Joseph D. Alba

Exchange rate determination and inflation in Southeast Asian countries

Abstract We estimate structural open economy models consistent with rational (RE) and theories consistent (TCE) expectations which incorporate cointegration to examine exchange rate determination and inflation in three southeast Asian countries. The RE model is rejected in favor of the TCE model. Our results show that while inflation in all three countries is affected by different external factors, Malaysia and Singapore avoided high inflation despite high levels of economic growth through ‘tight’ monetary policy. In contrast, the Philippines had high inflation, even with a stagnant economy, due to ‘loose’ monetary policy and the monetization of government debt.

The Impact of Exchange Rate on FDI and the Interdependence of FDI over Time

We examine the impact of exchange rates on foreign direct investment (FDI) inflows into the United States in the context of a model that allows for the interdependence of FDI over time. Interdependence is modeled as a two-state Markov process where the two states can be interpreted as either a favorable or an unfavorable environment for FDI in an industry. We use unbalanced industry-level panel data from the US wholesale trade sector and our analysis yields two main results. First, we find evidence that FDI is interdependent over time. Second, under a favorable FDI environment, the exchange rate has a positive and significant effect on the average rate of FDI inflows.

Terms-of-Trade Shocks and Exchange Rate Regimes in a Small Open Economy

We examine the impact of terms-of-trade shocks on key macroeconomic variables by numerically solving a dynamic stochastic general equilibrium model of a small open economy. The model considers nominal price rigidity under different exchange rate regimes. The numerical solutions obtained are consistent with the empirical regularities documented by Broda (2004), in which output responses to shocks are smoother in floats than in pegs; in moving from pegs to floats, the rise in nominal exchange rate volatility is coupled by the rise in real exchange rate volatility; and in both exchange rate regimes, net foreign assets is the most volatile variable.

Non-linear mean reversion of real exchange rates and purchasing power parity: some evidence from Turkey

Evidence was found of non-linear mean reversion in Turkeys real exchange rates. This suggests that a more complete examination of the empirical validity of PPP requires a joint examination of the non-linearity and non-stationarity of the real exchange rate.

TAYLOR RULE AND DISCRETIONARY REGIMES IN THE UNITED STATES: EVIDENCE FROM A k-STATE MARKOV REGIME-SWITCHING MODEL

We examine U.S. monetary policies from 1973 to 2014 with the Taylor rule as a benchmark by utilizing a k-state Markov regime-switching model in which the number and the periods of the regimes are endogenously determined. The model relates the federal funds rate to real time output gaps and inflation forecast. It endogenously identifies the periods of Taylor rule regime and discretionary regimes, consistent with the U.S. experience. The Taylor rule regime also coincides with periods of lower variability in inflation and in real GDP growth.

Predictability of Exchange Rates With Taylor Rule Fundamentals: Evidence from Inflation-Targeting Emerging Countries

ABSTRACT We investigate the out-of-sample predictability of U.S. dollar exchange rates with Taylor rule fundamentals in thirteen emerging countries with inflation-targeting monetary policy regimes. We find some evidence of out-of-sample exchange rate predictability for Brazil, Czech Republic, Hungary, Philippines, Thailand, and South Africa. Plots of the coefficients of U.S. inflation and Philippine inflation predict the direction of the U.S. dollar–Philippine peso exchange rates to be opposite to that predicted by the Taylor principle.

Oil shocks and monetary policy rules in emerging economies

We examine the effects of shocks in the oil market on key macroeconomic variables in small open economies using a dynamic stochastic general equilibrium model with sticky prices and imperfect competition under different monetary policy rules. The numerical solutions show that the types of exchange rate regimes and monetary policies could partly explain the trends in macroeconomic volatilities considering negative shocks to oil supply (Hamilton, 1983) and positive shocks to oil demand (Kilian, 2009). These findings are confirmed in vector autoregressive responses for Chile and Israel with inflation targeting under flexible exchange regimes and Hong Kong with fixed regime.

Determinants of Different Modes of Japanese Foreign Direct Investment in the United States

There are four major modes through which firms undertake foreign direct investment (FDI): merger and acquisition (M&A), joint venture, new plant, and others. The four modes of FDI are distinct from each other, and each has its own unique advantages and disadvantages. While a large and growing empirical literature examines the determinants of FDI, very few studies examine the determinants of the different modes. The central objective of this paper is to empirically analyze the extent to which the determinants of FDI such as firm size influence the choice of one mode of FDI over another. Our analysis follows a stylized two-stage investment process. First, we look at the probability of whether a Japanese firm is willing to undertake FDI in the United States. Second, which is the innovation of this paper and its main original contribution to the FDI literature, we analyze which of the four modes of FDI will be chosen by firms that are willing to undertake FDI.

Are Exchange Rate Expectations Adaptive? Evidence from a Structural Open Economy Macro Model

Abstract Although the assumption of rational expectations in open economy macroeconomic modeling has become standard practice in the last two decades, recent studies have shown that adaptive rather than rational expectations may be a better representation of exchange rate expectations. We use full-information, simultaneous-equation models for G-7 countries to compare static and adaptive expectations and examine if adaptive expectations are regressive or extrapolative. While we find adaptive expectations to be regressive, static expectations cannot be rejected in favor of adaptive expectations for four and five of the seven countries at the levels of significance of 5% and 1% respectively.

IS THERE A POSITIVE ASSOCIATION BETWEEN MERGER AND ACQUISITION AND NON-MERGER AND ACQUISITION FDI? FIRM-LEVEL EVIDENCE FROM JAPANESE FOREIGN DIRECT INVESTMENT INTO UNITED STATES

Japanese firms undertake multiple foreign direct investments (FDIs) in the United States. When Japanese firms undertake merger and acquisition (M&A) FDI, they acquire indivisible assets in the United States. To utilize their acquired assets fully, these firms may undertake additional non-M&A FDI. This implies a positive association between the number of M&As and the number of non-M&A FDIs because they may be complements. In contrast, the literature on the choice of modes of FDI examines the tradeoff between M&A and non-M&A FDI. This may suggest a negative association between the number of M&As and non-M&A FDIs because they may be substitutes. The authors examine whether the number of M&As and non-M&A FDIs are positively associated or not by proposing an econometric model that tests the contemporaneous association and the lagged complementary effect between M&A and non-M&A FDI. Using firm-level data, the authors find evidence that M&A and non-M&A FDI of Japanese firms in the United States are positively associated. Particularly, the findings indicate that given all other things equal, a one unit increase in the number of the firms M&A FDI (non-M&A) projects in a given year will increase the firms average non-M&A (M&A) FDI by 28.1% (15.8%) the following year.