Thesis (M.Com. (Economics and Economic History))--Rhodes University, 2006. / A thesis submitted in partial fulfilment of the requirements for the degree of Masters in Commerce (Financial Markets).

<p> </p><p>Indonesia, Malaysia, The Philippines, and Thailand, have all chosen outward-oriented strat-egy over inward-oriented strategy to gain economic growth. This approach was due to the Asian miracles development. Therefore, protectionism had to cave in (Edwards, 1993).</p><p>This thesis aim with the help of income terms of trade and GDP_{CAP to study the relation between trade and growth for these countries mentioned. Therefore, see if income terms of trade would work as an engine of growth for these countries. The purpose is to find a posi-tive correlation between the variables. ITT capture the price and volume effects when trade increases. That is why, ITT is used in this thesis, for the purpose that exports alone cannot explain growth if imports are left out.}</p><p>Time series was conducted with help of a unit root test, co-integration, and Granger causal-ity test. In each test made, the result provided showed of statistically significant values, hence, ITT is of relevance for growth in these countries, during 1980-2006.</p><p> </p><p> </p>

Indonesia, Malaysia, The Philippines, and Thailand, have all chosen outward-oriented strat-egy over inward-oriented strategy to gain economic growth. This approach was due to the Asian miracles development. Therefore, protectionism had to cave in (Edwards, 1993). This thesis aim with the help of income terms of trade and GDPCAP to study the relation between trade and growth for these countries mentioned. Therefore, see if income terms of trade would work as an engine of growth for these countries. The purpose is to find a posi-tive correlation between the variables. ITT capture the price and volume effects when trade increases. That is why, ITT is used in this thesis, for the purpose that exports alone cannot explain growth if imports are left out. Time series was conducted with help of a unit root test, co-integration, and Granger causal-ity test. In each test made, the result provided showed of statistically significant values, hence, ITT is of relevance for growth in these countries, during 1980-2006.

<p>This dissertation addresses three key issues in international finance and economics: the uncovered interest rate parity puzzle in exchange rates, the home bias puzzle in portfolio allocations, and the surprising lack of correlation between terms of trade shocks and output in small open economies. </p><p>The first chapter shows that the much-studied Uncovered Interest Rate Parity (UIP) puzzle, the observation that exchange rates do not adjust sufficiently to offset interest rate differentials, is more complicated than commonly understood. I show that the puzzle changes nature with the horizon. I confirm existing short-run evidence that high interest rate currencies depreciate less than predicted by the interest rate differential. But, building on Engel (2012), at longer horizons (4 to 7 years) I find a reverse puzzle: high interest rate currencies depreciate too much. Interestingly, the long-horizon excess depreciation leads exchange rates to converge to the UIP benchmark over the long-run. To address the changing nature of the puzzle, I propose a novel model, based on the mechanism of bond convenience yields, that can explain both the short and the long horizon UIP violations. I also provide direct empirical evidence that supports the mechanism. </p><p>In chapter 2, I address the puzzling observation that portfolios are concentrated in asset classes which comove strongly with the non-financial income of investors. As an explanation, I propose a framework of endogenously generated information asymmetry, where rational agents optimally choose to focus their limited attention on risk factors that drive both their non-financial income and some of the risky asset payoffs. In turn, the agents concentrate their portfolios in assets driven by those endogenously familiar factors. I explore an uncertainty structure that implies decreasing returns to information, whereas the previous literature has focused on a setup with increasing returns. I show that the two frameworks have differing implications, which I test in the data and find support for decreasing returns to information. </p><p>In chapter 3, I address the puzzling lack of correlation between Terms of Trade (ToT) and the Small Open Economy (SOE) GDP. A SOE model typically relies on three sources of exogenous disturbances: world real interest rate, Terms of Trade (ToT) and technology. However, the empirical literature has failed to reach a consensus on the relative importance of the terms of trade as a driver of business cycles, with some papers claiming they are hugely important while others find no evidence of a relationship at all. Kehoe and Ruhl (2008) have recently shown that the weak empirical link between ToT and the GDP might be due to measurement limitations with the output series in an open economy framework. This paper merges data on national accounts with data on global trade flows for a panel of 31 countries and finds that Terms of Trade have a negligible effect on GDP but a strong effect on aggregate consumption. The evidence supports the hypothesis that ToT are important drivers of business cycles, but measurement issues with GDP obscure their relationship with real output. This further suggests that researchers should be careful when equating model output with measured GDP in an open economy setup.</p> / Dissertation

Master of Arts / Department of Economics / Peri da Silva / Terms-of-trade argument (the optimal tariff theory) refers that a country with market power can gain national welfare when they impose a tariff for foreign exports and generate welfare at the expense of foreign trade partners. This argument has been long-term applied as an assumption in many theoretical trade models. Feenstra (2004) shows that the theoretical optimal tariff is equal to the inverse foreign export supply elasticity which implies if we can get the value of inverse export elasticity for each good then we can set up the optimal tariff to maximized our national welfare. Compared with the development in theory, the progress in the empirical study of terms-of-trade argument has been a bit stagnant until recent years. Christian Broda, Nuno Limão and David Weinstein (2008) show us an important empirical evidence that countries use market power when they set up tariff in their non-cooperative trade policy. And they estimate both import demand elasticity and export supply elasticity at the four-digit Harmonized System level by using 16 countries’ trade data and production data. In this report, we firstly introduce the theoretical basis of optimal tariff. Then we will discuss the contributions of Broda et al (2008) and other economists’ empirical findings of optimal tariff theory which applies Broda, Limão and Weinstein’s estimates of elasticities

Zugl.: Bern, Univ., Diss., 2008

In this dissertation we use Dynamic Stochastic General Equilibrium DSGE) models to explain empirical regularities and policy implications related to (1) durable goods, interest rates and small open economy business cycles, (2) Terms-of-Trade (ToT) and economic fluctuations in small open economies and (3) Budget Stabilization Funds (BSFs) and States’ business cycles. In the first essay, we document that durable spending in developed small open economies constitutes a large share of their total income. Their spending is highly procyclical, sensitive to interest rates, and leads the business cycle. We address these regularities with a RBC model with durable goods. The model successfully replicates the observed business cycle regularities and explains many anomalies not explained in the existing literature. It also emphasizes the role of interest rates uncertainty in explaining the dynamics of the small open economies. The second essay addresses the impacts of the ToT fluctuation on the business cycles of various small open economies. We argue that differences in the degree of durability in domestic production and imports may make these economies more or less sensitive to an identical ToT shock. We found that economies with higher durability usually enjoy more stable business cycle comparing with economies with lower degree of durability. Differences in the persistence of the ToT do affect the dynamic of the external accounts but it cannot explain the observed differences business cycles across small open economies. In the last essay, we evaluate the economic impacts of the Budget Stabilization Funds (BSF) on State-level business cycles. We lay out a State economy RBC model in which a State’s government applies a designated saving rule consistent with households’ optimization. Given the suggested rule we find that the BDFs become a significant automatic stabilizer. It is not only mitigates the procyclicality of the government spending but it also smooth the State’s business cycle.

One of the central issues in international macroeconomics is relative price movements and their sources. One such price is the price of crude oil. An increase in oil price leads to a transfer of income from importing to exporting countries through a shift in terms of trade. The general mechanism by which oil prices affect the economic performance is well under-stood. However, the dynamics of these effects – especially the adjustment to the terms of trade – are uncertain. The purpose of this paper is to analyse the impact of an increase in oil price on the terms of trade during the time period 1970 to 2004. The relationship between oil price and world business cycle as well as the relationship between oil price, GWP and Saudi Arabia’s export is also examined in this paper. The regression results show that an increase in oil price has a negative impact on terms of trade for the net importing country. Whether an increase in oil price has a positive or no effect at all on terms of trade for the net exporting country cannot be told form the regres-sion results.

The subject of this study is to examine the determinants of the real exchange rate in Taiwan. The sample period is from the first quarter of 1982 to the second quarter of 2011, and the variables include the real exchange rate, terms of trade, productivity differential, the real oil price, reserve differential, real interest rate differential, and the net foreign assets of Taiwan and America. The empirical results show that there is no cointegration between the real exchange rate and independent variables. Using a VAR model, this study finds that although the central bank of Taiwan would intervenes the real exchange rate, the variable related to the economic growth is still significant. At 5% significance level, an increase in the productivity differential leads the real exchange rate to depreciate. In addition, from the result of the granger causality test, this study finds that there exists unidirectional causality from the productivity differential and central bank intervention respectively to the real exchange rate. The effect of central bank intervention on the real exchange rate only persists one period, and the effect of the productivity differential persists two more periods. Therefore, it can be concluded that when estimating the future real exchange rate, it may be useful to take the productivity differential into account.

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