This paper presents further evidence on the empirical regularity known as the "45-degree rule." Income and price elasticities of trade are estimated for 21 countries in a cointegration framework. More specifically, the autoregressive distributed lag (ARDL) modeling approach and the DOLS procedure are adopted to estimate the long-run structure. The empirical results confirm the existence of a systematic relationship between growth rates and income elasticity estimates: faster growing economies have high income elasticities of demand for their exports but lower import elasticities, which implies that faster growth can be observed without any marked secular trend in real exchange rates.
Financial structure is an important determinant of the efficiency and stability of financial systems and the channels through which monetary policy is transmitted. We document the substantial differences in the financial systems of the euro area, the UK, the USA, Japan, and non-Japan Asia. The traditional classification of bank-based and market-based systems is shown to be too simplistic. We focus on two particular aspects of financial structure: financial institutions and the housing and mortgage markets. It is shown that institutional investors differ in important ways across the regions considered. One recent change is that Central Banks, particularly those in Asia, have become significant institutional investors. Housing and mortgage markets differ even more. We are still a long way from understanding which kind of financial structure is best.
Growing currency mismatches in the emerging market economies (EMEs) since 2010 have been driven by non‐financial companies. Their financing conditions were greatly eased by lower policy rates and a huge expansion in central bank balance sheets in major advanced economies. This has allowed these companies to increase their gearing, notably by greater foreign currency borrowing, thereby greatly increased the risk of currency mismatches. Microeconomic data show that it was not only companies providing tradable goods and services but also those producing non‐tradable goods which have increased their foreign currency borrowing. The across‐the‐board decline in EME companies’ profitability from mid‐2010 to mid‐2015 brought to light significant vulnerabilities and appeared to have constrained business fixed investment, and therefore growth, in the near term. But the strong external asset positions of the official sector in most EMEs will help the authorities cope with these challenges.
The paper surveys the literature that combines growth and trade into models of North-South interaction. We distinguish two strands of growth theory: old (exogenous) and new (endogenous) growth. We also distinguish old trade theory which assumes constant returns to scale and perfect competition, and new trade theory which relaxes both of these assumptions. This gives us four possible combinations of growth and trade theories which provide the basis of the taxonomy employed in our survey. We address the following long-standing issues raised in the literature: first, given that one of the North-South asymmetries is that the North leads in technical progress, how does the South adjust to such changes? Second, can the models explain patterns of trade and income differentials between the regions? Third, do asymmetries mean that standard prescriptions on the mutual benefits of free trade and free movements of capital need to be modified? Finally, can our models explain why the South continues to favour protection of its manufacturing sectors at the same time that barriers within the North are being dismantled? JEL Classification: F43, O41
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