Siew-Voon Soon

The Behavior of External Debt in Asian Countries: Evidence Based on Panel Unit Root Tests

This article investigates the mean-reverting behavior of the external debt ratio based on a clustered of 19 Asian countries from 1981 to 2010. For this purpose, we use a governments intertemporal budget constraint (GIBC) model popularized by Hamilton and Flavin (1986). Our conclusions were drawn from panel data based tests, including the newly developed test that accounts for both cross-sectional dependency and structural breaks. Two major findings are noteworthy; first majority debt ratios in the Asian countries are affected by structural breaks. Second, we find unit root tests that do not accommodate breaks are less likely to detect mean reversion in the debt ratios. In all, our results indicate debt sustainability is a general characteristic of all the Asian countries.

Real Exchange Rate Dynamics in the Asian Economies: Can Regime Shifts Explain Purchasing Power Parity Puzzles?

Abstract We show that the strong version of the purchasing power parity (PPP) hypothesis holds in most of the US dollar real exchange rates using cointegration method that accounts for breaks in the models. The break dates in seven of the Asian currencies coincide with the two rounds of currency depreciation recorded during the 1997–1998 financial crises. We obtain a mean half-life estimate of about 10 months for PPP to converge to its long-run equilibrium level. Our confidence intervals based on persistence profile approach for the half-lives is much narrower than previous evidence might indicate. Taken together, these results show that mean reversion is stronger than commonly thought.

Parity reversion in the Asian real exchange rates: new evidence from the local-persistent model

This article investigates the time-series properties of 13 Asian real exchange rates (RERs) vis-à-vis the US dollar. The half-life point estimates drawn from the local-persistent model are all less than 2 years, with a finite upper bound. There is no evidence to indicate that the Asian financial crisis has altered the speed of the purchasing power parity (PPP) adjustments. We find that the persistence of RERs over the last three decades remains unchanged in majority of the cases. Given the fairly rapid speed of adjustments and their corresponding confidence intervals, we conclude that the PPP puzzle does not exist in these countries.

Inflation, inflation uncertainty and output growth: what does the data say for Malaysia?

Purpose - – The purpose of this paper is to examine the causal relationships between inflation, output growth and their uncertainties in Malaysia. Design/methodology/approach - – The modeling approach allows for structural breaks to avoid the masking of specific impacts. Findings - – Based on the asymmetric Generalized Autoregressive Conditional Heteroskedasticity model, the paper found strong evidence favoring a positive effect of a change in the inflation uncertainty as predicted by the Friedman-Ball hypothesis. In addition, inflation (inflation uncertainty) has direct (indirect) negative effect on the output growth. The results are consistent with the Taylor effect – increases in inflation uncertainty decreases output uncertainty. The analysis also reveals that economic uncertainty lowers the growth rate of output, complying with Bernankes idea. Originality/value - – The present study suggests that extra efforts are required to locate the breaks in the variance in order to draw concrete evidence on link between economic uncertainty and macroeconomic performance.

Exchange rate pass-through in the Asian countries: does inflation volatility matter?

ABSTRACT This paper presents a nonlinear relationship between exchange rate pass-through (ERPT) and inflation volatility. Through the lens of a threshold framework, we uncover a clear evidence of near to one ERPT to consumer prices once inflation volatility crosses a threshold level of 4.17. Clearly, there are significant differences in the degree of ERPT between the high and low inflation volatility in the inflation targeting (IT) and non-IT Asian countries.

Persistence of Real Exchange Rates in the Central and Eastern European Countries

This paper investigates the mean reversion in real exchange rates for Central and Eastern European countries. In contrast to previous studies, we use the local-persistent model to measure the half-life. We find that the adjustment to purchasing power parity is more rapid after accounting for structural breaks, taking less than 18 months to be cut in half. The empirical evidence shows that there is no clear-cut difference in the speed of adjustment to shocks between the transition economies and the larger member countries of the European Union. The narrow confidence intervals for the half-lives that accord with the standard sticky-price models provide strong support for purchasing power parity. The purchasing power parity puzzle does not seem to hold in these transition countries. The practical implication of our findings is that the transition countries have successfully adopted trade policies that mimic those of the European Union, with a view to alignment in readiness for European Union membership..

Mean reversion in bilateral real exchange rates: evidence from the Malaysian ringgit

This study examines behaviour of the Consumer Price Index (CPI)-based Real Exchange Rates (RERs) of the ringgit against the currencies of Malaysias major trading partners. The empirical results, which are derived from newly developed tests advocated by Lee and Strazicich (LS, 2003) and Narayan and Popp (NP, 2010) that allow for two breaks in the series, provide conflicting results. We obtain weaker support for Purchasing Power Parity (PPP) using the Narayan and Popp (2010) test. By truncating the sampling period into two sub-periods, we find that PPP holds for majority of the Malaysias bilateral exchange rate vis-à-vis its major trading partners during the pre-crisis period. The 1997 currency crisis, however, has weakened the evidence in favour of PPP hypothesis in the strict sense.

Budget Deficits and Current Account Balances

Over the past three decades, the twin deficits hypothesis (TDH) — that budget deficit has a direct effect on current account deficit — has been a topic of interest in the empirical literature (see, for example, Bahmani-Oskooee, 1995; Khalid & Guan, 1999; Mohammadi, 2004; Bagnai, 2006; Salvatore, 2006; Bartolini & Lahiri, 2006; Baharumshah & Lau, 2007; Ito, 2009; Daly & Siddiki, 2009). The causal link between public budget deficit and current account balance has been analyzed extensively in the recent literature, largely because of its implications for long-term economic progress. For small, open economies that depend heavily on foreign capital, an adverse change in foreign investors’ behavior may trigger a series of sharp and disorderly adjustments of external imbalances that, in turn, have serious consequences on the economy (see, for example, Milesi-Ferretti & Razin, 1998; Chinn & Prasad, 2003). In an influential paper, Rodrik (1999) warned: ‘Openness to capital inflows can be especially dangerous if appropriate controls, regulatory apparatus and macroeconomic frameworks are not in place.’ (p. 30).1 From a theoretical viewpoint, fiscal expansion could worsen the current account balance and the appreciation of the real exchange rate (Salvatore, 2006).2 These imbalances may hinder economic growth and undermine a nation’s wealth creation.