Zhaoyong Zhang

Real Output Co-movements in East Asia: Any Evidence for a Monetary Union?

The East Asian region has experienced astonishing economic growth and integration over the past few decades. It is generally believed that a high degree of integration in the region would greatly shape the economic structure of each individual economy and has direct implications for the effectiveness of domestic stabilisation policy and policy coordination. This paper empirically examines the feasibility of forming a monetary union in East Asia by assessing the real output co-movements among these economies. As suggested by the optimum currency area (OCA) theory that losing monetary independence would be the major cost for adopting a common currency, it would be less costly for the economies to form a monetary union if the business cycles are synchronised across countries. The cointegration test and the Vahid and Engle (1993) test for common business cycles are conducted to examine their long-run relationship and short-run interactions in real outputs, respectively. Our study found that some pair countries in the region share both the long-run and short-run synchronous movements of the real outputs. In particular, the short-run common business cycles are found in some pairs of ASEAN economies consisting of Singapore, Thailand and Indonesia, and in the Northeast Asian region consisting of Hong Kong, Korea and Mainland China, as well as between Japan and Taiwan. These findings have important implications for the economies in terms of adjustment costs when considering the adoption of a monetary union.

Should Chinese Renminbi be Blamed for Its Trade Surplus? A Structural VAR Approach

During the recent years, the Renminbi (RMB) exchange rate issue has been at the centre of ongoing debate over the source of global current account imbalance, especially with the United States. The objective of this study is to contribute to the current discussion by providing some new evidence on China’s exchange rate policy and the impacts of RMB devaluation/revaluation on China’s trade balance using a structural vector autoregression (VAR) approach. The results indicate that the dynamic effect of exchange rate on China’s trade balance is still very limited and China’s balance of trade is mainly determined by the world demand and its trade performance, with the latter being a result of its successfully maintained comparative advantage.

Introduction: Monetary and Economic Integration in the East Asian Region

© 2006 The Authors Journal compilation

Can the Rest of East Asia Catch Up with Japan: Some Empirical Evidence

Abstract By applying the combined endogenous growth/diffusion model, we find strong and robust evidence of the existence of multiple convergent equilibria across the 10 East Asian economies in 1960–1997. The main conclusion is that, with the assumption of the same source of technology diffusion for all economies, East Asia will have in the long run the same growth rate as that of the leader (Japan), but with two mutually exclusive convergence clubs. This has important implications for an economy when forming its development policy to catch up on its target leaders.

The suitability of a monetary union in East Asia: What does the cointegration approach tell?

The issue of whether or not to form a monetary union in East Asia remains a hot issue in the study of the East Asian economies. Most of the existing studies apply a framework focusing on the symmetric issue of the fundamental shocks and the extent of correlations by applying the Blanchard and Quah [O.J. Blanchard, D. Quah, The dynamic effects of aggregate demand and supply disturbances, American Economic Review 79 (1989) 655-673] structural vector autoregression (VAR) technique, which includes first-differenced variables in the model and examines only the bilateral relationships. However, the shock symmetry does not necessarily require the co-movements of the real output variables between the countries concerned. The present paper employs the Johansen [S. Johansen, Statistical analysis of cointegration vectors, Journal of Economic Dynamics and Control 12 (1988) 231-254] cointegration approach to check the long-run co-movements of real outputs among the East Asian countries, Japan and the United States to draw some implications about forming a monetary union in the region. The results suggest that some groups of Asian NIEs plus the United States will be potential candidates to form a monetary union. Mainland China is not suggested as a member country of a monetary union with any of the grouped economies. More interestingly, the ASEAN countries alone are not a feasible group to form a monetary union unless Japan is included, which has important implications for the role of Japan towards the formation of a regional monetary union.

Measuring asymmetry and persistence in conditional volatility in real output: evidence from three East Asian tigers using a multivariate GARCH approach

We search for evidence of conditional volatility in the quarterly real Gross Domestic Product (GDP) growth rates of three East Asian tigers: Singapore, Hong Kong and Taiwan. The widely accepted Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH)-type model is used to capture the existence of asymmetric volatility and the potential structural break points in the volatility. We find evidence of asymmetry and persistence in the volatility of GDP growth rates. It is noted that the structural breakpoints of volatility correspond reasonably well to the historical economic and political events in these economies. Policy implications from our findings are discussed.

Volatility dynamics of the US business cycle: A multivariate asymmetric GARCH approach

Most empirical investigations of the business cycles in the United States have excluded the dimension of asymmetric conditional volatility. This paper analyses the volatility dynamics of the US business cycle by comparing the performance of various multivariate generalised autoregressive conditional heteroskedasticity (GARCH) models. In particular, we propose two bivariate GARCH models to examine the evidence of volatility asymmetry and time-varying correlations concurrently, and then apply the proposed models to five sectors of Industrial Production of the United States. Our findings provide strong evidence of asymmetric conditional volatility in all sectors, and some support of time-varying correlations in various sectoral pairs. This has important policy implications for government to consider the effective countercyclical measures during recessions.

Do exchange rates affect consumer prices? A comparative analysis for Australia, China and India

An important issue for exchange rate pass-through (ERPT) is the extent to which exchange rate changes affect the prices of imported goods and the consumer prices. The objectives of this study are to make a comparative study by exploring the literature relating pass-through for import prices and domestic prices in Australia, China and India. In particular, we test whether the exchange rate pass-through to import prices is complete, estimate the pass-through to consumer price index (CPI) to investigate whether there is any association between the pass-through and the average inflation rate across these countries. A structural VAR model is used to examine the exchange rate pass-through over the period 1990–2011. The impulse responses indicate that exchange rates have less effect in the rising domestic prices in China and India. This will have important policy implication for the monetary authorities.

Volatility and Correlation Dynamics of the Mainland Chinese and Hong Kong Stock Markets: Evidence from the A-, B-, H- and Red Chip Markets

This article examines the volatility dynamics of the mainland Chinese stock markets (Shanghai A- and B-shares, Shenzhen A- and B-shares, H-shares, and red chips) by employing the daily returns data from 1993 to 2012 and a multivariate volatility framework that incorporates the features of asymmetries, persistence, and time-varying correlations, which are typically observed in stock markets of developed economies. Our results indicate that, unlike the Shenzhen and Shanghai A-share markets, the B-share, H-share and red chip markets do not exhibit significant asymmetric volatility (leverage effect). Furthermore, return volatility in the A-share markets is relatively more volatile than the others before 1997 and becomes more stable afterward. In addition, there is strong evidence of volatility persistence in all the markets, and this finding is robust to changes in model specification. The Chinese stock markets apparently share a common degree of persistence (fractional integration) in volatility. Moreover, the conditional correlations are significantly time-varying and are strengthening over time, especially after 2002. These findings have important implications for hedging and portfolio management and diversification.

A Monetary Union in East Asia: Common Cycles Approach

It has been a hot debit whether a monetary union is feasible in the East Asian region. Most of the existing studies focus on the symmetric issue of the fundamental shocks and the extent of correlation by applying the Blanchard and Quah (1989) structural vector autoregression (VAR) technique, which includes the first-differenced variables in the model and examines only the bilateral relationship. However, the shock symmetry does not necessarily mean the co-movements of the real output variables (common business cycles) between the countries concerned. The present paper employs the Johansen (1988) cointegration test to check the long-run co-movements of real outputs and also conducts the Vahid and Engle (1993) common feature test to detect the short-term common business cycles. The novelty of this paper is twofold. First, whereas the structural VAR approach considers shocks correlation bilaterally, we use a multivariate VAR framework to allow for the relationships within a specific group of countries. Second, we employ the cointegration technique to examine both the long-run and the short-run dynamics of the real variables to determine the suitability and costs of forming a monetary union in the region.