Prospects for Closer Economic Relations between Europe and East Asia
Journal of Economic Integration 13(1), March 1998; 1-29
by Kym Anderson
Abstract: East Asia has rapidly become the third centre of gravity for global economic activity. North America is relatively well integrated with East Asia, but Europe is not. This paper explores the extent to which economic growth and trade policy developments over the next decade will strengthen European-East Asian economic integration, and what scope there is to facilitate that set of bilateral relationships. Use is made of a global CGE model (GTAP) to project the world economy to 2005 under various scenarios including Uruguay Round implementation, faster economic growth in China, reneging on the promised phase-out of textile quotas, and APEC trade liberalization. The bilateral trade consequences in those scenarios highlight the fact that as East Asia's relative importance in the world economy keeps growing, so too does its importance to Europe. More surprisingly, the importance of Europe to East Asia also is projected to grow with Uruguay Round implementation, and even APEC trade reform does not reduce Europe's projected trade with East Asia. (JEL Classification: F11, F13, F14, F15, F17)

Why Regionalism May Increase the Demand for Trade Protection
Journal of Economic Integration 13(1), March 1998; 30-61
by Sanoussi Bilal
Abstract: This paper examines the influence of regional integration on the demand for trade protection. Previous studies have suggested the a customs union reduces the pressures for trade restrictions, as national interest groups have less weight to influence a central trade authority than their own government. On the contrary, this paper argues that protectionist preferences may not be diluted at the regional level. The reasons for this lie in the ability of protection interests to organize themselves at the regional level and the advantage they have over anti-protectionist forces in doing so (principally due to their superiority in controlling the potential free rider problem). In consequence, specific groups seeking external protection are likely to experience a relative (if not absolute) reinforcement of their preferences in a trade bloc. (JEL Classification: D72, F13)

Design of an Antidumping Rule with Incomplete Information about Material Injury
Journal of Economic Integration 13(1), March 1998; 62-88
by Philippe Kohler, and Michael O. Moore
Abstract: This paper deals with the inability of an administering authority to directly observe the level of material injury in antidumping petitions. We focus on the use, by the domestic firm, of private information about injury in order to obtain higher protection. By using an incentive framework, we show that asymmetric information about the level of injury can be resolved by using a mix of lump-sum compensation, domestic unit taxes and antidumping duties rather than just import duties. Surprisingly, the lump-sum transfer decreases and the domestic unit tax increases with the level of material injury. This efficient antidumping rule will induce the domestic firm to tell the truth about the level of material injury. (JEL Classification: F13, L50)

Stock Prices and the Exchange Rate in a Structural Model with an Application to the Case of France
Journal of Economic Integration 13(1), March 1998; 89-107
by Zhen Zhu
Abstract: This paper investigates the relationship between stock prices and the real exchange rate suggested by some structural macroeconomic models such as Gavin [1989]. Adding stock prices to a conventional macroeconomic model allows us to examine the stock price-exchange rate relationship, and empirically investigate the dynamics of the variables in the system more precisely than a bi-variate system. French data are used to study the long run as well as short run relationships. The results suggest the usefulness of incorporating stock markets into such studies. (JEL Classification: E44, G15, F31)

Partial Credibility, Information Selection and the Signalling Channel of Sterilized Interventions
Journal of Economic Integration 13(1), March 1998; 108-130
by Silke Fabian Reeves
Abstract: The signalling channel suggests that central banks use sterilized interventions in the foreign exchange market to convey information about future monetary policy to the market. To date, this theory is not sufficiently supported by theoretical work that establishes the link between intervention signals and exchange rates. This paper develops a two country model of sterilized interventions. I argue that reputational effects cannot eliminate the credibility problem between central banks and the private sector and that agents will only partially use available information to form exchange rate expectations. Both partial credibility and non-rational expectations reduce the effectiveness of interventions. (JEL Classifications: E52, F31, F41)

Can We Believe in Cold Showers?
Journal of Economic Integration 13(1), March 1998; 131-162
by Neil Campbell
Abstract: This paper considers the case of a firm which faces the decision as to whether to invest in a cost-reducing technology with an uncertain return. Under certain conditions the removal of protection can facilitate this investment (a 'cold shower'). It is shown, in the case of Cournot competition, that a cold shower is more likely if a quota rather than a tariff is the protective instrument. It is also shown that a cold shower is more likely if the domestic firm is a Stackelberg leader rather than a Cournot competitor. A Cournot market structure is used to consider a reduction in the number of foreign firms (an increase in the domestic firms market power). It is argued that it is reasonable to believe that this will increase the likelihood of a cold shower occurring. (JEL Classification: F13)

Aggregate Shocks and the Relationship between U.S. Business Cycle Fluctuations and Export Performance
Journal of Economic Integration 13(1), March 1998; 163-198
by Prosper Raynold, and James A. Dunlevy
Abstract: In contrast to the preceding literature, we study the relationship between domestic economic activity and export performance within the framework of vector autoregressive representations of the U.S. macroeconomy that explicitly recognize the potential importance of the type of shocks that initiate co-movements between aggregate activity and export volume. Our results verify that the relationship between aggregate activity and export volume depends upon the type of shock. If the initiating shock is an increase in the relative price of oil or a monetary shock (either contractionary or expansionary), the resulting correlation between export performance and domestic activity is positive. On the other hand, if the initiating shock is a change in government purchases, the correlation is negative. These results are fully consistent with a broad interpretation of the capacity pressure hypothesis that allows for the possibility that monetary and other shocks have important effects on the costs of committing resources to the export sector. Our results also suggest that far from being anomalous, the procyclical capacity pressure effect reported in earlier studies is fully consistent with the capacity pressure hypothesis in that it merely reflects the importance of oil price and monetary shocks during the sample periods considered in those studies. (JEL Classification: E32, F10)

Volume 13 Number 2 June 1998

Optimal Trade Policy in Vertically Related Markets
Journal of Economic Integration 13(2), June 1998; 199-215
by Fan-yueh Chen
Abstract: We examine home country tariff policies when a domestic firm uses an imported key input to produce its low-exports, and foreign firms produce high-quality exports as well as the key input. We show that the decisions of foreign vertically integrated firms on strategy regarding input supply depend on the tariff-inclusive and quality-adjusted comparative advantage between countries. We prove that the home country's optimal policy is to tax either its goods exports or its key input imports. We also show that without vertical integration, if and only if goods are not very quality-differentiated, the home country should subsidize either its goods exports and/or its key input imports (JEL Classification: F12, F13)

Metlzer's Paradox and Optimum Tariff in a Monetary Economy
Journal of Economic Integration 13(2), June 1998; 216-231
by Theodore Palivos, Chong K. Yip, and Terence T. L. Chong
Abstract: We augment the standard two country, two-commodity and two-factor trade model by allowing for money to exist as an additional asset. We find that it is possible for an increase in the domestic tariff to worsen the terms of trade if the important sector is severely distorted by the existence of the money. Moreover, the Metzler condition is no longer both necessary and sufficient to rule out the Metzler paradox. Finally we show that the conventional formula for the optimum tariff, derived in barter trade models, has a downward(upward) bias if money is more(less) efficacious in the importable sector. "In the real world there is no simple dividing line between trade and monetary issues." (JEL Classification: F11,E40)

Testing the Purchasing Power Parity Theory: A Case of the Taiwanese Dollar Exchange Rate
Journal of Economic Integration 13(2), June 1998; 232-254
by Hiroki Tsurumi, and Chyong L. Chen
Abstract: From July 1978 to April 1989 Taiwan adopted a snake system by allowing the foreign exchange rate fluctuate within a narrow band of the centered rate. Using monthly data on the Taiwan dollar/U.S. dollar exchange rate, we show that inference on the purchasing power parity hypothesis is sensitive to whether we incorporate double truncation and autoregressive and moving average error terms into regression model.(JEL Classification: C2, F4)

Fertility, the Quality of Children and Economic Growth
Journal of Economic Integration 13(2), June 1998; 255-275
by Chi-Chu Chou
Abstract: This paper develops a theory of the fertility choice that on the shadow price of the quality of children and fertility rate within a framework of long term economic growth. The analysis also links the shadow price of quality with the interaction between fertility and economic growth. Through the choice of per child quality within family, the analysis contributes to narrowing the many remaining gaps between endogenous family decision on fertility and aggregate economic growth (JEL Classification: J13, J24, O10, O49)

Political Risk in Hong Kong and Taiwan: Pricing the China Factor
Journal of Economic Integration 13(2), June 1998; 276-291
by Ephraim Clark
Abstract: This paper measures how the risk associated with foreign direct investment in the prosperous, liberal economies of Hong Kong and Taiwan is affected by the prospect of reunification with the poor, politically and economically backward mainland. This China factor is modeled as a jump to a higher political risk level. I find that the China factor effect is substantial on Taiwan but still almost six times higher on Hong Kong. Nevertheless, Hong Kong's political risk is considerably lower than China's thereby confirming the intuition that Hong Kong could be a lower risk back door avenue to the potentially lucrative Chinese market. (JEL Classification : G31)

Intertemporal Balance, Sustainability and Efficiency of the Exchange Rate Mechanism
Journal of Economic Integration 13(2), June 1998; 292-310
by Ho-don Yan
Abstract: Under the assumption that balance of payments must satisfy the expected intertemporal balance, this paper seeks to establish a pre-condition for a crisis of the Exchange Rate Mechanism (ERM). Proposing that non-stationarity of the growth rate of assets is evidence of a violation of expected intertemporal balance, we calculate Augmented Dickey-Fuller statistics of growth rate of foreign exchange reserves prior to the ERM crisis in September, 1992 for member states. In all, but one, of the crisis experience, there is no evidence of a violation of intertemporal balance prior to the month of the crisis. However, the persistent violation of intertemporal balance by Italy prior to the crisis reflects that the fundamental disequilibrium matters to the viability of the ERM. With no evidence of efficient allocation of the foreign reserves within the member states, the ERM is exposed to attack by speculators. (JEL Classification: F31, F33)

International Capital Movement in the OG Growth Model with Intergenerational Transfer Motives
Journal of Economic Integration 13(2), June 1998; 311-332
by Young D. Yoon
Abstract: This paper examines the long run consequences of capital movements in overlapping generation growth model with bequest motive. Whereas there is only terms of trade effect of free capital movements across countries in the traditional Solow-type growth model there are three kinds of effects in our OG model with bequest motive: the bequest-accumulation (or reduction) effect, the terms of trade effect, and golden rule effect. In the capital-importing country the bequest reduction effect of lower interest rate disfavors the future generations while the terms of terms of trade effect and golden rule effect of it favors them. In the capital-exporting country the bequest-accumulation effect and the terms of trade effect of higher interest rate favors future generations while the golden rule effect of it disfavors them, Present paper singled out the bequest accumulation effect and the bequest reduction effect of the interest rate change caused by international capital movements. This paper also showed that there is close relationship between the welfare of future generations and their assets in the context of the OG model with bequest motive. (JEL Classification: F21)

Dynamic Patterns of Trade Imbalance and Asset-Debt Position with Adjustment Costs of Investment
Journal of Economic Integration 13(2), June 1998; 333-363
by Tadashi Inoue
Abstract: Dynamic patterns of trade imbalance and asset-debt position analyzed employing a model of two model of two countries, one good, two primary inputs, and identical technologies and preferences with investment adjustment costs. The countries are assumed to have different initial per capita physical capital endowment and foreign assets. Our model covers both types of adjustment cost Uzawa[1965]'s Penrose effect type and Eisner and Strotz[1963]'s type. First, the system is shown to be globally stable(Theorem 1). Then, Theorem 2 shows that if the per capita capital stocks of both countries increase over time or the capital stock of the foreign country increases while that of the home country decreases, and if the home country is rich in both initial physical capital endowments and foreign assets, then the home country either initially exports goods but eventually becomes an importer or she always imports goods. In either case she remains a creditor. (JEL Classification : F21, O12)

Volume 13 Number 3 September 1998

Regional Integration and Growth in Developing Nations
Journal of Economic Integration13(3), September 1998; 367-399
by Richard E. Baldwin, and Elena Weghezza
Abstract: This paper explores the growth implications of regional integration. From the theory, th identifies the 'footprints' that such growth should leave in the data. It then check the data of the four poor EU nations for such footprints. Prima facie evidence for Ireland, Portugal and Spain support the notion that EU membership induced investment-led growth, but Greek data reject it. This suggests that the integration of relatively poor nations into a rich trading bloc favoured the poor nation's investment rate, however this was not strong enough to overcome poor macroeconomic management and market rigidities(which were features of the Greek case). (JEL Classification : F43, O4, F15)

An Industrial Analysis of Trade Creation and Diversion Effects of NAFTA
Journal of Economic Integration 13(3), September 1998; 400-425
by David Karemera, and Kalu Ojah
Abstract: Welfare effects of economic integration are often studied with aggregate data, and as such provide limited insights about the effects of trade pacts to individual economic agents in the free trace area. In this study a three-digit disaggregated commodity/industry data grouped under the Standard International Trade Classification is used to empirically assess the economic benefits of the North American Free Trade Agreement(NAFTA). Import demand elasticities from a dynamic demand model were used to estimate both trade creation and trade diversion effects of removing all tariff barriers from among NAFTA countries-US, Canada and Mexico. Results show that US Imports of crude oil and petroleum products from Canada and most US imports from Mexico are more sensitive to domestic prices than to bilateral import prices. Further, results indicate that US will benefit the most from the initial trade effects of NAFTA, while Mexico will benefit least. Specifically, Us exporters of automatic data processing equipment, and pulp and waste paper products will benefit the most from increased trade with NAFTA countries. Mexican exporters of crude oil, and vegetables and fresh produce; and Canadian exporters of paper and paperboard products will be the most beneficiaries of NAFTA among exporters in these respective countries.(JEL Classification: F1, F2)

Modeling Inter-Korean Economic Integration
Journal of Economic Integration 13(3), September 1998; 426-463
by Marcus Noland, Sherman Robinson, and Ligang Liu
Abstract: We construct the Korean Integration Model (KIM), a two-country computable general equilibrium(CGE) model linking the North and south Korean economies. Using KIM, we simulate the impact of customs union and a monetary union of the two economies both in the presence and absence of crossborder factor mobility. Factor mobility is of critical importance. If factor market do not integrate, the macroeconomic impact on South Korea of economic integration with the North is relatively small, while the effects on North Korea are large. With a monetary union and factor market integration, there is a significant impact on the South Korean income and wealth distribution. If investment flows from South to North and labor flows from North to South, there is a shift in the South Korean income distribution toward capital, and within labor toward urban high skill labor, suggesting growing income and wealth inequality in the South. (JEL Classification: F15, O53, P33)

International Impact of Productivity Shocks with Endogenous Labor Supply: The Two Large Economy Case
Journal of Economic Integration 13(3), September 1998; 464-484
by Ali Kocylgit
Abstract: The study constructs a deterministic, overlapping-generations, two-economy model. The analysis is conducted in the context of an infinitely-lived economy where individuals have finite (two-periods) lifetimes. The model shows that a positive productivity shock produces positive correlation between savings and investment despite the fact that there is prefect international capital mobility. Further, the simulation results show that the endogeneity of the labor supply gives rise to cyclical adjustment of the economy towards its steady state. (JEL Classification: F4)

Foreign Capital Inflow and Regional Immiserization
Journal of Economic Integration 13(3), September 1998; 485-498
by Bharat R. Hazari, and Pasquale M. Sgro
Abstract: In recent years a number of papers have examined the impact of inflow of foreign capital on welfare in a trade theoretic model. Two fundamental questions have been raised in this literature. First, what is the welfare impact of foreign capital inflow under a laissez faire regime? Second, what is the impact of tariff induced capital inflow on welfare? In this paper we depart from the Heckscher-Ohlin framework where there is only one representative agent whose welfare is considered. We exploit a trade theoretic framework to analyse the impact on an inflow of foreign capital on regional welfare, in particular, urban and rural incomes The analysis is undertaken in a four goods, two region model where each region produces and consumes its own non-traded good. Foreign capital is only used in the urban region and its inflow is treated initially as exogenous and later endogenised via a movement in the terms-of-trade. An exogenous inflow of foreign capital necessarily raises aggregate urban income irrespective of capital intensity conditions. The rural region is 'immiserized' by the inflow of foreign capital provided that the rural traded good is more capital intensive than the rural non-traded good. In this framework rural employment always falls and urban employment always rises. In the case where foreign capital inflow is induced by a change in the terms-of-trade, immiserization may occur in both regions depending on the capital intensities in all sectors. This paper highlights the locational implication of the inflow of foreign capital.(JEL Classification: F2, O1, R1)

The Factor Specificity and the Exchange Rate Theory of Purchasing Power Parity: An Extension of the Jones-Purvis Model
Journal of Economic Integration 13(3), September 1998; 499-521
by Juan Antonio Garc a-Cebro
Abstract: The focus of this paper is on the structural aspects of exchange rate determination, generalizing the 1983 Jones-Purvis model. Specifically the Jones-Purvis model is extend to incorporate the concept of factor specificity. It is shown that deviations from purchasing power parity depend on, among other determinants, factor specificity. Furthermore, it examines the factor specificity as a short-medium run determinant of the behavior of exchange rate, in a framework where two countries are affected by a common extend shock. (JEL classification: F11, F31)

Is Tourism Just Another Commodity? Links between Commodity Trade and Tourism
Journal of Economic Integration 13(3), September 1998; 522-543
by Stephen T. Easton
Abstract: Commodity trade and international tourism may linked through substitution on the supply side or by substitution or complementarity on the demand side. Simple correlation reveals a positive association between international tourism to and commodity exports from Canada. A model incorporating both tourism and exports provides evidence of substitutability between them. Such a link implies that export promotion or tourism promotion may work at cross purposes. (JEL Classification: F14)

Volume 13 Number 4 December 1998

Economic Integration of the Chinese Provinces : A Business Cycle Approach
Journal of Economic Integration 13(4), December 1998; 549-570
by K. K. Tang
Abstract: This paper uses correlation of business cycles to gauge the degree of economic integration of the Chinese provinces. The more integrated the provincial economies are, the stronger their correlations should be. Only the correlations between some provinces in eastern China are found to be consistently strong, suggesting that an integrated national economy is yet to be shaped Secondly, the results imply that treating China as a single entity could be misleading, even at the macro level, expecially in understanding China's business cycles.(JEL Classification : E3, O1)

Economic Integration in Southern Africa - a Risk of Strong Polarisation Effects or a Chance for Joint Development?
Journal of Economic Integration 13(4), December 1998; 571-585
by Harald V. Proff
Abstract: Despite negative experiences with regional integration in sub-Saharan Africa the SADC members announced in August 1996 to make the entire region a free trade area in the next eight years. This article evaluates the opportunity and threats of SADC in order to answer the question whether this integration will lead to strong polarisation effects or an opportunity for joint development in the region. It becomes clear that neither generalizations on welfare gains of regional integration nor generalizations on the distribution of the gains from integration are possible. However a clear tendency for mutual economic benefits of SADC can be deduced.(JEL Classifications : F15, O14)

Inflation and Uncertainty : Does the EMS Participation Play Any Role?
Journal of Economic Integration 13(4), December 1998; 586-605
by Nicholas Apergis
Abstract: This paper examines whether European Monetary System (EMS) membership has affected the link between inflation and inflation uncertainty. ARCH measures of conditional inflation volatility and Granger-causality tests for nine OECD countries over the Period 1980-1994 indicate that in non-EMS countries-in these countries a monetary target seems to have been closely followed inflation seems to determine behaviour of inflation uncertainly. By contrast, in EMS countries - these countries gave geared their monetary policies to an exchange rate target - inflation seems to have no impact on inflation uncertainty. This finding is probably due first, to the absence of any institutional restriction that characterizes non-EMS membership, on the manner the monetary policy is pursued, and second, to the fact that under a monetary rule, any institutional or regulatory changes in the monetary sector are expected to fall more adversely upon inflation as well as inflation uncertainty.(JEL Classification : E31)

Long-run and Short-run Effects of Exchange Rate Movements for Major EU Countries: Cointegration and Error-Correction Modeling
Journal of Economic Integration 13(4), December 1998; 606-625
by Manuel Cantavella-Jord , and Celestino Su rez-Burguet
Abstract: This paper examines the long-run and short-turn effects of depreciation/devaluation for major European Union countries (Germany, France, the United Kingdom, and Italy) over the 1975-1997 period. The approach is based on cointegration techniques proposed by Johansen ［1988］and use quarterly data. The empirical result indicate the existence of a positive relationship between the exchange rate and the trade balance for each country although long-run effects are rather moderate. According to the short-run analysis, there is a finding of a J-curve for Italy and the United Kingdom. The cost of relinquishing individual exchange rate may be rather small for major EU countries.(JEL Classification : F31, F41)

Are the U.S. Exports to and Imports from Japan Cointegrated?
Journal of Economic Integration 13(4), December 1998; 626-643
by Yangru Wu, and Junxi Zhang
Abstract: The size and duration of U.S. bilateral trade deficit with Japan has raised concern from both politicians and the general public. This paper seeks to investigate the behavior of this deficit by conducting stationarity tests on the deficit and tests for long-run relationships between U.S. exports to and imports from Japan. We show that, if an endogenously searched break is properly accounted for, exports and imports are cointegrated with a coefficient of one, and the deficit appears to be stationary. Thus, in contrast to the public's perception, we conclude that the U.S.-Japan trade deficit may not be "too large." (JEL Classifications: F14, C22)

Capital Inflows and Capital Flight-Individual Countries Experience
Journal of Economic Integration 13(4), December 1998; 644-661
by Chander Kant
Abstract: This paper examines whether individual countries' data show that FDI inflows facilitate capital flight and whether capital flight occurs due to poor domestic investment climate or is it due to discriminatory treatment against residents' investment. Three capital flight measures are used. Although the relationships have the expected signs, the absolute magnitude of the relationship among the countries differs widely. Also, the three measures of capital flight analyzed do not give consistent results. Thus, the definition and concept of capital flight that is actually used matters.(JEL Classifications :F23, F34, G15)

International Trade and the Risk Premium in the Currency Forward Market
Journal of Economic Integration 13(4), December 1998; 662-672
by Bernhard Eckwert, and Udo Broll
Abstract: In this paper we present an intertemporal model of the spot and forward markets for foreign exchange. We analyze the implications of central bank interventions on the spot market for the risk premium in the currency forward market and discuss the consequences for the allocation of exchange rate risk and for the volume of international trade. As a main result we find that exchange rate volatility does not generate systematic risk and hence does not adversely affect international trade as long as the monetary authorities do not exogenously intervene in the foreign exchange spot market.(JEL Classification : F11, F31, F33)