Macroprudential Policy in a Bubble-Creation Economy
This paper analyzes macroprudential policy in the form of loan-to-value (LTV) restriction in a bubble-creation economy of Martin and Ventura (forth- coming). We find that implementation of LTV policy may generate multiple equilibria. Moreover, its effectiveness in terms of investment and size of bubbles depends on the degree of financial friction. In high-capital steady state, low (high) financial friction implies that bubbles originally crowd out (in) investment, so that implementation of LTV policy causes bubbles to decrease (remain unchanged) and enhances (reduces) investment. However, in low-capital equilibrium, the policy has ambiguous effects. LTV policy may help to lower the possibility of sunspot equilibria in two aspects: (1) by destabilizing the low-capital steady state and (2) by confining the set of consistent market sentiments in the presence of high financial friction.
Assessing Tax Incentives for Investment: Case Study of Thailand
Tax incentives for investment are very popular among developing countries but they are costly and unlikely to compensate for other shortcomings. One of the reasons many governments often uses when expanding the tax incentives is that their tax incentives are inferior relative to those of competitors. This study examines the impacts of those tax incentives on the tax competitiveness using the case study of Thailand. It takes into account important tax provisions under both standard and preferential tax treatments, and computes effective average tax rates (EATRs) applied to the country’s focused industries. It then compares Thailand’s EATRs with those of ASEAN peers. Such industry-specific lens is crucial since the tax benefits offered as well as the composition of investment assets can vary substantially between industries. It finds that, Thailand’s investment incentives are broadly comparable to those offered by its ASEAN peers. Under the maximum incentives, the EATRs range from 6-9% depending on the investment intensity in each industry. This suggests that, with the exception of targeted incentives for the biotec industry, the government should refrain from throwing any more tax or monetary incentives and focus on fixing structural shortcomings. The results also indicate that accelerated depreciation and investment tax allowance are two options that may perform better than the tax holiday in term of minimizing the incentive redundancy.
Central Bank Communication and Monetary Policy Effectiveness: Evidence from Thailand
This paper has two main objectives. First, we introduce a novel textual analysis technique for estimating latent policy position in the monetary policy committee (MPC) statement based on word frequencies (so called ‘Wordfish’, developed by Slapin and Proksch, 2008). This method is applied to extract informational content embed in the MPC statements during the first decade of inflation targeting in Thailand. Second, we provide a comprehensive assessment of communication on monetary policy effectiveness in three main aspects, i.e. predictability of short-run policy interest rate, monetary transmission mechanism and the ability to anchoring long-run inflation expectations. Specifically, by augmenting our communication measure with various Taylor-type rule specifications, it is found that monetary policy statements help to improve short-run predictability of policy interest rate. Furthermore, using structural vector autoregression, we find that the impulse responses of policy rate shock on output and inflation are stronger when communication is included, indicating the improved efficacy of the transmission mechanism process. Our econometric results also indicate that the MPC statement exerts its influence over the yields with longer maturities. Finally, an increase in policy interest rate can anchor expected inflation only in the short run, while monetary policy communication provides additional effects to long-term inflation expectations.
Consequences of Bank Loan Growth: Evidence from Asia
When an increase in bank loans does not immediately lead to a hike in non-performing loans, bank loan officers (and/or bank managers) whose compensation is based on the value/amount of loans granted have incentives to grant more loans to (potentially lower credit quality) borrowers, which should increase the banks’ profits (and their personal compensation) in the short run. Using a sample of publicly listed banks in 18 countries in Asia during the period 1990-2014, I show that banks’ loan growth rate has a negative short-run effect on their nonperforming loans and a positive short-run effect on their profitability. While the loan growth rate does not increase non-performing loans in the short run, there is some evidence to suggest that it increases non-performing loans in the long run. The results further indicate that banks’ profitability is not affected by the level of loans but by the loan growth rate.
Currency Wars: Who Gains from the Battle?
We study the growth effects of currency undervaluation when countries employ active exchange rate management policies or impose capital controls, using a panel dataset of 185 countries. Applying two-stage regressions, we find that changes in undervaluation driven by exchange rate management and capital control policies have no significant impact on economic growth. Undervaluation that leads to higher growth mainly stems from policies that lower government consumption, reduce inflation and increase domestic savings. However, these policies are good for growth by themselves, with only limited additional growth effects through increased currency undervaluation. In sum, we find no evidence that battling in the currency depreciation war significantly increases a country’s growth rate.
Bank Systemic Risk and Corporate Investment
We develop a simple three-period model in which a bank’s investment is influenced by short-term financing and a probability of a financial crisis. The presence of moral hazard problems in banks and firms causes (1) banks to take on riskier loans, (2) bank systemic risk to increase, and (3) firms to invest in riskier projects. We measure “bank systemic risk” using three measures that capture (1) bank funding maturity and (2) bank asset commonality. We document that in a sample of firms in 10 emerging markets and advanced economies bank systemic risk is positively associated with the firm-level investment ratio after controlling for the country’s cross-sectional mean ratio of total loans to total assets of banks, country-level and firm-level variables until the start of the financial crisis of 2007. The effect becomes negative after 2007. We show that bank systemic risk strengthens the sensitivity of corporate investment to growth opportunities.
Does Money Make People Right-Wing and Inegalitarian? A Longitudinal Study of Lottery Winners
The causes of people’s political attitudes are largely unknown. We study this issue by exploiting longitudinal data on lottery winners. Comparing people before and after a lottery windfall, we show that winners tend to switch towards support for a right-wing political party and to become less egalitarian. The larger the win, the more people tilt to the right. This relationship is robust to (i) different ways of defining right-wing, (ii) a variety of estimation methods, and (iii) methods that condition on the person previously having voted left. It is strongest for males. Our findings are consistent with the view that voting is driven partly by human self-interest. Money apparently makes people more right-wing.
Firm Productivity in Thai Manufacturing Industries: Evidence from Firm-level Panel Data
Using firm-level panel data from the Manufacturing Industry Survey of Thailand between 1999 and 2003, this paper estimates the production function and examines the determinants of total factor productivity (TFP) for manufacturing firms in Thailand. Controlling for industry, region, and year fixed effects, production function coefficients and TFP measures are obtained through various estimation techniques including ordinary least squares (OLS), fixed effects, random effects, and the Levinsohn and Petrin (2003) for comparison. For production function estimation, the results illustrate the biases introduced in traditional TFP estimates and we discuss the performance of alternative estimators. For the determinants of TFP, the results show that firm size is associated with firm TFP, with smaller firms being more productive than larger ones. Firm age and TFP are negatively correlated, indicating that newer firms tend to exhibit higher TFP. Firms with a more skilled workforce also show a higher level of production. Moreover, firm TFP benefits from integration into world markets: foreign-owned firms and exporters have significantly higher TFP. The results further reveal that firm TFP varies with the form of organization, with private firms (in terms of legal organization) and Head-Branch typed firms (in terms of economic organization) having higher TFP. Our findings draw attention to some key areas of policy relevance in which policies promoting labor quality may have important benefits for firm TFP. Furthermore, development in the international integration of firms into world markets through their participation in export markets and attraction of foreign capital is also likely to have large payoffs in terms of TFP for Thai manufacturing.
Capital flows and the current account: Taking financing (more) seriously
This paper questions the appropriateness of popular analytical frameworks that focus on current accounts or net capital flows as a basis for assessing the pattern of cross-border capital flows, the degree of financial integration and the vulnerability of countries to financial crises. In the process, it revisits the Lucas paradox, the Feldstein-Horioka puzzle and the notion of sudden stops. It argues that, in a world of huge and free capital flows, the centrality of current accounts in international finance, and hence in academic and policy debates, should be reconsidered.
Observability and Endogenous Organizations
This paper establishes a relationship between the observability of common shocks and optimal organizational design in a multiagent moral hazard environment. We consider two types of organizations, namely relative-performace and cooperative regimes, and show that, with sufficient information regarding common shocks, a cooperative organization can be optimal even if outputs are highly correlated. The model is then embedded in a Walrasian general equilibrium model in which choices regarding organizations and investment in information on common shocks are jointly determined. Numerical results reveal that both cooperative and relative-performance regimes can coexist in equilibrium but only cooperative organizations invest in full observability of common shocks. Changes in the cost of information and aggregate wealth can affect substantially the types of organizations operating and the matching patterns of heterogeneous agents in these organizations. General equilibrium effects are key in determining how information costs impact the way production is organized.
Gauging Households’ Debt Tolerance: Evidence from Thailand
Understanding households’ debt tolerance has direct implications on policies addressing high household debt in many Asian economies. This study examines the determinants of debt tolerance and assesses the tolerance level among different household segments. It defines the debt tolerance as the ability to cope with debt without suffering from anxiety and provides empirical evidence based on a survey on Thai households in 2013. Using the IV probit model, the findings indicate that factors important to the debt tolerance include not only debt burden and financial cushion but also income security, financial history, and financial discipline. This suggests that addressing the debt tolerance issue requires a multi-faceted approach. It also highlights the relatively low debt tolerance among households in precarious jobs including farmers, general workers and business owners. The results are robust to a number of alternative specifications.
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.
Index-based Risk Financing and Development of Natural Disaster Insurance Programs in Developing Countries
This paper explores innovations in index-based risk transfer products (IBRTPs) as a means to address important insurance market imperfections that have precluded the emergence and sustainability of formal insurance markets in developing countries, where uninsured natural disaster risk remains a leading impediment of economic development. Using a combination of disaggregated nationwide weather, remote sensing and household livelihood data commonly available in developing countries, the paper provides analytical framework and empirical illustrations on how to design nationwide and scalable IBRTP contracts, to analyse hedging effectiveness and welfare impacts at the micro level and to explore cost effective risk-financing options. Thai rice production is used in our analysis with the goal of extending the methodology and implications so as to enhance the development of national and regional disaster risk management in Asia.
Monetary Policy and Financial Spillovers: Losing Traction?
Has financial globalisation compromised central banks’ ability to manage domestic financial conditions? This paper tackles this question by studying the dynamics of bond yields encompassing 31 advanced and emerging market economies. To gauge the extent to which external financial conditions complicate the conduct of monetary policy, we isolate a “contagion” component by focusing on comovements in measures of bond return risk premia that are unrelated to economic fundamentals. Our contagion measure is designed to more accurately capture spillovers driven by exogenous global shifts in risk preference or appetite. The analysis reaches several conclusions that run counter to popular presumptions based on comovements in bond yields. In particular, emerging market economies appear to be much less susceptible to global contagion than advanced economies, and the overall sensitivities to contagion have not increased post-crisis.
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.