Showing papers in "CESifo Economic Studies in 2006"

On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate

Abstract: Fixed and flexible exchange rates each have advantages, and a country has the right to choose the regime suited to its circumstances. Nevertheless, several arguments support the view that the de facto dollar peg may now have outlived its usefulness for China. (i) Although foreign exchange reserves are a useful shield against currency crises, by now China’s current level is fully adequate, and US treasury securities do not pay a high return. (ii) It may become increasingly difficult to sterilize the inflow over time. (iii) Although external balance could be achieved by expenditure reduction, e.g. by raising interest rates, the existence of two policy goals (external balance and internal balance) in general requires the use of two independent policy instruments (e.g. the real exchange rate and the interest rate). (iv) A large economy like China can achieve adjustment in the real exchange rate via flexibility in the nominal exchange rate more easily than via price flexibility. (v) The experience of other emerging markets points toward exiting from a peg when times are good and the currency is strong, rather than waiting until times are bad and the currency is under attack. (vi) From a longer-run perspective, prices of goods and services in China are low—not just low relative to the US (0.23), but also low by the standards of a Balassa–Samuelson relationship estimated across countries (which predicts 0.36). In this specific sense, the yuan was undervalued by � 35 percent in 2000, and is by at least as much as that today. The study finds that, typically across countries, such gaps are corrected halfway, on average, over the subsequent decade. These six arguments for increased exchange rate flexibility need not imply a free float. China is a good counter-example to the popular ‘‘corners hypothesis’’ prohibition on intermediate exchange rate regimes. However, the specific changes announced by the Chinese authorities in July 2005 have not yet resulted in a de facto abandonment of the

Corporate Governance in China: Current Practices, Economic Effects and Institutional Determinants

Abstract: This article provides a preliminary survey of the burgeoning literature on the Chinese listed firms’ corporate governance. We structure the existing research around three themes: (1) What are the current corporate governance practices in China? (2) How do these corporate governance practices affect the Chinese listed firms’ valuation and various corporate decisions? (3) How does China’s unique institutional setting pre-determine the governance model adopted in China? The evidence indicates that the current governance practice adopted in China can be best described as a control-based model, which contrasts strikingly with the market-oriented model commonly used in the US and UK, and championed by most corporate governance advocates. The evidence also shows that Chinese firms, whose corporate governance practices deviate from the control-based model, demonstrate stronger performance, and tend to make decisions in line with the shareholders’ interest. The evidence from the literature also suggests that the control-based model is rooted in the ‘administrative governance’ approach adopted by the Chinese regulatory authorities, and is tailed to China’s specific institutional setting. (JEL classification: G3)

Transparency of Monetary Policy: Theory and Practice

Abstract: Transparency has become one of the main features of monetary policymaking during the last decade. This article establishes stylized facts and provides a systematic overview of the practice of monetary policy transparency around the world. It shows much diversity in information disclosure, even for central banks with the same monetary policy framework, including inflation targeting. Nevertheless, the study finds significant differences in transparency across monetary policy frameworks. The empirical findings are explained using key insights distilled from the theoretical literature. Thus, this article aims to bridge the gap between the theory and practice of monetary policy transparency. (JEL codes: E58, D82) Copyright 2006, Oxford University Press.

Are Chinese Official Statistics Reliable

Abstract: This article points out that Chinese official statistics are by and large reliable because of the assigned responsibility of the officials preparing them, of their being used in government decision making that is open to public scrutiny, and in many published articles in referred journals. Errors or statistical discrepancies do exist and users of these statistics need to be cautious. Studies by the author using official statistics are cited to support their usefulness. In particular, the estimates of Gross Domestic Product growth rates are re-examined and the errors in the allegation of overestimation by Young, A. ((2003), "Gold into base metals: productivity growth in the People's Republic of China during the reform period," J.P.E. 111 (December), 1220--1261.) are revealed. (JEL classification: O10, P20) Copyright 2006, Oxford University Press.

China's exchange rate and international adjustment in wages, prices, and interest rates: japan déjà vu?

Abstract: China keeps its exchange rate tightly fixed to the dollar. Its productivity growth and trade surplus have been high, and it continues to accumulate large dollar reserves. Many observers take this as evidence that the renminbi is undervalued and should be appreciated to reduce the Chinese trade surplus. We argue that an appreciation of the renminbi need not reduce China’s trade surplus but could cause serious deflation in China. To show this, we consider international adjustment between China and the United States from both an asset-market and a labor-market perspective, and compare this to Japan’s unsuccessful appreciation of the yen.

China's Banking Reform: An Assessment of its Evolution and Possible Impact

Abstract: The Chinese banking system, characterized by massive government intervention, poor asset quality and low capitalization, has started a reform process based on three main pillars: (i) bank restructuring, through the cleaning-up of non-performing loans and public capital injections, particularly in the four largest state-owned banks; (ii) financial liberalization, with the gradual flexibilization of quantity and price controls, the opening-up to foreign competition and cautious steps toward capital account liberalization; and (iii) strengthened financial regulation and supervision, coupled with efforts to improve corporate governance and transparency. Although the reform is still ongoing, our preliminary assessment indicates that changes are needed for the reform to be fully successful. Asset quality has improved, particularly in the recapitalized banks, but there is a high risk of a new build-up of non performing loans. Capitalization has increased in the largest banks, as a consequence of the government capital injections, but it generally remains low and profitability has fallen even further. China?s huge financing needs, to maintain high economic growth, and its commitment to fully open up its banking system to foreign competition urgently require a more comprehensive and time-bound strategy, with a long-term vision of the desired structure of the Chinese banking system. Bank recapitalization should be completed immediately, not only to ensure bank soundness, but also to increase profitability, which could be affected negatively as competition increases with full financial liberalization. Bank recapitalization, however, needs to be accompanied by a radical improvement in corporate governance, which would clearly be facilitated by a change in the property structure.

Is Social Capital the Capital of the Poor? The Role of Family and Community in Helping Insure Living Standards against Health Shocks

Abstract: We estimate the effect of social capital on the ability of households to insure consumption after unexpected negative shocks. Many theoretical models argue that strong ties to extended family members and to one’s community help protect families when an adult becomes ill or disabled. Using household-level longitudinal data on Indonesian families, we test whether consumption declines less after a negative health shock for those with many ties to their community and for those in a community with dense ties. We take advantage of a particularly rich set of measures of social capital including measures of civic participation; the existence of traditions of mutual cooperation; long-term relationships in the community and ethnic and linguistic diversity. We also examine the role of a large and prosperous extended family. We find little support for the hypothesis that social capital is the capital of the poor. (JEL classification: D12, D13, G21, G22, O16)

Global Competition for Mobile Resources: Implications for Equity, Efficiency and Political Economy

Abstract: International integration of markets for labor and capital has far-reaching policy implications in economies where governments pursue extensive programs of redistribution through tax and transfer policies. The large fiscal impacts that result from movement of high- and low-income populations, as well as of capital, affect the benefits, costs, and political payoffs of redistributive policies, creating incentives for fiscal competition that may limit the extent of redistribution over time. Migration and capital flows are dynamic adjustment mechanisms, analysis of which can shed light on the consequences of structural changes such as globalization of factor markets and EU enlargement. (JEL codes: H0, J0) Copyright 2006, Oxford University Press.

Marriage: Past, Present, Future?

Abstract: If they existed, markets for sex and markets for children would share a common feature: women sell and men demand. No society allows the trade in children, instead we have marriage. This article discusses biological and legal aspects of reproduction, and their implications for gender roles and family forms. (JEL: J12, J13) More than one third of children are born to unmarried mothers in the US, France, Britain, and the Nordic countries. Evidently, activities formerly the preserve of marriage are no longer. What has caused this change? This article discusses biological and legal aspects of reproduction in order to shed some light on the causes and consequences of changes in family formation.

Dynamic Stochastic General Equilibrium Models as a Tool for Policy Analysis

Abstract: This article discusses the evolution of dynamic macroeconomic models from calibrated Real Business Cycle models to estimated dynamic stochastic general equilibrium models. The purpose is to suggest the usefulness of these models as a tool for policy analysis, with a particular emphasis on aspects of monetary policy. (JEL classification: D58, E50) This article gives an overview of the literature that has led to the emergence of dynamic stochastic general equilibrium (DSGE) models. This approach to macroeconomic modelling has gained widespread support among researchers and has recently started to be taken seriously by policy-making institutions as a modelling framework which is useful for policy analysis and the conceptual support of decision making. Modern macroeconomics is the result of an intense, and at times passionate, scientific debate that has taken place over the last decades. In the early 1980s, a new approach to the business cycle analysis was introduced by Kydland and Prescott (1982). The main tenet of their approach was that a small model of a frictionless and perfectly competitive market economy, inhabited by utility-maximising rational agents which operate subject to budget constraints and technological restrictions, could replicate a number of stylised business cycle facts when hit by random productivity shocks. This so-called real business cycle (RBC) approach to macroeconomic modelling was early on criticised on various aspects. Nevertheless, as it is now widely acknowledged, the RBC agenda has made a lasting methodological contribution. Most of today’s DSGE models

Price shocks in general equilibrium: alternative specifications

Abstract: This paper compares a number of alternative specifications for price setting in the context of the Smets-Wouters (2003) Dynamic Stochastic General Equilibrium (DSGE) model. We first show that an empirically plausible alternative interpretation of the estimated price mark-up shocks is that they represent relative price (e.g. productivity) shocks in a flexible price sector. We then compare the Calvo model with a standard Taylor contracting model and show that by allowing for sector-specific capital the Taylor contracting model with a relatively short contract length of three quarters is performing as well as the Calvo model.

The Chinese Conundrum: External Financial Strength, Domestic Financial Weakness

Abstract: China’s recent investment boom looks much like the investment boom in the Asian tigers of the 1990s. Both were marked by a surge in bank credit to the private sector, a real estate boom and questions about the quality of domestic financial intermediation. Yet, China has few of the external vulnerabilities that marked the Asian tigers. Its current account surplus is rising, and its reserves far exceed its short-term external debt. However, China’s external strength is unlikely to allow it to avoid future banking trouble and a new round of costly non-performing loans. The trigger for the next generation of bad loans in China, though, will not be sudden withdrawal of external credit (JEL classification: F32, G21).

Does ageing call for a reform of the health care sector

Abstract: A popular view is that ageing populations increase health expenditure to GDP ratios because health expenditure correlates positively with age and because the concomitant shrinking of the labour force depresses GDP. The resulting increase in transfers from the young to the old then calls for a reform of health care policies. This article critically examines the arguments underlying this view. It gives credit to factors that counteract the expenditure effect, the effects upon health care market and labour market distortions and the effects upon intergenerational solidarity. Although important, these factors are found to have insufficient weight to invalidate the popular view.

Public Insurance against Idiosyncratic and Aggregate Risk: The Case of Social Security and Progressive Income Taxation

Abstract: In this paper I discuss the role a progressive income tax system and a redistributive pay as you go (PAYGO) social security system can play in insuring and reallocating idiosyncratic as well as aggregate risk. I also argue that the underlying source of market failures generating such a role for government intervention may be crucial when

The Evolution of Income-related Health Inequalities in Switzerland Over Time

Abstract: This article presents new evidence on income-related health inequality and its development over time in Switzerland. We employ the methods lined out in Van Doorslaer and Jones (2003, "Inequalities in self-reported health: validation of a new approach to measurement", Journal of Health Economics 22(1), 61--78) and Van Doorslaer and Koolman (2004, "Explaining the differences in income-related health inequalities across European Countries", Health Economics 22(7), 609--628) measuring health using an interval regression approach to compute concentration indices and decomposing inequality into its determining factors. Nationally representative survey data for 1982, 1992, 1997, and 2002 are used to carry out the analysis. Looking at each of the four years separately the results indicates the usual positive relationship between income and health, but the distribution is among the least unequal in Europe. No clear trend emerges in the evolution of the inequality indices over the two decades. A small but significant increase over the first 15 years is followed by stabilization if not a slight decrease in total income-related health inequality. The most important contributors to health inequality are income, education and activity status, in particular, retirement. Regional differences including the widely varying health care supply, in contrast, do not exert any systematic influence. (JEL codes: D32, I10, I12) Copyright 2006, Oxford University Press.

China in the World Trading System

Abstract: This article discusses China's trade policy stance following World Trade Organization (WTO) accession in 2002. The issues now for China are less the merits of WTO accession, and more how her global trade policies are cast given WTO membership. Three issues are taken up. The first is the extent to which WTO accession helps China in dealing with various key trade issues, including anti-dumping, and textiles and apparel trade. The second is China's participation in regional trade agreements post-WTO accession. The third is the implementability of China's accession commitments in the key service areas (banking, insurance, telecoms). (JEL: F10) Copyright 2006, Oxford University Press.

Monetary Policy, Corporate Financial Composition and Real Activity

Abstract: This article addresses two fundamental questions about monetary policy, credit conditions and corporate activity. First, can we relate differences in the composition of debt between tight and loose periods of monetary policy to firm characteristics like size, age, indebtedness or risk? Second, do differences in companies' financial compositions matter for real activity of firms such as inventory and employment growth? The article offers some evidence from firms in the UK manufacturing sector which suggests that the composition of debt differs considerably with characteristics such as size, age, debt and risk, it also shows a significant effect from financial composition and cash flow to inventory and employment growth. (JEL codes: E32, E44, E51) Copyright 2006, Oxford University Press.

Advertising, Generic Competition and Price Regulation in Pharmaceutical Markets

Abstract: The effect of price regulation on generic market entry and welfare in the presence of (persuasive) advertising is analysed. An incumbent has the possibility to invest in advertising targeted at the physician. Advertising creates vertical product differentiation between brand-name drugs and its generic substitutes. This differentiation creates the possibility to make positive profits for both firms. The presence of price regulation, however, reduces the anticipated generic profits. If price regulation is too strict, then the generic firm will refrain from market entry. Hence, the model confirms the empirical observation that generic market shares are lower in countries with strict price regulation. (JEL: I11, L13) Copyright 2006, Oxford University Press.

The UK and the Eurozone

Abstract: The article reviews the case for the UK to join the Eurozone by way of presenting a review of HM Treasury's widely well-regarded "Euro Report" (2003). The review provides an opportunity to rehearse and update the elements of optimum currency area (OCA) theory. In particular, the study draws attention to fresh estimates of the trade effect of the UK's adhesion to the Eurozone, the small size of which sharply contrasts with earlier estimates. They substantially remove a challenge to the Report's negative conclusion. The study sets the review in the perspective of public opinion surveys and HM Government's decisions. (JEL codes: E42, F0, F15) Copyright 2006, Oxford University Press.

Cost-Effectiveness Analysis in the Health Sector when There is a Private Alternative to Public Treatment

Abstract: In health economics, cost-effectiveness is defined as maximized health benefits for a given health budget. When there is a private alternative to public treatments, care must be taken when using cost-effectiveness analysis to decide what types of treatments should be included in the public program. The correct benefit measure is in this case the sum of health benefits to those who would not be treated without the public alternative and the cost savings to those who would otherwise choose private treatment. In the socially optimal ranking of treatments to be included in the public health program, treatments should be given higher priority the higher are costs per treatment for a given ratio of gross heath benefits to costs. (JEL: H42, H51, I18) Copyright 2006, Oxford University Press.

Selecting your Surgeon: the Private–Public Mix in Public Hospitals in Jerusalem; Considerations of Efficiency and Equity

Abstract: The question of whether to permit private medical services (dubbed SHARAP) in government hospitals is one of the most controversial issues in Israeli health care today, with parallels in European countries. Under the Israeli National Health Insurance Law, all residents that are entitled to free medical care included in a defined "basket" of services. This basket excludes the choice of surgeon for hospital services, such as surgical operations. However, people can pay for this choice out-of-pocket or through supplementary insurance. Such surgical procedures can take place in private facilities, often by publicly employed surgeons during their after work hours. Most of the public hospitals in Israel forbid such "private" operations on their premises. However, in three Jerusalem public, non-profit hospitals, choice of surgeons is allowed under long-standing SHARAP programs. This study explores the functioning of surgical care in these hospitals, in order to contribute empirically based evidence to the above mentioned debate. The study is based on administrative data of the three hospitals on about 37 000 operations carried out in the year 2001, 16 percent of which were in the SHARAP program. The study analyzes and discusses the implications of SHARAP for equity, efficiency and freedom of choice. It finds, first, that most SHARAP activity is for relatively routine procedures. Second, that despite SHARAP, nearly all the public complex operations are performed by teams that include very senior surgeons. Finally, the study finds that the costs to the majority of patients for most operations are reasonable, especially when covered by supplementary insurance, which most people hold. On the other hand, SHARAP appears to continue to be beyond the reach of most low-income persons. Moreover, by opting for SHARAP, patients do increase the likelihood that a very senior surgeon will be the surgeon-of-record, and this does have implications for health care equity. (JEL classification: I18, I32) Copyright 2006, Oxford University Press.

Medical Associations, Medical Education and Training on the Job

Abstract: This study analyzes the impact of medical associations (MAs) on physician income and standards of medical education and training on the job. Higher standards increase the probability of adequate treatment of patients. It can be shown that the older generations of physicians exploit the younger ones by either implementing seniority payments or by setting a higher standard for medical education and a lower standard for training on the job than the health authority. The rents which can be achieved by the physicians accrue only to the older generations who initially set up the MA. Abolishing the system in favor of individual contracting, therefore, requires considerations about a compensation of currently older physicians. (JEL classification: I11) Copyright 2006, Oxford University Press.