Special Issue in the World Economy (Forthcoming)

This paper analyzes the issue of excess liquidity, inflation, and the exchange rate appreciation currently evolving in China. In mapping the co-movement between excess liquidity and inflation and developing a dynamic model, the paper shows that excess liquidity, ignited by the dramatic capital inflows, is a significant driver for China consumer price inflation during the recent decade. In addition, the article compares the dynamic paths of inflation and interest rates between China and the US and reveals marked changes in their differentials over the recent years. Associating these findings with the evolving appreciation of the yuan against the dollar, the paper advises a slowdown in the rate of the RMB appreciation. Instead of quick appreciation, the paper proposes more flexibility in the RMB exchange rate regime combined with alternative capital control measures to rein excess liquidity and curb ongoing inflation in China.

This paper estimates the impact of intra-regional real exchange rate flexibility on East Asian exports. The hypothesis is that the impact would be negative for East Asian countries regardless of their exchange rate regimes. The results validate the hypothesis. The findings show that for Chinese exports the long-run effect is as much as that of a real appreciation of Renminbi. By contrast, for Japanese exports the effect is three-times larger than that of a real appreciation of Yen. The findings imply that a regional currency basket mechanism would lessen the adverse effect of exchange rate flexibility and engineer a collective exchange rate adjustment for resolving global payment imbalance against East Asia.

This paper measures the level by which global oil price returns influence the stock returns and volatility in the BRIC equity markets and observes the time varying conditional correlation between BRIC equity returns and oil price returns. The study concludes that the level of impact of oil price returns on equity returns and volatility in the BRIC countries depends on the extent to which these countries are net importers or net exporters of oil. It also deducts that despite the aggressive economic growth of the BRIC countries in the past 25 years, the volatility of stock returns in these economies does not have a significant impact on the volatility of global oil price returns.

This paper investigates the validity of the Fisher hypothesis in Japanese long-term interest rates (two, three, four, five, seven and ten years ) using non-stationary time series models. At first, the entire sample period (October 1987 through June 2006) is investigated. After-wards the samples divided into three segments depending on each period’s monetary policy regimes are investigated. Thus, the asymmetric impacts of inflation expectation on Japanese long- term interest rates can be investigated. The first period examined is from October 1987 through June 1991. The second period is from July 1991 through July 2000. The third period is from March 2001 through June 2006. The first period is tightening, but the second and third periods are easing. Thereby, it is concluded that the Fisher hypothesis is valid only in all maturities of long-term interest rates in the first period. However, it does not hold in any of the maturities in the entire sample period or in the second and third periods.