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Pacific Economic Review

Impact factor: 0.722 5-Year impact factor: 0.645 Print ISSN: 1361-374X Online ISSN: 1468-0106 Publisher: Wiley Blackwell (Blackwell Publishing)

Subject: Economics

Most recent papers:

  • Second‐Best Theory: Ageing well at Sixty.
    Robin Boadway.
    Pacific Economic Review. May 30, 2017
    We summarize the evolution of the theory of second best since the original contribution of Richard Lipsey and Kelvin Lancaster. Early studies investigated the optimality of piecemeal first‐best policy in controlled sectors when distortions exist elsewhere. The applied welfare economics approach of Arnold Harberger and its embodiment in cost–benefit analysis incorporated second‐best analysis into the evaluation of public programs. Modern second‐best analysis emphasizes policy‐making in a distorted economy where distortions reflect either constraints on government policy instruments or features of the economic environment such as limited government information. This is illustrated using optimal commodity and income taxation and its refinements to intertemporal and uncertain settings. Second‐best analysis is a defining feature of modern normative public economics.
    May 30, 2017   doi: 10.1111/1468-0106.12225   open full text
  • The Way We Teach Public Economics: A Rationalization Using the Theory of Third Best.
    Wai Chiu Woo.
    Pacific Economic Review. May 30, 2017
    The devastating implications of the theory of second best, despite being well recognized a half century ago, do not have much influence on the current way we teach public economics at undergraduate level, as this paper shows. The current practices basically stick to the first‐best policy framework, and the theory of second best, even if mentioned, is at most marginally important. Some justifications for this textbook framework are called for if we do not think second best is a bad idea. This paper argues that this textbook framework cannot be justified by the absence of irremovable distortions in the real world, and should be considered within the social‐welfare framework to maintain coherence with other parts of the framework. Without calling for a major revamp of the current way of teaching, I suggest that the theory of third best can be adopted to justify this way of teaching in a realistic environment: when policy‐makers are informationally constrained, and when the unaccounted‐for distortion is not large, or when a conservative attitude is adopted for interventions.
    May 30, 2017   doi: 10.1111/1468-0106.12224   open full text
  • Concluding Comments to the Debate.
    Richard G. Lipsey, Yew‐Kwang Ng.
    Pacific Economic Review. May 30, 2017
    In this final piece to the symposium for a special issue of Pacific Economic Review on the theories and applications of second‐best and third‐best theories, Richard Lipsey and Yew‐Kwang Ng provide their final comments to the debate. Several issues of agreement and disagreement are discussed. Most importantly, while both agree on the formal correctness of both the second‐best and third‐best theories, Lipsey believes the main proposition of third‐best theory (following the first‐best rules under Informational Poverty) is applicable only to a situation (status quo) where the first‐best rule (such as taxing a pollution at the marginal damage of $N) is already being followed; Ng regards it as applicable whether or not the first‐best rule is currently being followed. This also partly explains their difference on the practical policy relevance and the importance of that theory.
    May 30, 2017   doi: 10.1111/1468-0106.12223   open full text
  • Economic Policy with and without Maximizing Rules.
    Richard G. Lipsey.
    Pacific Economic Review. May 30, 2017
    This paper contrasts the static neoclassical and the evolutionary views of the economy and economic policy. It responds to Ng's comments on Lipsey's original criticism of third‐best theory. Under a relevant definition of informational poverty and Ng's other assumptions, the expected value of any policy‐created divergence from the status quo is negative: If there is not enough known to determine what to do, nothing should be done, rather than establishing first‐best conditions as Ng's analysis has it. It is argued that Ng's analysis of his two other information states adds little to what common sense suggests. To address Ng's argument that policies using context‐specific objective functions lack the required welfare basis, the present paper studies how economic policy is actually pursued absent guides provided by welfare economics. Policies that follow from evolutionary economic theory imply that many things that are seen as ‘distortions’ in welfare economics are actually desirable forces that drive economic growth.
    May 30, 2017   doi: 10.1111/1468-0106.12222   open full text
  • Theory of Third Best: How to Interpret and Apply.
    Yew‐Kwang Ng.
    Pacific Economic Review. May 30, 2017
    Six decades after the formulation of his (Lipsey & Lancaster, ) celebrated general theory of the second best, Richard Lipsey has written on the important issue of second‐best and third‐best theories. In particular, he criticizes the theory of third best (see Section 3 below). This paper explains our agreements and differences and reaches the following conclusions. First, several arguments provided do not invalidate the theory of third best, at least if correctly interpreted and applied. We may have useful piecemeal welfare policies after all, if appropriately used. Second, I did not and do not attempt to refute the general result of second‐best theory; both the second‐best and third‐best theories remain valid, if properly interpreted. Third, the usefulness of some general results (properly interpreted and used) and the importance of additional information (if available) on specific context need not be an either–or choice (Section 1). Finally, the third‐best theory is not completely non‐context specific; the distinction between cases of Informational Poverty and Scarcity itself depends on the context. However, it also provides some general guides useful for making piecemeal policies in different contexts (Sections 3 and 4).
    May 30, 2017   doi: 10.1111/1468-0106.12221   open full text
  • Generality Versus Context Specificity: First, Second and Third Best in Theory and Policy.
    Richard G. Lipsey.
    Pacific Economic Review. May 30, 2017
    Second‐best theory established that a policy's effect on community welfare (or any other objective function) varies with its specific context. In contrast, Ng argues that fulfilling first‐best conditions piecemeal is optimal whenever the policy‐maker's information is insufficient to determine the direction of the change in the variable under consideration that will raise welfare, irrespective of the conditions in that market. It is argued in the present paper: (i) that Ng's own assumptions imply not that first‐best conditions should be established under these circumstances, but that the status quo should be maintained; (ii) that when Ng's key assumption is altered to be empirically relevant, all policy decisions become fully context‐specific; and (iii) that Woo's argument for accepting Ng's conclusions in spite of point (ii) is incorrect. The conclusion discusses valid uses of piecemeal welfare theory in spite of second best.
    May 30, 2017   doi: 10.1111/1468-0106.12220   open full text
  • Towards a Theory of Third‐Best.
    Yew‐Kwang Ng.
    Pacific Economic Review. May 30, 2017
    The theory of second best (Lipsey & Lancaster ) shows that the presence of irremovable distortions renders the second‐best conditions exceedingly complicated; by satisfying some optimality conditions, an improvement is not ensured. However, the complicated second‐best rules are neither optimal nor feasible if informational and administrative costs are taken into account. The simple first‐best rules are the optimal feasible in an important class of situations (Informational Poverty), implying that analyses based on first‐best assumptions are still relevant for practical policy‐making. This is so because, with a reasonable concavity assumption, staying with the first‐best rules maximises expected benefit. With more (but not perfect) information, third‐best policies are appropriate. Some informal illustrative applications of this third‐best theory are provided. In particular, average‐cost pricing for public utilities may not be far from the third‐best optimum and the necessity to raise government revenue through non‐lump‐sum taxes need not impose any real distortion.
    May 30, 2017   doi: 10.1111/1468-0106.12219   open full text
  • Credit Constraints, Export Mode and Firm Performance: An Investigation of China's Private Enterprises.
    Faqin Lin.
    Pacific Economic Review. February 22, 2017
    Firms can export either directly or through a trade intermediary (indirect exporting). This paper examines how financial constraints determine whether firms export directly or indirectly, and how this choice affects firm performance. For this investigation, we use the most recent Chinese private firm‐level data, collected in 2011 by the World Bank. We establish two main results. First, indirect exporters face higher financial constraints than direct exporters. Second, indirect exporters are less productive and profitable than direct exporters. In addition, we rationalize these patterns with a simple model that incorporates credit constraints and imperfect contractibility in companies’ export decisions. Our results imply that although globalization allows more firms in developing countries to enter the global market through indirect exporting, limited access to capital restricts firms to exporting directly and precludes them from pursuing more profitable opportunities.
    February 22, 2017   doi: 10.1111/1468-0106.12207   open full text
  • Market Efficiency, Heterogeneous Trade Costs and Export‐Only Firms.
    Bin Qiu, Zhijun Yan.
    Pacific Economic Review. February 22, 2017
    This paper provides a two‐country general equilibrium model under monopolistic competition, in which we incorporate heterogeneous fixed export costs, a non‐zero export tax rebate rate and efficiency asymmetry to explain the existence of export‐only firms. We focus on the impact of efficiency differences on social welfare and the evolution of export‐only activities from autarky to trade. We show that exposure to trade brings a country of larger size and with higher efficiency more welfare gains, including higher industry productivity and greater variety of products. We also find that firms that face lower fixed export costs enjoy greater export tax rebates and firms that are located in more efficient countries have a greater chance of becoming export‐only firms. Further internationalization promotes the prosperity of export‐only activities.
    February 22, 2017   doi: 10.1111/1468-0106.12206   open full text
  • Political Economy Model of Cross‐Border Mergers Under Mixed Oligopoly.
    Jie Li, Jing Lu, Mobing Jiang.
    Pacific Economic Review. February 22, 2017
    This paper analyses the horizontal cross‐border mergers under the framework of political economy in mixed markets. We explore the conditions under which a cross‐border merger between a partially privatized foreign public firm and a profit‐maximizing domestic firm occurs and is approved by the domestic government. We show that a welfare‐maximizing domestic government approves the merger if the share owned by the foreign government is sufficiently low and the merger is relatively efficient; a government only caring about political contributions always approves such a merger; we also consider the case where the government cares about both social welfare and political contributions.
    February 22, 2017   doi: 10.1111/1468-0106.12205   open full text
  • Foreign Direct Investment and Democracy: A Robust Fixed Effects Approach to a Complex Relationship.
    Rodolphe Desbordes, Vincenzo Verardi.
    Pacific Economic Review. February 22, 2017
    We develop a new robust‐to‐outliers dummy estimator that we subsequently apply to investigate the impact of various democratic attributes on foreign direct investment in recent years. We find that democracy has generally a positive impact on foreign direct investment, once outliers are controlled for, but that this relationship is very specific to each host country's characteristics.
    February 22, 2017   doi: 10.1111/1468-0106.12204   open full text
  • Do Rising Labour Costs Drive Innovation in Enterprises? Propensity Score Matching Evidence from Chinese Firms.
    Xianhai Huang, Hangyu Chen, Gaoju Yang.
    Pacific Economic Review. February 22, 2017
    This paper uses a monopolistic competition model and propensity score matching (PSM) with Chinese firm‐level data to determine whether rising labour costs drive innovation within enterprises. The results indicate that rising wages do drive firms to invest more in R&D and use more capital to substitute for labour to minimize costs, which improves total factor productivity. The results are verified by several robustness tests.
    February 22, 2017   doi: 10.1111/1468-0106.12203   open full text
  • Foreign Direct Investment with Endogenous Technology Choice.
    Herbert Dawid, Benteng Zou.
    Pacific Economic Review. February 22, 2017
    In this paper, we analyse the optimal foreign direct investment (FDI) of a firm operating in a duopolistic market. FDI induces technological spillovers to a competitor in the foreign country; the intensity of which depends on the absorptive capacity of the foreign firm and the size of the technological gap. We characterize a technology spillover threshold and show that for an intensity of spillovers below this threshold, there is a unique locally asymptotic stable steady state with a positive capital stock in the developing country. Furthermore, we characterize how optimal foreign investment patterns and the investor's value function depend on the level of technology transferred and characterize the optimal level to be used for the FDI.
    February 22, 2017   doi: 10.1111/1468-0106.12202   open full text
  • Nonperforming Loans and Purchase of Loans by Public Asset Management Companies in Malaysia and Thailand.
    Masahiro Inoguchi.
    Pacific Economic Review. December 21, 2016
    This paper explores the factors which eliminated the nonperforming loan (NPL) problem in Malaysia and Thailand following the 1997 Asian financial crisis. The number of NPL, which expanded in the aftermath of the crisis, has since declined in most South‐East Asian countries. Although previous studies have explored the causes of the increase in NPL numbers, few have analysed the factors that contributed to the reduction in their number in Asia. In Malaysia and Thailand, authorities put in place several measures to manage NPL. As a vehicle to acquire NPL from banks, Malaysia established the Pengurusan Danaharta Nasional Berhad (Danaharta) in 1998, while Thailand established the Thai Asset Management Corporation (TAMC) in 2001. We analyse whether the characteristic features of banks, improvements in macroeconomic conditions, and facilities for purchasing loans caused a reduction in the number of NPL in Malaysia and Thailand. The results suggest that selling loans to a public asset management company was effective in reducing the number of NPL in Thailand. While macroeconomic conditions influenced the decline in NPL ratios in Thailand, in Malaysia, well performing commercial banks and large commercial and investment banks generally had smaller NPL ratios throughout and following the crisis.
    December 21, 2016   doi: 10.1111/1468-0106.12197   open full text
  • What Types of Policy Uncertainties Matter for Business?
    Masayuki Morikawa.
    Pacific Economic Review. December 21, 2016
    This paper reports data from the author's original survey of Japanese companies concerning the distributions on subjective uncertainties over economic policies and their effects on business operations. Companies perceive uncertainty over the future course of certain economic policies, such as the social security system and international trade policy. Policy uncertainty regarding the tax system, trade policy and environmental policy can have substantial effects on managerial decisions, especially on equipment investment and overseas activities. According to the companies’ subjective probability distributions on their sales outlook, manufacturers face greater uncertainty than non‐manufacturing companies do. Uncertainty over economic policies substantially reduces the expected sales growth rate.
    December 21, 2016   doi: 10.1111/1468-0106.12196   open full text
  • Multi‐Sector Nonparametric Production‐Frontier Analysis of the Economic Growth and the Convergence of the European Countries.
    Barnabé Walheer.
    Pacific Economic Review. October 21, 2016
    In this paper, I apply the recent nonparametric multi‐sector production‐frontier methodology of Walheer (), tailored to analyse the economic growth and convergence of countries taking the sector heterogeneity and interdependence into account, to the European countries from 1995 to 2014. Thanks to a simple rewriting of his initial model, I also provide results at the sector level, which was not possible with the initial version of the methodology. My results confirm the non‐neutrality of technological change and highlight that human capital accumulation plays the biggest role in the increase of labour productivity. Technological change and capital accumulation also play an important, if smaller, role in the increase of output‐labour productivity. My results also confirm the presence of heterogeneity between sectors in Europe, which supports the use of multi‐sector analysis. Finally, my results confirm the presence of two groups, in terms of labour productivity, within the European counties: Eastern and Central European countries and the EU12. These two groups diverge over time. The results are not affected by robustness checks.
    October 21, 2016   doi: 10.1111/1468-0106.12195   open full text
  • Monte‐Carlo Comparison of Conditional Nonparametric Methods and Traditional Approaches to Include Exogenous Variables.
    José Manuel Cordero, Cristina Polo, Daniel Santín, Gabriela Sicilia.
    Pacific Economic Review. October 21, 2016
    The aim of this paper is to compare the performance of the conditional nonparametric approach with several traditional nonparametric methods to incorporate the effect of exogenous or environmental variables into the estimation of efficiency measures. To do this, we conduct a Monte Carlo experiment using a translog production function with one output, two discretionary inputs and two exogenous variables to generate simulated data. According to the values of different accuracy measures calculated to evaluate the performance of each method, the conditional data envelopment analysis clearly outperforms all the traditional alternatives.
    October 21, 2016   doi: 10.1111/1468-0106.12194   open full text
  • Semiparametric Smooth Coefficient Estimation of a Production System.
    Subal C. Kumbhakar, Kai Sun, Rui Zhang.
    Pacific Economic Review. October 21, 2016
    This paper addresses endogeneity of inputs in estimating a semiparametric smooth coefficient production function using a system approach. The system consists of a translog production function and the first‐order conditions (FOC) of profit maximization. Each coefficient of the production function is an unknown function of some exogenous environmental variables. This makes the production function observation‐specific so long as the environmental variables are observation‐specific. The estimation of the system involves applying the functional coefficient instrumental variable method (Cai et al., 2006) for the endogeneity of inputs in the first step, and the semiparametric smooth coefficient seemingly unrelated regression method (Henderson et al., 2015) in the second step. Using a Chinese food industry data set, we show that the semiparametric system approach gives the most economically meaningful input elasticity estimates compared with alternative models. We also calculate the returns to scale along with the technical and allocative inefficiency estimates.
    October 21, 2016   doi: 10.1111/1468-0106.12193   open full text
  • Various Approaches to the Aggregation of Economic Productivity Indices.
    Bert M. Balk.
    Pacific Economic Review. October 21, 2016
    This paper discusses the aggregation of economic productivity indices, in particular Caves, Christensen and Diewert and Moorsteen–Bjurek indices. As part of the theory, some proposals developed in a number of recent papers (co‐) authored by Valentin Zelenyuk are put into context. Alternatives are offered which at the same time show that meaningful aggregation is not so simple.
    October 21, 2016   doi: 10.1111/1468-0106.12192   open full text
  • Recent Developments in Productivity Analysis.
    C. A. K. Lovell.
    Pacific Economic Review. October 21, 2016
    I provide a selective and idiosyncratic examination of several recent, and in some cases not‐so‐recent, developments in productivity analysis that I find interesting. Some have been influential, among them being an analysis of the linkage between management and productivity, an analysis of productivity dispersion (or productivity gaps) and productivity‐enhancing resource reallocation, the incorporation of environmental impacts into productivity measurement, and an analysis of the impact of productivity on business financial performance. Others, for whatever reason, have had less impact, including an analysis of two quite different productivity indices bearing the same name, developing the linkage between empirical and theoretical productivity indices, and the derivation, interpretation and implementation of indirect productivity indices.
    October 21, 2016   doi: 10.1111/1468-0106.12191   open full text
  • Global Investment Environment of the Post‐Quantitative Easing World: The ‘new‐old’ and ‘new‐new’ Normal.
    Michael Melvin.
    Pacific Economic Review. August 19, 2016
    Global markets since late 2007 are not ‘normal’, where normal means market conditions we would expect to observe going forward in the absence of any new economic shocks. Financial markets have been dominated by extraordinary central bank policies that were created to deal with challenging market conditions reflecting heightened risk aversion and illiquidity. Markets in the future will have some characteristics that look more like the market conditions observed in the pre‐crisis period, which I call the ‘new‐old normal’ and other conditions that differ from the past, which I call the ‘new‐new normal’. I first review what happened during the financial crisis in terms of developments in three asset classes, equities, fixed income and currencies, to place the forward‐looking view in proper context. Then the transition period from the quantitative easing (QE) era of exceptional monetary policy to post‐QE markets is discussed. Post‐transition, we will see some features of the post‐QE world that will resemble pre‐crisis market conditions, the ‘new‐old normal’ with higher policy interest rates, wider cross‐country interest differentials, lower cross‐asset return correlations and a resurgence of the importance of cross‐country differences in fundamentals in international investing. However, some features of the post‐QE investment environment will be unlike anything observed in the past: the ‘new‐new normal’ with reduced liquidity and more days of exceptionally large volatility and asset price moves due to regulatory effects resulting in a reduced ability of market‐makers to provide inventory buffers for counterparties and electronic trading venues that shut down trading in high volatility periods; low inflation; flatter yield curves; and emerging markets providing less opportunity for diversification gains as they converge to developed financial market characteristics.
    August 19, 2016   doi: 10.1111/1468-0106.12175   open full text
  • Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model.
    Yasuyuki Sugiyama, Muneyuki Saito.
    Pacific Economic Review. July 26, 2016
    In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.
    July 26, 2016   doi: 10.1111/1468-0106.12157   open full text
  • Stock Market Responses Under Quantitative Easing: State Dependence and Transparency in Monetary Policy.
    Yoshiyuki Nakazono, Satoshi Ikeda.
    Pacific Economic Review. July 26, 2016
    This paper evaluates the effects of unconventional monetary policies adopted by the Bank of Japan from the year 2001 to 2006. A new measure is proposed to identify a nontraditional monetary policy shock from policy packages under the zero lower bound of short‐term nominal interest rates during the quantitative easing period, using data on intraday 3‐month Euroyen futures rates. We find that stock markets do not react to a policy surprise in an expected manner and negatively respond to a monetary easing surprise. Moreover, we find an asymmetric response during a boom and a recession and a nonlinear reaction because of increasing uncertainty concerning future inflation dynamics and the enhancement of monetary policy transparency. Our result suggests that it is difficult to implement unconventional monetary policy to manage agents’ expectations and a ‘lean against the wind’ policy to prevent asset bubbles, particularly at the zero bound.
    July 26, 2016   doi: 10.1111/1468-0106.12158   open full text
  • Globalization: Financial, Trade and Institutional Aspects with Applications to China.
    Raouf Boucekkine, Xianhai Huang.
    Pacific Economic Review. July 26, 2016
    There is no abstract available for this paper.
    July 26, 2016   doi: 10.1111/1468-0106.12176   open full text
  • External Debt and Taylor Rules in a Small Open Economy.
    Shigeto Kitano, Kenya Takaku.
    Pacific Economic Review. June 03, 2016
    We develop a dynamic stochastic general equilibrium model of a small open economy in which both price rigidity and financial friction exist. We compare two cases featuring different interest rate rules. Both cases use the standard Taylor‐type interest rate rules, but the second case also considers external debt levels. We find that when friction in foreign borrowing is large, adding an external debt level to Taylor rules improves welfare. The welfare curve, however, exhibits a hump shape because excessive reactions to changes in external debt reduce welfare.
    June 03, 2016   doi: 10.1111/1468-0106.12156   open full text
  • Fundamentals and Sovereign Risk of Emerging Markets.
    Joshua Aizenman, Yothin Jinjarak, Donghyun Park.
    Pacific Economic Review. May 17, 2016
    We empirically assess the relative importance of various economic fundamentals in accounting for the sovereign credit default swap (CDS) spreads of emerging markets during 2004–2012, which encompasses the global financial crisis of 2008–2009. Inflation, state fragility, external debt and commodity terms of trade volatility were positively associated, while trade openness and a more favourable fiscal balance/GDP ratio were negatively associated with sovereign CDS spreads. Yet the relative importance of economic fundamentals in the pricing of sovereign risk varies over time. The key factors are trade openness and state fragility in the pre‐crisis period, the external debt/GDP ratio and inflation in the crisis period, and inflation and the public debt/GDP ratio in the post‐crisis period. Asian countries enjoy lower sovereign spreads than Latin American countries, and this gap widened during and after the crisis. Trade openness was the biggest factor behind Asia's lower sovereign spreads before the crisis, and inflation during and after the crisis. The results imply that external factors were paramount in pricing sovereign risk prior to the crisis, but internal factors associated with the capacity to adjust to adverse shocks gained prominence during and after the crisis.
    May 17, 2016   doi: 10.1111/1468-0106.12160   open full text
  • China's Capital and ‘Hot’ Money Flows: An Empirical Investigation.
    Tao Cai, Vinh Q. T. Dang, Jennifer T. Lai.
    Pacific Economic Review. March 19, 2016
    We examine time‐series characteristics of China's capital flows during 1998–2014. More specifically, we employ Kalman filtering state‐space models to gauge the relative importance of permanent and transitory components in China's overall foreign direct investment (FDI), equity, bond, other investment and bank credit flows. Our results show that only in the case of FDI are both gross inflow and net flow dominated by a permanent stochastic level, suggesting that this source of capital is largely permanent. Incorporating covariates into the state‐space models, we find that a larger difference between onshore and offshore renminbi interest rates encourages capital inflows that are dominated by a transitory component. Greater global risk perception, proxied by S&P 500's volatility index, in contrast, discourages them. These covariates imply that capital control may not be effective in stemming volatile and speculative flows. Our results on bilateral capital flows between China and the USA also suggest that these flows are less persistent and more volatile during 1998–2014 than previously found based on 1988–1997 data. Our results bear important policy implications as China engages in further reforms in its domestic financial system and greater integration with the world financial system.
    March 19, 2016   doi: 10.1111/1468-0106.12091   open full text
  • World Trade and the Environment: Issues and Policies.
    Winston W. Chang.
    Pacific Economic Review. March 19, 2016
    This paper provides an overview of trade, environmental and related public issues and policies. It discusses the pollution problem, the recent global warming trend, the attempts of various institutions, including the United Nations, the World Trade Organization, regional, national and other organizations, to solve the global trade and environmental issues. The paper also discusses a number of basic theoretical issues and empirical findings, such as the free‐rider problem, the tragedy of the commons, the theory of second best, the relative efficacy of price and quantity control, carbon leakage, border carbon adjustments, the cap‐and‐trade system, the pollution haven hypothesis, the optimal social discount rate and the environmental Kuznets curve. Some computable general equilibrium models are reviewed and several notable World Trade Organization environmental and health‐related trade dispute cases are analysed, including the tuna–dolphin, shrimp–turtle, eco‐labelling, beef‐hormone and genetically modified organism cases.
    March 19, 2016   doi: 10.1111/1468-0106.12100   open full text
  • Internationalisation of the Renminbi as an Investing and a Funding Currency: Analytics and Prospects.
    Dong He, Paul Luk, Wenlang Zhang.
    Pacific Economic Review. March 19, 2016
    This paper develops a three‐currency model to study the determinants of the demand for assets and liabilites denominated in an international currency and to shed light on the prospects for the renminbi as a budding international currency. We show that interest rate differentials would be only one of the factors shaping the renminbi's position, while other factors, including the correlation between foreign countries' economic growth and their bilateral exchange rates against the renminbi, and the correlation between exchange rates of the renminbi with other international currencies, would also be important. A broad interpretation of these findings is that the renminbi will likely be attractive to investors from high‐income economies and fund‐raisers from emerging market economies.
    March 19, 2016   doi: 10.1111/1468-0106.12120   open full text
  • Monetary policy regime change and regional inflation dynamics: looking through the lens of sector‐level data for Korea.
    Chi‐Young Choi, Joo Yong Lee, Róisín O'Sullivan.
    Pacific Economic Review. March 19, 2016
    This paper explores the impact of the adoption of inflation targeting (IT) on the dynamics of city‐level inflation in Korea using both aggregate and sector‐level data. When looking at aggregate regional inflation, we find that the mean, volatility and persistence fell in all cities in the wake of the monetary policy regime change, consistent with other evidence in the literature. Delving more deeply into the disaggregate data reveals additional insights however. For most of the changes we observe in the dynamics of regional inflation, we find that the aggregate effects are being driven primarily by sectors that fall into the ‘Services’ category. We posit that the impact of better anchored inflationary expectations is primarily on the less‐traded services sectors of the economy, where the domestic monetary policy framework has a relatively larger influence. When it comes to the increased co‐movement observed across regions under an IT regime, however, it is the ‘Commodities’ sectors rather than ‘Services’ that are responsible, probably because services inflation becomes relatively more influenced by local factors once it has stabilized within the target range. Therefore, adoption of IT may not necessarily increase all measures of regional synchronization even when the goal of better‐anchored inflationary expectations is achieved.
    March 19, 2016   doi: 10.1111/1468-0106.12121   open full text
  • Tax Policies, Regional Trade Agreements and Foreign Direct Investment: A Welfare Analysis.
    Charles Braymen, Yang‐Ming Chang, Zijun Luo.
    Pacific Economic Review. March 16, 2016
    In this paper, we develop a partial equilibrium three‐country model to examine the relationship between regional trade agreements (RTAs) and foreign direct investment (FDI) in an environment with double taxation. Our analysis shows that FDI is welfare‐improving for at least one or both of the two regional countries if wage asymmetry is significantly large. FDI and an RTA are also welfare‐improving for the high‐wage country and the region if the wage differential is not small. We also examine the role of repatriation taxes in affecting the determination of firm location under an RTA. Our results suggest that the signing of an RTA may induce relocation from the high‐wage country to the low‐wage country unless an increase in the repatriation tax rate also occurs.
    March 16, 2016   doi: 10.1111/1468-0106.12077   open full text
  • What Drives Urban Consumption in Mainland China? The Role of Property Price Dynamics.
    Yu‐Fu Chen, Michael Funke, Aaron Mehrotra.
    Pacific Economic Review. March 16, 2016
    This paper adds to the literature on wealth effects on consumption by disentangling house price effects on consumption for mainland China. In a stochastic modelling framework, the riskiness, rate of increase and persistence of house price movements have different implications for the consumption/housing ratio. We exploit the geographical variation in property prices by using a quarterly city‐level panel data set for the period 1998Q1–2009Q4 and rely on a panel error correction model. Overall, the results suggest a significant long‐run impact of property prices on consumption. They also broadly confirm the predictions from the theoretical model.
    March 16, 2016   doi: 10.1111/1468-0106.12078   open full text
  • A Simple Model of Contract Enforcement Institutions.
    Takuma Kunieda, Keisuke Okada, Akihisa Shibata.
    Pacific Economic Review. March 16, 2016
    We demonstrate that in highly productive economies contract enforcement institutions are endogenously established, and partnership contracts correct inefficient land allocation. In less productive economies, however, such institutions are not established, and partnership contracts are not formed. In economies with intermediate productivity levels, multiple Nash equilibria exist; that is, contract enforcement institutions are established in the high Nash equilibrium whereas they are not formed in the low Nash equilibrium. In this case, institutional quality can be diverse across economies. We also prove that improvement in institutional quality reduces within‐country inequality. All these outcomes are consistent with cross‐country observations.
    March 16, 2016   doi: 10.1111/1468-0106.12090   open full text
  • Real Estate Market Policy and Household Demand for Housing.
    Yuan Cheng, John K. Dagsvik, Xuehui Han.
    Pacific Economic Review. April 27, 2014
    This paper used an estimated mixed multinomial logit model of household housing demand to examine the impact of four housing market‐related policies on a stated preference survey sample. The estimated demand probability function suggested that household choice behaviour does show huge heterogeneity. The estimated results were then employed to examine the effects of the policies. We estimated the potential disequilibrium between demand and supply under the construction‐size‐limitation policy, demonstrated that the efficient movers' subsidy increases along with the household income, and simulated the changes in housing demand when tax policy is changed. We demonstrate the potential usefulness of our modelling framework in assisting policy‐making decisions. Our model also partially explains the failures and controversies of the latest real‐estate intervention policies in China.
    April 27, 2014   doi: 10.1111/1468-0106.12062   open full text
  • Exchange Rate Exposure of Sectoral Returns and Volatilities: Further Evidence From Japanese Industrial Sectors.
    Prabhath Jayasinghe, Albert K. Tsui, Zhaoyong Zhang.
    Pacific Economic Review. April 27, 2014
    In this paper we argue that the commonly employed exposure coefficient/beta is inadequate for capturing the entire impact of exchange rate changes on firms' future operating cash flows. Instead, we employ the bivariate Glosten–Jagannathan–Runkle generalized autoregressive conditional heteroskedasticity mean model to investigate four aspects of exchange rate exposure, including sensitivity of stock returns to exchange rate changes, sensitivity of stock returns to the volatility of exchange rate changes, sensitivity of conditional variance of returns to exchange rate volatility, and the dynamic conditional correlation between returns and exchange rate changes, respectively, using data from 10 industrial sectors in Japan. We find significant evidence of such exchange rate exposure which is not captured by the conventional measure. The diagnostic statistics confirm the adequacy of our model, and, hence, the robustness of the results.
    April 27, 2014   doi: 10.1111/1468-0106.12061   open full text
  • Terms of Trade Shocks and Endogenous Search Unemployment: A Two‐Sector Model with Non‐Traded Goods.
    Xinpeng Xu, Yu Sheng.
    Pacific Economic Review. April 27, 2014
    We develop a simple and tractable two‐sector search model featuring a non‐traded sector and endogenous search unemployment to examine the impact of terms of trade shocks on unemployment. We show that changes in terms of trade will not only lead to employment reallocation across sectors, as in the traditional trade models, but, more importantly, impact upon search unemployment within each sector. Specifically, we show that an improvement (deterioration) of terms of trade reduces (increases) unemployment rates in both traded and non‐traded sectors.
    April 27, 2014   doi: 10.1111/1468-0106.12060   open full text
  • Saving–investment Association and Regional Capital Mobility in China: A Nonparametric Panel Approach.
    Mingming Jiang.
    Pacific Economic Review. April 27, 2014
    Using a nonparametric panel data model, this paper estimates the degree of time‐varying and province‐specific capital mobility in China during 1970–2006. We estimate the savings–investment association, that is, the savings retention rate à la Feldstein and Horioka, as a measure of capital mobility. We also split the total savings (investment) into private and government savings (investment) to explore the role of government in improving capital mobility. Over time, we find an improvement in capital mobility after the mid‐1990s. Across provinces, we observe higher capital mobility in eastern/coastal regions. From the 1990s, the government is found to play a less important role in promoting capital mobility. Across provinces, the government is found to be more important in either the municipalities (Shanghai and Beijing) or the less developed inland provinces.
    April 27, 2014   doi: 10.1111/1468-0106.12026   open full text
  • China's Profits and Losses from Currency Intervention, 1994–2011.
    Hailong Jin, E. Kwan Choi.
    Pacific Economic Review. April 27, 2014
    China's currency policy has been criticized for its apparent pursuit of mercantile advantage by artificially stimulating exports, with potential adverse effects on other economies. While China's currency policy may have positive output effects, there may be additional profits or losses. This paper computes the annual and cumulative accounting profits from currency intervention since 1994 when China began its currency intervention. It is shown that profits initially were positive but since 2007 China has lost a massive amount from the currency market.
    April 27, 2014   doi: 10.1111/1468-0106.12059   open full text
  • Stochastic Regional Convergence in China: The Role of Regional Clusters in a Nonlinear Perspective (1952–2007).
    Maria Jesus Herrerias, Javier Ordóñez.
    Pacific Economic Review. April 27, 2014
    This paper investigates the notion of stochastic convergence behaviour across the Chinese provinces. Unlike previous works, the present paper takes into account the economic geography by examining the regional clusters and the significant transformation of the Chinese economy through the introduction of structural breaks and nonlinearities in the model. Results indicate that the regional clusters are relevant to the convergence behaviour across China, when both the administrative division and the regional clusters are considered. However, the number of provinces that are converging is higher in the latter case. When nonlinearities were considered across the regional clusters, we found that 18 provinces have already converged with their cluster, 3 provinces are catching up and 10 regions show divergence. These findings are useful for the design and development of national and regional economic policies in the Chinese economy.
    April 27, 2014   doi: 10.1111/1468-0106.12058   open full text
  • Capital Market Openness and Output Volatility.
    Kwang‐Myoung Hwang, Donghyun Park, Kwanho Shin.
    Pacific Economic Review. August 01, 2013
    In this paper, using data from 21 advanced and 81 developing countries during 1971–2010, we empirically examine the impact of capital market openness on output volatility. We find that opening of capital markets increases the output volatility of developing countries. Furthermore, we find that the main channel through which capital market openness increases volatility is currency and external‐debt crisis. Finally, we find that while Asian countries are less likely to experience a crisis, they become even more unstable than other developing countries once a crisis occurs. Our evidence strengthens the case for caution in developing countries' opening up of their capital markets.
    August 01, 2013   doi: 10.1111/1468-0106.12031   open full text
  • From the Global to the National Cycle: An Intricate Liaison.
    M. Ayhan Kose, Prakash Loungani, Marco E. Terrones.
    Pacific Economic Review. August 01, 2013
    This paper examines the linkages between the global business cycle and national cycles. We first analyse the evolution of the global business cycle and present its main properties during global recessions and recoveries. We then consider how the sensitivity of national cycles to the global cycle varies over different phases of the global cycle and depends on country‐specific features. Our findings collectively portray an intricate liaison between the global business cycle and national cycles. National business cycles are tightly linked to the global cycle, but the sensitivity of national cycles to the global cycle is much higher during global recessions than expansions. There are significant differences across countries in how they respond to the global cycle as advanced economies appear to be more sensitive to global recessions than are developing economies. Moreover, countries tend to be more sensitive to the global cycle, the more integrated they are to the global economy.
    August 01, 2013   doi: 10.1111/1468-0106.12030   open full text
  • Is Asia Decoupling from the United States (Again)?
    Sylvain Leduc, Mark M. Spiegel.
    Pacific Economic Review. August 01, 2013
    The recovery from the recent global financial crisis exhibited a decline in the synchronization of Asian output with the rest of the world. However, a simple model based on output gaps demonstrates that the decline in business cycle synchronization during the recovery from the global financial crisis was exceptionally steep by historical standards. We posit two potential reasons for this exceptionally steep decline. First, financial markets during this recovery improved from particularly distressed conditions relative to previous downturns. Second, monetary policy during the recovery from the crisis was constrained in developed economies by the zero bound, but less so in Asia. To test these potential explanations, we examine the implications of an increase in corporate bond spreads similar to that which took place during the recent European financial crisis in a three‐region open‐economy dynamic stochastic general equilibrium model. Our results confirm that global business cycle synchronization is reduced when zero‐bound constraints across the world differ. However, we find that the impact of reduced financial contagion actually goes modestly against our predictions.
    August 01, 2013   doi: 10.1111/1468-0106.12029   open full text
  • Asia's Decoupling: Fact, Fairytale or Forecast?
    Lillie Lam, James Yetman.
    Pacific Economic Review. August 01, 2013
    Standard measures of economic co‐movement between Asia‐Pacific economies and those elsewhere had been observed to follow a downward trend, leading some commentators to suggest that the region was decoupling. However, this process reversed in response to the 2008 international financial crisis, and co‐movement increased to historically high levels for some economies. We examine co‐movement patterns and show that these are very sensitive to changes in macroeconomic volatility over time. Controlling for this, however, co‐movement is closely linked to underlying trade and financial integration. If international links continue to strengthen in future, co‐movement will strengthen in tandem. Decoupling is more a fairytale than a fact or a forecast.
    August 01, 2013   doi: 10.1111/1468-0106.12028   open full text
  • Political Connections and Firm Performance in Chinese Companies.
    Zhong‐qin Su, Hung‐Gay Fung.
    Pacific Economic Review. August 01, 2013
    This study uses panel data analysis to examine the relationship between political connections and firm performance in Chinese firms from 2004 to 2008. We define firm‐level political connections and demonstrate a robust result for the positive relationship between political connections and firm performance. In addition, we integrate the effects of ownership structure, related‐party transactions and political connections into our analysis and continue to show a positive relationship. We show that political connections dampen the negative effect on firm value of related‐party transactions. Finally, we demonstrate channels through which the benefits of political connections are realized in terms of greater cash holdings, larger long‐term loans, lower financing costs, larger sales and lower sales costs. Our results indicate that state‐owned and non‐state‐owned enterprises use political connections equally effectively to enhance performance.
    August 01, 2013   doi: 10.1111/1468-0106.12025   open full text