A.K.M. Mahbub Morshed

Sectoral adjustment costs and real exchange rate dynamics in a two-sector dependent economy

Abstract This paper develops a two-sector model in which intersectoral capital movements involve adjustment costs, expressed as capital lost in the transformation process. These costs have important consequences for the dynamics of capital accumulation and particularly for real exchange rate dynamics. Persistent deviations of the real exchange rate from its equilibrium are derived and for plausible values of the adjustment cost parameters are consistent with the observed degree of real exchange rate persistence. For low adjustment costs the dynamics are qualitatively similar to those of the standard Heckscher–Ohlin technology. For high adjustment costs, the model converges to the specific-factors model. Thus our framework includes these two standard models as polar extremes.

Additional sources of bias in half-life estimation

Recently, an increasing amount of attention is being paid to biases in the measurement of time series dynamics based on calculations of half-life. In particular, this issue amplifies the controversy surrounding the purchasing power parity doctrine. Cross-sectional and temporal aggregations, along with mis-specified models, were previously identified as sources of this bias. We identified several other sources of bias, namely, sampling error, incorrect approximations, and structural breaks in time series. These sources should also receive sufficient attention for a sound measurement of half-life.

What can we learn from a large border effect in developing countries

Abstract Failure of the law of one price (LOP) in the short run is an empirical regularity. Recent research, using disaggregated price data for different cities across an international boundary, has shown that the variation of the prices in equidistant cities located in two different countries is systematically larger than that for the cities within the same country. Nontariff barriers and exchange rate variability are cited as the proximate causes of this systematic difference in consumer price variability. Results using data from developing countries with large nontariff barriers and more volatile exchange rate suggest that those claims are overemphasized.

Currency substitution in selected African countries

Purpose - This paper aims to investigate the presence of currency substitution in eight African countries. Design/methodology/approach - This study investigates the presence of currency substitution in eight African countries – Egypt, Morocco, Nigeria, Ghana, Kenya, South Africa, Tunisia and Zambia – for the period 1976 to 2005 using both regional and US dollar as anchor currencies. Findings - The paper finds that currency substitution is prevalent in Ghana and Nigeria when CFA franc is used as an anchor currency. However, when US dollar is used as an anchor currency there is no evidence of currency substitution in Ghana, but the presence of currency substitution in Nigeria is still observed. The paper also finds the presence of currency substitution in South Africa, but not in Egypt when the US dollar is the anchor currency. For Kenya, Tunisia and Zambia there is no evidence of currency substitution irrespective of the anchor currencies considered. In the case of Morocco, no evidence of currency substitution is observed when the Egyptian pound is used as anchor currency, but there is weak evidence of currency substitution when the US dollar is considered. Originality/value - This paper provides useful information on the presence of currency substitution in African countries.

Current Account Imbalances and Foreign Investment: A Theoretical Analysis of Interrelationships and Causalities

This paper develops a unified structure to examine the interrelationships between current account, foreign investment, and domestic capital accumulation. In particular, we develop a two-country, two-period model with international mobility of both physical and financial capital, and endogenous domestic capital accumulation. We consider cases where (i) current account is endogenous, but foreign investments are exogenous, and (ii) current account is exogenous, but foreign investments are endogenous. For (i), we examine how inflow and outflow of foreign physical capital affects current account. For the second case, we examine how an increase in current account deficit affects foreign investments. The complementarity or substitutability of foreign capital and domestic capital turns out to be crucial to the relationship between current account deficit and foreign investment.

Price convergence in US cities: a cointegration approach with two structural breaks

This article investigates how the price indices of major cities of the US respond to the shock from a city and from monetary policy. We find that the crisis of Bretton Woods system in 1968 and the oil crisis in 1974 should be incorporated as structural breaks in monetary policy variables and price indices. Using cointegration technique with structural break in our aggregated data, we find that the average half-life is 1.75 years, which is closer to what some of others found in disaggregated data, and that the interest rate is an effective tool for controlling cities’ price in short run.