Essays on International Finance and Trade
- Author(s): Zeng, Li
- Advisor(s): Obstfeld, Maurice
- et al.
Chapter one of this dissertation tries to empirically answer the question of what explains China's foreign reserve holdings. The author finds that some VEC models motivated by modern mercantilism perform better in predicting China's foreign reserves than selected ARIMA models and those based on precautionary demand theories, both with statistical significance. This suggests that previous econometric studies, whose emphasis has been overwhelmingly placed on precautionary motives, might have missed some more important factors in explaining China's reserve holdings. Further structural analyses of these models show that the buildup of reserve stocks by China has a negative (depreciating) effect on its real exchange rate and a positive impact on its export growth. These findings seem to corroborate the conjecture that the recent increase in China's reserve holdings is a part of its export-led development strategy, and they also suggest that such a policy is effective for China.
The second chapter studies the impact of trade liberalization on imports, exports, and overall trade balance for a large sample of developing countries, using two recently constructed measures of trade liberalization dates. The authors find strong and consistent evidence that trade liberalization leads to higher imports and exports. However, in contrast to Santos-Paulino and Thirwall (2004), who find a robustly negative impact of trade liberalization on the overall trade balance, the authors find only mixed evidence of such a negative impact. In particular, the authors find little evidence of a statistically significant negative impact using their first measure of liberalization dates, which extends Li (2004). Using a second measure of liberalization dates compiled by Wacziarg and Welch (2003), the authors find some evidence that liberalization worsens the trade balance, but the evidence is not robust across different estimation specifications, and the estimated impact is smaller than that reported by Santos-Paulino and Thirwall (2004).
The last chapter empirically tests the proposition that domestic real oil prices can help to forecast real effective exchange rates. For most countries in the sample, little evidence was found to support such a proposition. There were two exceptions, Japan and Norway, who showed some consistent signs in favor of the oil-price exchange rate model. But the statistics favoring the model are mostly insignificant. The author also finds that the relations between oil prices and real exchange rates are not stable over time. The conjecture that the oil-price exchange rate model can produce better forecasts on exchange rates when oil prices are more volatile is not consistent with the pattern seen in the subsample results.