Economics Journals| The Effect of Real Exchange Rate

Recent developments in global finance and the world economy have demonstrated some of the shortcomings in the widely-applied equilibrium-based modeling approach. In this paper, the global E3MG model (www.e3mgmodel.com) has been applied to assess the impacts of the crisis that began in 2008 with the so-called credit crunch. E3MG is a sectoral input-output model (including the banking sector), based on the system of national accounts. The model includes 20 global regions and uses annual time series data. E3MG's parameters are estimated using error-correction methodology, making it an almost unique tool in being able to assess short-term sectoral impacts, as well as long-term trends. Using E3MG, an analysis of the crisis and current (January, 2009) policy measures has been build up through a series of carefully-defined scenarios, simulating aspects of behavioral changes within the banking sector and in the wider global economy. The results help to explain the mechanisms through which the real economy has been impacted by the crisis and give an indication of the effectiveness of current policy. Finally, the paper considers the effects of policy measures designed to restore confidence in the global financial system that are coordinated at the global level, following the `seven-point plan' outlined in Barker (2009).

Global Financial Crisis of 2008-09: Triggers, Trails, Travails, and Treatments

-- Ganti Subrahmanyam

The present world economy has, increasingly, been interconnected in terms of small units such as industries, regions and national economies as discontinuous systems. Changes in these systems have varied impact across the world economies. This paper tries to trace out various triggers, trails and travails of the present crisis, with a view to suggest solutions or treatments for the global financial crisis of 2008-09. For instance, one of the triggers identified is the prolonged implementation of low interest rate policy. This, coupled with the savings glut in the world economy has led to sub-prime lending in the US, as it was used to finance the US mortgage debts. The author indicates that some new lessons have been learnt from the current financial crisis, the most important of them being the need for retooling the finance and economics models. Further, globalization, along with its bestowed benefits, brings in increased frequency and spread of financial and economic crises.

The Effect of Real Exchange Rate on Thailand's Export

-- Hway-Boon Ong, Yih-Jian Yoong,
Siew-Ling Lim and Gee-Kok Tong

The effect of real exchange rate on trade flow enables effective planning and management of exchange rate risk. This paper seeks to examine the impact of real exchange rate volatility, Real Gross Domestic Product (RGDP) and Bilateral Real Exchange Rates (BRER) on Thailand's exports to its two major trading partners, Japan and the US. It is revealed that there are significant evidences that the RGDP of Japan and the US have a positive impact on Thailand's real exports. The Thailand-Japan bilateral exchange rate is also found to be negatively linked to Thailand's real export. Consequently, Thailand should consider reducing its exchange rate misalignments and diversify its export portfolio away from the US.

Foreign Direct Investment: Key to Poverty Reduction in Malaysia

-- Noor Al-Huda Abdul Karim and Shabbir Ahmad

Malaysia's rapid economic growth has given rise to the realization of distributional objectives for achieving its ultimate goal of national unity. Reducing poverty and income disparities among races, income groups and regions is continuously emphasized by the Government of Malaysia in the country's series of national development plans. This paper concentrates on the significance of Foreign Direct Investment (FDI) in poverty reduction across the states of Malaysia. In the econometric analysis, a set of panel data covers eight sub-periods over the period 1984-2005. All the 13 states and 3 federal territories of Malaysia are taken into account in the analysis. The FDI-poverty model selected is in the log-linear form and the FDI inflows into the manufacturing sector is the only explanatory variable. The empirical results show that the FDI coefficient has a statistically significant negative sign, suggesting that the poverty incidence could be reduced by increasing FDI inflows into the Malaysian states.

An Aggregate Import Demand Function: An Empirical Investigation by Panel Data for Latin American and Caribbean Countries

-- Ilhan Ozturk and Ali Acaravci

This paper estimates the aggregate import demand function for Latin American and Caribbean countries, using the dynamic panel data methods, over the period 1975-2005. Consistent with theoretical postulates, this paper finds that the demand for import responds negatively to an increase in the relative prices and positively to an increase in real income. The results imply that fiscal or monetary policies may be used as policy instruments to keep inflation at a reasonable rate so as to rectify any trade imbalances. In addition, for a sustainable trade balance, the development of more local industries should be encouraged to lower the import content.

Stock Interdependencies: The Case of an Emerging East Asian Economy

-- V G R Chandran and Ramesh Rao

This paper examines the relationship between stock indices of Malaysia and the emerging East Asian countries, namely South Korea, Taiwan, Hong Kong and Japan. The cointegration analysis found a long-run relationship between the stock indices of Malaysia and South Korea. The results of the Granger causality suggest no evidence of any causality between the stock indices of Malaysia and Japan. Whereas in the short run, a unidirectional causality running from stock indices of South Korea and Hong Kong to that of Malaysia were detected. Conversely, stock indices of Malaysia and Taiwan showed bidirectional causality.

Spectral Analysis: Time Series Analysis in Frequency Domain

-- Vishwanathan Iyer and Kaushik Roy Chowdhury

This paper describes how the frequency domain analysis provides an alternative approach to time domain analysis of a given time series. Spectral and periodogram analyses of a given time series are performed to detect trends and seasonalities in the data. A cross-spectral analysis is done to find causality and comovements in two different time series. Univariate frequency domain analysis is done using time series of varying nature including simulated white noise process, random walk process, AR(1) process, Wolfer's Sunspot data and Box-Jenkins Airlines data; while bivariate (cross-spectral) analysis is done for macroeconomic variables such as money in circulation and inflation.

A Re-Examination of Redistributive Effects of Direct Healthcare Financing Under Alternative Decompositional Frameworks

-- Hyacinth Ementa Ichoku and William M Fonta

Healthcare financing, like fiscal policies, have explicit distributional implications. It is often important for policy purposes to make explicit such distributional consequences. A number of decomposition frameworks have been developed in literature for analyzing redistributional impact of fiscal and transfer policies. This study examines the conceptual basis of two of such decomposition frameworks—the Aronson, Johnson and Lambert (AJL) (Aronson et al., 1993) model, which has dominated much of literature, and the Duclos, Jalbert and Araar (DJA) (Duclos et al., 2003) model. The models are applied to estimate the components of inequity in healthcare financing in Nigeria. The results show clear differences in the estimated components of inequity. The study also finds that underlying the decomposition frameworks are conceptual differences on account of which interpretation of inequity components estimated from the two models must be done with care.

Technology, Production Factors and Specialization: New Evidence

-- Tiago Neves Sequeira

This paper presents new evidence concerning the relationship between relative factor endowments, productivity and specialization. Using a recently developed dynamic panel data fixed effects estimator, the study evaluates the effect of factor endowments in comparison to the effect of productivity on specialization in different sectors of the economy. The study reveals that productivity has more influence in determining industrial specialization than factor endowment. The study concludes that on average, a developing country's machinery sector benefits from investment in capital accumulation and technology.

Liquidity Effect of Single Stock Futures on the Underlying Stocks: A Case of NSE

-- Anver Sadath and B Kamaiah

This paper examines the bid-ask spread of underlying stocks around the introduction of Single Stock Futures (SSF) in the National Stock Exchange (NSE), in order to ascertain whether SSF trading has any liquidity effect on the underlying stocks. Using both high frequency and daily data from January 1, 2001 to December 31, 2002 on a dataset consisting of 28 stocks on which stocks futures were traded from November 9, 2001 in the NSE, the study shows that the liquidity of underlying stocks has increased as there is considerable decline in both spread and return variance in the post-futures period. This decline in spread may be attributed to the SSF trading, as existence of futures market prompts informed traders to migrate to futures market so as to capitalize on the trading flexibilities available there. Consequently, the dealers in the spot market reduce spread as they need not incur any adverse selection cost for trading with informed traders. Besides, with shift of well-informed traders to futures markets, better information is incorporated into the prices. This leads to reduction in volatility of spot market. This decline in volatility helps dealers to reduce spread as inventory risk associated with maintaining balanced inventory decreases. Thus, it can be concluded that introduction of SSF in the NSE has resulted in improvement of liquidity in the cash market.

Exchange Rate and Trade: A Causality Analysis for Pakistan Economy

-- Qazi Muhammad Adnan Hye, Uzma Iram and Amra Hye

This paper investigates the direction of causality between exchange rate and trade (exports and imports) for a developing country like Pakistan, utilizing the monthly time series data covering the period 1995-2006. Cointegration and causality tests were conducted to assess the link between trade and exchange rate. The results of Johansen-Juselius (JJ) cointegration tests indicate that there is one cointegrating vector between exchange rate, exports and imports. However, an important finding of this empirical research is that there is a strong and stable relationship between exports and imports, and the causality is bidirectional. This study also rejects previous findings about negative effect of exchange rate volatility on trade volume in a developing economy like Pakistan.

The Microfinance Promise in Financial Inclusion: Evidence from India

-- Naveen K Shetty and Veerashekharappa

Finance is one of the effective tools in spreading economic opportunities. Wider access to adequate and timely finance helps both the producers as well as consumers in raising their welfare status. The increasing gap between demand and supply of financial services has led to the `exclusion' of large number of rural population from formal financial institutions. As a response to the failure of formal financial institutions in reaching the poor, the `microcredit' or more broadly `microfinance' approach was innovated and institutionalized in the Indian rural credit system. It was aimed at overcoming the twin problems of formal credit system—non-availability and poor recovery performance of the existing rural credit institutions. As a result, Microfinance Institutions (MFIs) have made inroads into the rural areas to improve and extend timely, easy and adequate access to financial services. In this context, the present paper examines the nature and type of new institutions that emerged in the Indian financial system to include the excluded. The study finds that SHG-bank linkage and MFI models are the two dominating microfinance approaches in the post-financial reforms in India. The study also finds that the microfinance sector in India is growing with the genesis of new institutions on the one hand and, on the other hand, the NGOs are transforming themselves into financial institutions and entering the business of microfinance. The study concludes that the suitable regulatory environment is the prime concern for sustainable delivery of microfinance in India.

Implementation of Fiscal Responsibility Legislation: A Study of Andhra Pradesh

-- A Giridhar

The paper attempts to show that adherence to fiscal policy rules not only makes the state government move towards long-term fiscal sustainability, but also helps in reorienting its expenditure. It states that, in order to bring in balance between financial rectitude and welfare optimization it is essential that subsidies are channelized to targeted groups while monitoring important risks such as interest rate, expenditure on irrigation projects and scholarships. Further, it contends that institutional integrity and political will are critical in achieving the objectives set out in Fiscal Responsibility and Budget Management (FRBM) Act.