Wednesday, August 13, 2008

Appreciation hurts the trade account

... or so we think. But not necessarily as much as we might expect. It depends whether the export has high or low import content. Here's the paper by Koopman et al. Here's the abstract:

As China's export juggernaut employs many imported inputs, there are many policy questions for which it is crucial to know the extent of domestic and foreign value added in its exports. The best known approach - the concept of "vertical specialization" proposed by Hummels, Ishii and Yi (2001) - is not appropriate for countries that engage actively in tariff/tax-favored processing exports such as China, Mexico, and Vietnam. We develop a general formula for computing domestic and foreign contents when processing exports are pervasive. Because this new formula requires some input-output coefficients not typically available from a conventional input-output table, we propose a mathematical programming procedure to estimate these coefficients by combining information from detailed trade statistics with
input-output tables. By our estimation, the share of foreign content in China's exports is at about 50%, almost twice the estimate given by the HIY formula. There are also interesting variations across sectors and firm ownership. Those sectors that are likely labeled as relatively sophisticated such as electronic devices have particularly high foreign content (about 80%). Foreign-invested firms also tend to have higher foreign content in their exports than do domestic firms.

and here's Koopman's blogpost.

Hawk or dove?

US and EU are both still facing inflation threat. Relatively, US' Fed is more dovish and EU's ECB hawkish. Why? Trade unions matter, says Marty Feldstein (HT. Mankiw).

How about Pak Boediono's BI? He said that BI would bring down inflation to 6-7.5% in 2009. But given the recent development that sounds too ambitious. (Unless Pak Boed becomes more hawkish. That is, to raise the BI rate again for, say, 50% then 25%. Keeping the margin at 25 bps might not be strong enough. A 50 bps should send a firmer message to help shape the expectation).

Again, just privatize Merpati!

Ross McLeod wonders if Merpati should be privatized. He implies so, and I agree. Whatever happened to that plan?