Location choice and tax responsiveness of foreign multinationals: Evidence from ASEAN countries
This study uses a firm-level dataset to examine the impacts of taxation on multinationals’ decisions to set up new foreign subsidiaries in developing ASEAN countries. It finds that taxes play a critical role in MNEs’ location choice decision, with tax incentives being instrumental for maintaining location choice probabilities associated with each host country. The findings also indicate important heterogeneity in the tax responsiveness. First, the tax sensitivity for high-tech firms is significantly lower than that for low-tech firms. Second, having a prior presence in the respective host country is associated with substantially lower tax responsiveness. Finally, in accordance with international tax-avoidance considerations, the tax responsiveness is significantly diminished for affiliates with a connection to tax-haven countries. These provide important policy implications for developing-country governments that consider employing tax incentives to attract MNEs.
Extrapolative Beliefs and Exchange Rate Markets
Following Engel (2016) and Valchev (2015), this paper documents the relationship between interest rate differentials and differential returns on domestic and foreign bonds over time horizon using a broader data sample. I find that countries with higher contemporaneous interest rates earn excess positive bond returns initially in accordance with previous UIP literature. However, the sign of excess returns reverses in the medium run. Higher contemporaneous interest rates predict negative excess returns. Eventually, interest differentials have no excess return predictability. I argue that behavioral bubbles are natural and successful candidates in generating exchange rate dynamics observed in the data. In particular, I propose that investors rely not only on fundamentals (interest differentials) but also extrapolate past exchange rates when forming expectations. The proposed extrapolative model is consistent with both excess return patterns and survey evidence in the data.
Drivers of Financial Integration: Implications for Asia
Deeper intraregional financial integration is prominent on Asian policymakers’ agenda. This paper takes stock of Asia’s progress toward that objective, analyzing recent trends in cross-border portfolio investment and bank claims. Then, it investigates the drivers of financial integration by estimating a gravity model of bilateral financial asset holdings on a large sample of source and destination countries worldwide, focusing in particular on the role of regulation and institutions. The paper concludes that financial integration in Asia could be enhanced through policies that lower informational frictions, continue to buttress trade integration and capital market development, remove restrictions to foreign flows and bank penetration, and promote a common regulatory framework.
Portfolio Flows, Global Risk Aversion and Asset Prices in Emerging Markets
In recent years, portfolio flows to emerging markets (EMs) have become increasingly large and volatile. Using weekly portfolio fund flows data, the paper finds that their short-run dynamics are driven mostly by global “push” factors. To what extent do these cross-border flows and global risk aversion drive asset volatility in EMs? We use a Dynamic Conditional Correlation (DCC) Multivariate GARCH framework to estimate the impact of portfolio flows and the VIX index on three asset prices, namely equity returns, bond yields and exchange rates, in 17 emerging economies. The analysis shows that global risk aversion has a significant impact on the volatility of asset prices, while the magnitude of that impact correlates with country characteristics, including financial openness, the exchange rate regime, as well as macroeconomic fundamentals such as inflation and the current account balance. In line with earlier literature, portfolio flows to EMs are also found to affect the level of asset prices, as was the case in particular during the global financial crisis.
Thai Inflation Dynamics in a Globalized Economy
This paper investigates whether the observed changes in Thai inflation dynamics since the 1990s can be attributed to the process of globalization. First, this paper develops a dynamic factor model to extract a global component from underlying inflation rate movements in Thailand and its top trading partners. Based on the empirical findings, the importance of the global factor for Thailand doubled since 2001, emphasizing the growing role of globalization since then. Second, to explore the economic determinants behind the global factor, this paper estimates an unobserved components model for Thai inflation that is consistent with an Open Economy New Keynesian Phillips curve (OE-NKPC). The empirical model incorporates structural breaks to examine how the influences of domestic and global output gaps for Thai inflation changes over time. Based on the findings, long-term inflation expectations declined significantly and became well anchored at an average level of 2.4 percent shortly after the Bank of Thailand adopted an explicit inflation target in 2000. At the same time, short-run inflation movements became increasingly driven by a global rather domestic output gap. Based on an extended OE-NKPC, the global output gap still remains important beyond the direct import price channel during the 2001-2007 period. However, after the global financial crisis, the global output gap only serves to capture the direct effects of world oil price movements on inflation.
Globalization and International Inflation Dynamics: The Role of the Global Output Gap
Globalization has been suggested to increase the sensitivity of domestic inflation to global economic conditions. This paper develops an unobserved components model that is consistent with an open economy New Keynesian Phillips curve (NKPC), and finds that a global output gap has replaced the domestic output gap as the key driving variable for inflation in 17 advanced and emerging countries, particularly since the year 2000. The cross country analysis also suggests that the influence of the global output gap for national price movements is positively correlated to a country’s degree of openness in trade. Upon the inclusion of import and oil prices to the NKPC specification, the global output gap remains a significant driving variable for inflation, suggesting that the global output gap matters for inflation beyond the traditional import price channel.