicitly controlling for self-selection of policy adoption. Employing a variety of propensity score matching methods, we show that dollarization not only increases bilateral US trade with dollarized countries, but promotes a dollarizer’s bilateral trade with other dollar-zone countries as well.

I. INTRODUCTION The relationship between the government budget deficit and the current account deficit has been a contentious subject in empirical macroeconomics for at least the past 20 yr. Papers have variously found a positive link, no link, and three recent pieces even find a negative link between the two. There are, however, some things that almost all these studies have in common. For example, they ignore the possibility of structural breaks in the series when examining their time series properties. Most previous studies treat the variables under study as being integrated of order 1, which is to say as having a unit root. This is a hard assumption to square with the fact that the variables are measured as fractions of gross domestic product (GDP) and have, over the last half century at least, shown no inclination toward typical unit root behavior. By contrast, in three recent pieces (Corsetti and Muller 2006; Kim and Roubini 2008; Muller 2006), the two series are simply treated as pure stationary processes without any pretesting, which obviously conflicts with results from the traditional unit root tests. In this article, we show that both the budget deficit and the current account deficit are stationary around an occasionally shifting mean (which is to say that they have structural breaks but are stationary after allowing for those breaks). Since it is well known that traditional unit root tests have little power when the underlying data contain structural breaks, this explains the puzzling finding that the budget deficit and the current account deficit expressed as fractions of GDP test out as I(1) series in practice. Our findings also cast doubt on the validity of assuming the two series are purely stationary processes. Given our framework, a simple test for the existence of a long-run equilibrium relationship between budget and current account deficits is to compare the number and timing of their structural shifts. We find that the two series are not closely related either in their number of breaks or in their timing of structural shifts. We thus conclude that over the long run (genetically?), the deficits are not twins. Another factor that existing studies have in common is their treatment of the error structure of the model as homoskedastic, despite relatively clear visual evidence of volatility clustering (conditional heteroskedasticity) in least squares residuals. When we consider the short-run dynamics of the demeaned variables through a vector autoregression (VAR) analysis, we show that the error covariance of this VAR model is significantly conditionally heteroskedastic and go on to specifically account for this phenomenon with a VAR-generalized autoregressive conditional heteroskedasticity (GARCH) model. We consider a trivariate model that also includes the real interest rate. Here, we find a significant and sizeable positive short-run effect of budget deficit innovations on the current account deficit in both the impulse response functions and the variance decompositions of the model. Our answer to the question of the paternity of the two deficits thus depends on the horizon studied. Each series has structural breaks that are largely independent of each other so they are not twins at all over the long run. However, once we allow for these secular shifts, the short-run dynamics reveal a very strong family resemblance indeed. The rest of the article is organized as follows. In Section II, we review some of the existing empirical literature. Section III discusses the time series properties of the data and presents our results about the long-run evidence on the twin deficits question. Section IV sets out our VAR-GARCH model and presents our results on short-run twin deficits behavior. Section V is a brief conclusion. II. AN OVERVIEW OF THE EMPIRICAL LITERATURE The relationship between current account deficits and government budget deficits has been a subject of extensive study. …

This study employs Monte Carlo experiments to evaluate the performances of a number of common panel data estimators when serial correlation and cross-sectional dependence are both present. It focuses on fixed effects models with less than 100 cross-sectional units and between 10 and 25 time periods (such as are commonly employed in empirical growth studies). Estimator performance is compared on two dimensions: (i) root mean square error and (ii) accuracy of estimated confidence intervals. An innovation of our study is that our simulated panel data sets are designed to look like ‘real-world’ panel data. We find large differences in the performances of the respective estimators. Further, estimators that perform well on efficiency grounds may perform poorly when estimating confidence intervals and vice versa. Our experimental results form the basis for a set of estimator recommendations. These are applied to ‘out of sample’ simulated panel data sets and found to perform well.

We evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted this policy by the end of 2004. Using a variety of propensity score matching methods, we show that, on average, inflation targeting has large and significant effects on lowering both inflation and inflation variability in these thirteen countries. However, the effectiveness of inflation targeting on lowering inflation is found to be quite heterogeneous. The performance of a given inflation targeting regime can be affected by country characteristics such as government's fiscal position, central bank's desire to limit the movements of exchange rate, its willingness to meet the preconditions of policy adoption, and the time length since the policy adoption.

We evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s. To address the self-selection problem of policy adoption, we make use of a variety of propensity score matching methods recently developed in the treatment effect literature. Our results show that inflation targeting has no significant effects on either inflation or inflation variability in these seven countries. Further evidence from long-term nominal interest rates and income velocity of money also supports the window-dressing view of inflation targeting.

We make the first attempt in the literature to empirically examine the spillover effects of U.S. monetary policy on trade in other countries. In a large sector-level bilateral trade dataset of 137 countries for the years 1970-2000, we find strong and robust evidence supporting an international credit channel of U.S. monetary policy transmission. We show that: 1) financially more constrained sectors have a more negative exposure of their trade to a tight U.S. monetary policy; 2) this international credit channel works mainly during significant U.S. monetary tightening periods (e.g., a large increase in interest rates); 3) the negative impact of a tight U.S. policy is significantly stronger in financially less developed countries or countries with no monetary autonomy.

We employ an unobserved components model to disentangle the long-term trend from cyclical movements in the price of internationally traded crude oil using data from 1861 to 2010. The in-sample estimation of the model identifies a deterministic quadratic trend and two types of cycles, with the short cycle having a period of 6 years and the long cycle of 29 years. Compared to the large amplitude of the cycles, the growth rate of the long-term trend is small. The out-of-sample forecasting performance of various competing models is compared to that of a "no change" random walk forecast. While the random walk forecast tends to be the most accurate at shorter horizons, it is outperformed by the trend-cycle models at horizons longer than one year. The results provide evidence of predictability in the price of crude oil at long horizons.

Ashley and Ye (2012) exemplifies the state-of-the-art in post-sample Granger causality analysis in a small-scale (bivariate) setting, albeit with a sufficiently large sample (T = 480 months) as to make post-sample testing feasible. In the present work we extend this work in two directions. First, here we analyze four macroeconomically important endogenous variables – monthly measures of aggregate income, consumption, consumer prices, and the unemployment rate – embedded in a six-dimensional information set which also includes two interest rates, both taken to be exogenous. Second, we compare the causality results obtained using a traditional large-to-small (but partially judgmental) model identification procedure to those obtained using the objective (but mechanical) “Autometrics” identification procedure given by Doornik and Hendry (2007).

This paper employs monthly data on China’s net oil import from January 1997 to June 2010 to assess the role of China’s net import in the evolution of the crude oil price. Based on a vector autoregression (VAR) analysis, we find that the growth of China’s net oil import has no significant impact on monthly oil price changes and there is no Granger causality between the two variables. The historical decomposition indicates that shocks to China’s oil demand have only played a small role in the oil price run-up of 2002–2008. We also calculate the price changes implied by China’s net oil import growth from a longer-term supply and demand shift perspective. doi: 10.5547/ISSN0195-6574-EJ-Vol32-No4-4 “Surging Chinese demand is underpinning the recent spike in the price of oil, figures from the International Energy Agency (IEA) show. This ‘China factor’ has more bearing on oil prices than the ‘risk factor’ coming from global tensions, some experts say”

This study employs Monte Carlo experiments to evaluate the performances of a number of common panel data estimators when serial correlation and cross-sectional dependence are both present. It focuses on fixed effects models with less than 100 cross-sectional units and between 10 and 25 time periods (such as are commonly employed in empirical growth studies). Estimator performance is compared on two dimensions: (i) root mean square error and (ii) accuracy of estimated confidence intervals. An innovation of our study is that our simulated panel data sets are designed to look like “real-world” panel data. We find large differences in the performances of the respective estimators. Further, estimators that perform well on efficiency grounds may perform poorly when estimating confidence intervals, and vice versa. Our experimental results form the basis for a set of estimator recommendations. These are applied to “out of sample” simulated panel data sets and found to perform well.