Firm-level Perspective of Thailand’s Low Investment Puzzle
Private investment in Thailand has been standing at a low level since the aftermath of the Asian Financial Crisis until present. Using firm-level data of virtually all registered firms in Thailand during 2001-2013, this paper finds that more than 60 percent of Thai firms have been undertaken negative net investment (invested at a rate slower than the depreciation rate) each year. Our regression results suggest that small firms and large firms have been facing different kinds of obstacles that ultimately led to persistently low investment at the aggregate level. For large firms, low or negative net investments are driven mainly by weak growth prospects and future uncertainties. For small firms, their investments are more likely hindered by supply-side constraints (lack of access to external finance) and negative net investments are driven mainly by inefficiency.
From Many to One: Minimum Wage Effects in Thailand
This article examines the effects of changing the minimum wage policy structure in Thailand, from multilevel wages set geographically to a single statutory minimum. It exploits the recent hike in the minimum wage to evaluate the effects on employment and wage distribution. We find that employment is weakly affected, with reductions in youth unskilled employment and localised downward adjustments for SMEs. Furthermore, wage distribution seems to have improved. Using an application of the Recentered Influence Function applied to provincial wage distributions, we show that wages are affected up to the 60th percentile, suggesting that minimum wage levels serve as numeraire for wage renegotiation in a Middle Income country context. The hike in the minimum has benefited workers in the 15-45th percentiles, with no discernible effects in the lowest quantiles which appear to be driven by non-compliance among microenterprises.
Floods and Farmers: Evidence from the Field in Thailand
This paper studies the impacts of the 2011 flood on preferences, subjective expectations, and behavioral choices among Thai rice-farming households. Our results show that experiencing the 2011 flood made farming households more risk averse, more impatient, and more altruistic, and that asset-poor farming households were more likely to be affected by the flood than better-off households. The flood also made households adjust upward their subjective expectations of future severe floods. After being hit by the 2011 flood, households lost their confidence in social safety nets, signifying the limitations of risk-sharing in the presence of covariate shocks. Middle-income households who were not prone to floods had higher expectations of public insurance following the flood. Mediating through the changes of preferences and subjective expectations, the flooded households were less likely to save money and engage in self-insurance mechanisms, as well as to invest in productive investments, but more likely to take out commercial crop insurance, especially those in the bottom and middle wealth groups. These findings shed light on the design of incentivecompatible safety nets and development interventions.
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.
Natural Disasters, Preferences, and Behaviors: Evidence from the 2011 Mega Flood in Cambodia
This paper studies the impacts of the 2011 mega flood on preferences, subjective expectations, and behavioral choices among Cambodian rice-farming households. We find flood victims to have larger risk aversion and altruism, and lower impatience and trust of friends and local governments. The disaster also induced flooded households to adjust upward their subjective expectations of future floods and of natural resources as a safety net. Mediating (partially if not all) through these changes in preferences and expectations, the 2011 flood also affected households’ behavioral choices, some of which could further result in long-term economic development and resilience to future floods. We find flooded households to have lower productive investment, to substitute away social insurance by increasing self-insurance and demand for market-based instruments, and more importantly, to increase the use of natural resources as insurance. These findings shed light on the design of incentive-compatible safety nets and development interventions.
Monetary Policy, Bank Lending and Corporate Investment
The purpose of this study is to shed light on the chain of causality from macroeconomic financial policy to the microeconomic investment function. Concretely, we aim to provide an in-depth analysis of the relationships between the monetary policy of central banks, the loan policy of commercial banks, and the investment behavior of firms. We focus on countries that conduct their monetary policy under the inflation-targeting framework. Our empirical analysis with data from Germany, Switzerland and Thailand provides several new insights. First, after controlling for the US monetary policy, the monetary policy in Germany and Thailand appears to influence the banks’ lending rate in the short run (i.e. within two months), whereas the monetary policy in Switzerland seems to be ineffective at influencing the banks’ lending rate in the short run. Second, our results show that the banks’ lending rate has a negative effect on their loans and that this negative effect is weakened by their growth opportunities. Third, we find that the supply of bank loans plays a more pivotal role in determining firms’ investment than the lending rate. Last but not least, we document that neither the lending rate nor the loan-to-assets ratio moderates the sensitivity of the firms’ investment to growth opportunities.
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.
Mortality Risk and Human Capital Investment: The Legacy of Landmines in Cambodia
Life expectancy plays a key role in determining households’ optimal investment in children’s human capital accumulation. This paper examines this relationship by looking at a unique case of Cambodia and the nation’s prevalence of landmines. Extensive usage of landmines during its long civil conflict since the 1970s was followed by large international effort of landmine clearance operation. A two-fold increase in landmine clearance effort during the periods 2004-2005 in affected areas, has led to a subsequent sharp fall in landmine casualty rates. Together with the male-biased characteristic of landmine accidents, all three variations allow us to estimate the impact of working-age mortality risk on skill formation using a difference-in-difference-in-difference model. To deal with the unobservable, landmine casualty rates are also instrumented by the stock of dangerous land in neighbouring areas. We find a strong negative effect of landmine mortality on both schooling and health investment outcomes. When the mortality risk from such a fearful event as landmine accidents is replaced by a more common incident of traffic accidents, any mortality effect on schooling outcomes is no longer detected. This is evidence of a role played by subjective life expectation in optimal decision making on the households.
The Impact of Family Business Apprenticeship on Entrepreneurship and Survival of Small Businesses: Evidence from Thailand
This paper investigates the impact of exposure to a family business and participating in a family business on individuals decision to start a business (self-employed and small business) and their likelihood of survival. We find that individuals who have a family member doing business are more likely to start their own business. However, only individuals who have actually worked in the family-owned business are more likely to survive longer. This paper demonstrates that the higher the number of hours they worked in a family business, the higher the probability of survival. The impact remains significant even if the sample includes only individuals who are the spouses of business owners. The impact of prior experience from helping a family business depreciates over a short period of time. This result suggests that entrepreneurial skills can be learnt from an apprenticeship in small businesses.
The Output Euler Equation and Real Interest Rate Regimes
Output Euler equations (OEE) for the US deliver slope estimates that are not significantly different from zero. This finding is counterintuitive as it implies a zero elasticity of intertemporal substitution (EIS) and aggregate demand movements that are nonresponsive to the short-term real interest rate. This paper shows that failure to account for regime changes in the dynamics of the real interest rate is responsible for the zero EIS result. In doing so, an empirical investigation is carried out based on an unobserved components framework with Markov-switching parameters that models the underlying process for the real interest rate jointly with the OEE. According to the estimation results, the ex-post real interest rate is a highly persistent process with means, variances and degrees of persistence that are different for the periods 1966-1980, 1980-1985, and 1985-2015. Once these changes in real interest rate behavior are taken into account, estimates for the EIS are 0.1 and are no longer statistically insignificant. This finding is robust to various measures of the output gap as well as alternative specifications for the time-varying natural real rate.
Childhood Post Traumatic Stress Disorder and Later-Life Outcomes: A Hidden Consequence of the 1989 Typhoon Gay
In human capital literature, it is established that skills are cross-productive and that the production technology is dynamic. This study looks at a case of Thailand and shows that a damage of mental health capital early on in life has a significant adverse effect on schooling attainment. We take the event of Typhoon Gay in 1989 in Thailand’s South-Eastern region as a random trigger of Post-Traumatic Stress Disorder prevalence amongst young children in the disaster area. Using both micro datasets and a unique survey, we find strong evidence that disaster affected children suffered from a long-term undetected reduction in their mental health capital and thus worse accumulation of skills in other dimensions.
International Correlation Asymmetries: Frequent-but-Small and Infrequent-but-Large Equity Returns
We propose a novel regime-switching model to study correlation asymmetries in international equity markets. We decompose returns into frequent-but-small diffusion and infrequent-but-large jumps, and derive an estimation method for many countries. Wefind that correlations due to jumps, not diffusion, increase markedly in bad markets leading to correlation breaks during crises. Our model provides a better description of correlation asymmetries than GARCH, copula and stochastic volatilit ymodels. Good and bad regimes are persistent. Regime changes are detected rapidly and risk diversification allocations are improved. Asset allocation results in and out-of-sample are superior to other models including the 1/strategy.
Daily Movements in the Thai Yield Curve: Fundamental and Non-Fundamental Drivers
This paper attempts to identify the key determinants of daily yield movements in the Thai government bond market. It finds that Thai short-term yield movements are solely driven by domestic factors, namely policy rate expectations and bond supply. By contrast, longer-tenor yields are also found to be affected by global factors, namely global monetary conditions and global risk appetite. Apart from these “fundamental” factors, the net-buying pressures of foreign players, and not those of domestic investors, are also found to exert significant influence over the Thai medium and long rates. Taken alone, this finding may appear somewhat alarming as it implies that foreign activity can be a significant source of market volatility. Further investigations suggest, however, that the detected foreign influence may be due to informational reasons; foreign investors lead yield movements because they provide price-relevant “private” information to the market. Viewed in this light, the detected foreign influence may not altogether be so detrimental, at least insofar as normal periods are concerned.
Corporate Debt Maturity and Future Firm Performance Volatility
We propose a simple idea that corporate debt maturity should serve as a good indicator of future firm performance volatility. We show in a simple two-period model that the riskiness of corporate investment is a decreasing function of corporate debt maturity. If “observable” corporate debt maturity and ex ante “unobservable” corporate risk-taking is highly correlated, corporate debt maturity should be highly correlated with “ex post” realized firm performance volatility in following years. Using data on publicly listed firms in 10 developing and developed countries over the period 1991-2013, we find that future firm operating performance volatility decreases as corporate debt maturity increases and that future firm value volatility is not associated with corporate debt maturity. In addition, banking sector development and export intensity of a country play an important role in determining firm operating performance volatility.
Monetary Policy with Imperfect Knowledge in a Small Open Economy
Incorporating adaptive learning into a small-open-economy DSGE model, we analyze how monetary policy rules should adjust when agents’ information set deviates from that assumed under the rational expectations framework. We find that when agents observe current shocks but do not observe the parameters governing key macroeconomic dynamics, the resulting distortion is small and the preferred policy under rational expectations works well. However, the welfare cost of imperfect knowledge becomes quite severe when agents also have to learn about the structural shocks to the economy. Monetary policy can play a significant role in mitigating distortions associated with this form of imperfect knowledge.