Qingyuan Du, Columbia University, and Shang-Jin Wei, Columbia University and NBER
A Darwinian Perspective on the Chinese Real Exchange Rate
The conventional view is that a large departure from purchasing power parity and the existence of a large current account surplus make it indisputable that the Chinese real exchange rate is substantially undervalued. Du and Wei argue that the conventional view misses something important (although not standard in the existing theory of exchange rate): a rise in the sex ratio (increasing relative surplus of men in the marriage market) in China may have simultaneously generated a decline in the real exchange rate (RER) and a rise in the current account surplus. The authors demonstrate this logic through both a savings channel and an effective labor supply channel. In this model, a low RER is not a cause of the current account surplus, nor is it a consequence of currency manipulations. Empirically, those economies with a high sex ratio tend to have a low real exchange rate, beyond what can be explained by the Balassa-Samuelson effect, financial underdevelopment, dependence ratio, and exchange rate regime classifications. Once these factors are accounted for, the Chinese real exchange rate is estimated to be undervalued by only a relatively trivial amount.
Martin Berka, Massey University, and Michael B. Devereux, University of British Columbia and NBER
What Determines European Real Exchange Rates? (NBER Working Paper NO. 15753)
Berka and Devereux study a newly constructed panel data set of relative prices for a large number of consumer goods among 31 European countries over a 15 year period. The data set includes euro-zone members both before and after the inception of the euro, floating exchange rate countries of western Europe, and emerging market economies of Eastern and Southern Europe. The researchers find that there is a substantial and continuing deviation from PPP at all levels of aggregation, both for traded and non-traded goods, even among euro-zone members. Real exchange rates exhibit two clear properties in the sample: 1) they are closely tied to GDP per capita relative to the European average, at all levels of aggregation and for both cross country time series variation; and 2) they are highly positively correlated with cross-country and time-series variation in the relative price of non-traded goods. The authors construct a simple two-sector endowment economy model of real exchange rate determination which exhibits these two properties, calibrated to match the data. Simulating the model using the historical relative GDP per capita for each country, they find that for most countries, there is a very close fit between the actual and simulated real exchange rate.
Yi Wen, Federal Reserve Bank of St. Louis
Making Sense of China's Excessive Foreign Reserves
Large uninsured risk, severe borrowing constraints, and rapid income growth can create excessively high household saving rates and large current account surpluses for emerging economies. Therefore, the massive foreign-reserve buildups by China are not necessarily the intended outcome of any government policies or an undervalued home currency, but instead a natural consequence of the country's rapid economic growth, in conjunction with an inefficent financial system (or a lack of timely financial reform). Wen provides a tractable growth model of precautionary saving to quantitatively explain China's extraordinary path of trade surplus and foreign-reserve accumulation in recent decades. Ironically, the analysis here suggests that without a well-developed domestic financial market, the value of the renminbi (RMB) may significantly depreciate, not appreciate, once the Chinese government abandons its linked exchange rate and the massive amount of precautionary savings of Chinese households are unleashed toward international financial markets to search for better returns.
Woochan Kim, KDI School of Public Policy and Management
Korea Investment Corporation: Its Origin and Evolution
Kim gives a detailed account of the creation and the evolution of Korea Investment Corporation (KIC) a sovereign wealth fund established in 2005 by the Korean governmen -- first addressing the debates among various stakeholders that occurred at the time of its creation and how they shaped the governance structure and the management of KIC, and later discussing the evolving views on KIC's mission. That section of the paper first introduces the early discussion of using KIC as a macroeconomic policy tool to address the problems related to foreign capital inflows. Then, Kim considers the government's aspiration to make KIC a tool to attract foreign asset management companies and thereby transform Seoul into East Asia's financial hub. Finally, the paper reviews the newly emerging view that KIC should be used as a vehicle to prevent FX liquidity crises, such as the one Korea experienced in 2008-9.
Binkai Chen, Central University of Finance and Economics, and Yang Yao, Peking University
The Cursed Virtue: Government Infrastructural Investment and Household Consumption in Chinese Provinces
Using Chinese provincial panel data for the period 1978-2006, Chen and Yao study the relationship between government infrastructural investment and household consumption. In their baseline reduced-form regression, they find that a 1 percentage point increase in infrastructural investment in the government budget leads to a 0.31 percentage point reduction in the share of household consumption in GDP. This result holds qualitatively in a variety of specifications and under different estimation methods. In contrast, private investment is not found to have any significant impact on the share of household consumption. The structural estimations establish two channels for government investment's negative effects, one by encouraging the development of the secondary sector that is more capital intensive than agriculture and services, and the other by increasing profits in the industrial sector.
Hyungkwon Jeong, Bank of Korea, and Sung Wook W. Joh, Seoul National University
Risk Taking of 'TBTF' Banks in a Concentrated Market: Evidence from Surviving Banks after a Financial Crisis
Jeong and Joh examine how banks with a belief in the "Too-Big-To-Fail (TBTF): doctrine behave when the banking industry becomes concentrated. A simple Cournot-model shows that a stronger TBTF belief increases individual bank's optimal loan supply so high that the industry's aggregate loan supply also increases as the market becomes more concentrated, posing a big systemic risk to the economy. The hypothesis is supported by a co-integration approach based on the aggregate time-series Korean bank data following the financial crisis in 1997. Panel data analyses show that the impact of market concentration on credit expansion increases when a bank becomes larger through mergers, and the impact decreases after the change of ownership to foreigners.
Zvi Bodie, Boston University, and Joseph Cherian and Chua Wee Kang, National University of Singapore
Worry-free Inflation-Indexing for Sovereigns: How Governments can Effectively Deliver Inflation-Indexed Returns to Their Citizens and Retirees
Bodie, Cherian, and Wee Kang explore how small countries -- such as Malaysia, Singapore, and Taiwan -- can offer their aging populations the means to protect their retirement income against inflation without the governments directly issuing inflation-protected bonds. Although inflation swaps are a well-known means by which to attain this, these researchers show how an inflation index-replication strategy is also feasible. With this ability to provide inflation-adjusted returns, governments, pension funds, and other institutions can begin to offer a broad suite of inflation-indexed products, ranging from retirement annuities to inflation-linked insurance policies. This will improve the functioning of national pension systems and hence the welfare of retirees. The added benefit of such structures is that they allow governments to broadly replicate their local Consumer Price Index (CPI) returns without disrupting their traditional financing structures. Given the potential of reinsuring national default risks across borders via currency and credit default swap facilities at the federal level, there is a unique role for the government in this process as the reinsurer of last resort.
Chong En Bai and Binzhen Wu, Tsinghua University
Payroll Tax and Household Consumption
Using the Urban Household Survey Data of 9 provinces during 2002-6, Bai and Wu examine the effect of the payroll tax rate on household consumption and savings. Theoretically, when there are simultaneous target-saving motives and credit constraints, anincrease in the payroll tax for social security in the current period might have a negative effect on consumption because it reduces current disposable income. The authors exploit the changes in the payroll tax rate and coverage rate for social security over time, and the variation of changes across cities, to construct instrumental variables for the payroll tax rate and to address the problem of omitted variables. Their results show that after controlling for the wage before contribution, the payroll tax has a significantly negative effect on household consumption. When the payroll tax rate increases by 1 percentage point, household consumption declines by about 3.3 percent. This negative effect is stronger on poorer households, but does not depend on the potential benefit of social security in the future. The effect of the payroll tax rate on the saving rate is positive but not significant. Moreover, the data show that the increase in the payroll tax may not result in an increase in social security benefits for the elderly. At the same time, their propensity to consume is lower than that of the young, so raising the payroll tax may actually reduce aggregate consumption.
Bruce D. Meyer, University of Chicago and NBER, and James X. Sullivan, University of Notre Dame
Consumption and Income Inequality in the U.S. Since the 1960s
Official income statistics indicate a sharp rise in inequality over the past four decades. The ratio of the 90th to the 10th percentile of income, for example, grew by 23 percent between 1970 and 2008. However, these official statistics may not accurately reflect inequality in well-being for a number of reasons. For example, income is likely to be poorly measured, particularly in the tails of the distribution. Also, income fails to capture other important dimensions of well-being, including in-kind benefits, lifetime resources, housing quality, and access to medical care. Meyer and Sullivan examine inequality in economic well-being in the United States since the 1960s using consumption and income based measures of inequality. They also advance the literature on inequality by investigating the importance of measurement error and constructing improved measures of consumption over a longer time period. After examining income inequality between 1963 and 2008 using data from the Current Population Survey (CPS-ADF/ASEC), and consumption inequality between 1960 and 2008 using data from the Consumer Expenditure (CE) Interview Survey, they investigate inequality patterns in different parts of the distribution by reporting ratios of percentiles, focusing on the 90/10, 90/50, and 50/10 ratios. They show that both the level and pattern of inequality are sensitive to how inequality is measured. In general, accounting for taxes considerably reduces the rise in income inequality since 1963, while accounting for non-cash benefits has only a small effect on changes in income inequality. Consumption inequality is less pronounced than income inequality, particularly for the bottom half of the distribution. Both income and consumption inequality rise in the early 1980s and remain somewhat flat in the 1990s, but in the 2000s overall consumption inequality shows little change while overall income inequality rises somewhat.
Lucas W. Davis and Catherine Wolfram, University of California at Berkeley and NBER
Deregulation, Consolidation, and Efficiency: Evidence from U.S. Nuclear Power
For the first four decades of its existence the U.S. nuclear power industry was run by regulated utilities, with most companies owning only one or two reactors. Beginning in the late 1990s electricity markets in many states were deregulated and almost half of the nation's 103 reactors were sold to independent power producers selling power in competitive wholesale markets. Deregulation has been accompanied by substantial market consolidation and today the three largest companies control more than one-third of all U.S. nuclear capacity. Davis and Wolfram find that deregulation and consolidation are associated with a 10 percent increase in operating efficiency, achieved primarily by reducing the frequency and duration of reactor outages. At average wholesale prices, the value of this increased efficiency is approximately $2.5 billion annually and implies an annual decrease of almost 40 million metric tons of carbon dioxide emissions.
Ayako Kondo, Osaka University, and Hitoshi Shigeoka, Columbia University
Effects of Universal Health Insurance on Health Care Utilization and Health Outcomes: Evidence from Japan
Kondo and Shigeoka investigate the effects of a massive expansion in health insurance coverage on health care utilization and health outcomes by examining the introduction of universal health insurance in Japan in 1961. They find first that health care utilization increases more than would be expected from previous estimates of the elasticities of individual-level changes in health insurance status. Second, increases in the supply of health care services tend to be smaller than increases in the demand for these services. The size of the supply response differs across types of services: while the number of medical institutions is unchanged, there is suggestive evidence of increases in the numbers of beds and physicians. This slow supply-side response may constrain the ability of the health care system to meet increased demand resulting from expansions in coverage. Third, there is no strong evidence of reduced mortality rates for any age categories, but there is some reduction in tooth cavities among elementary and junior high school children.
Janet Currie, Princeton University and NBER, and Erdal Tekin, Georgia State University and NBER
Is the Foreclosure Crisis Making Us Sick?
Currie and Tekin investigate the relationship between foreclosure activity at the zip code level, and the health of residents of that zip code. They use data from Arizona, Florida, and New Jersey, three states that have been hard hit by the foreclosure crisis. They combine foreclosure data for 2005 to 2009 from RealtyTrac with data on emergency room visits and hospital discharges. They find that the presence of Real Estate Owned (REO) properties in the neighborhood is associated with increases in medical visits for mental health (anxiety and suicide attempts); preventable conditions (such a hypertension); and with increases in a broad array of physical complaints that are plausibly stress related. These effects are much larger for blacks than for whites, consistent with the perception that African-Americans have been particularly hard hit.