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School of Economics and Finance · Te Kura Ohaoha Pūtea: Working Paper Series

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Browsing School of Economics and Finance · Te Kura Ohaoha Pūtea: Working Paper Series by Author "Chang, Chia-Ying"

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    Banking crises and sudden stops: What could IMF do to assist?
    (Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying
    Along the studies suggesting IMF to promote private capital flows, this paper sheds light on the links of banking crisis and sudden stops and provides suggestions which are flexible and more specific for countries in various situations of sudden stops. In this overlapping generation framework in an open economy with international credit markets, both the default risks of firms’ loan repayment, and the possibilities of bank runs are considered. As a result, there are good and bad equilibriums, depending on whether bank runs would occur in the lifetime. In the four bad equilibrium discussed in the paper, sudden stops may be unnecessary or unavoidable coinside with the expectation of bank runs, which may or may not occur as expected. There are bad equilibriums in which sudden stops are unnecessary. These are the cases when IMF’s assistance could prevent sudden stops, and the repayment to IMF’s short-term lending facilities can be guaranteed. In the bad equilibriums when bank runs are unavoidable and when sudden stops cannot be prevented and may last for a long period of time, it could be very costly to assist countries in such equilibrium without certain policies becoming effective. Assisting several countries under this circumstances all together could jeopardize IMF’s situation. These findings are consistent with those in [Eichengreen, Guptam and Mody (2006)], and the suggestions for countries in various situations are more specific.
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    Banking crises, sudden stops, and the effectiveness of short-term lending
    (Te Herenga Waka—Victoria University of Wellington, 2013) Chang, Chia-Ying
    This paper sheds light on the linkages between banking crises and sudden stops and discusses the effectiveness of short-run lending in their prevention. It develops an overlapping generations framework and incorporates the possibilities of bank runs and moral hazard of financial intermediaries. Consequently, I find that the strategy to overcome liquidity problems could worsen banks’ positions and cause bank runs and sudden stops. A small liquidity shock may still lead to a banking crisis through the depositors’ expectation. A large shock would require short-run lending to prevent an immediate bank run, but the repayment obligation may worsen moral hazard problems.
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    Can a home country benefit from FDI? A theoretical analysis
    (Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying
    The effects of outward FDI on home country’s growth remain an open question. The growth of outward FDI has renewed this attention. By allowing for endogenous decisions of firms on both whether to conduct FDI and whether to flow capital returns back to the home country, we have found several interesting results. First, as long as the probability of conducting FDI is positive, a higher proportion of entrepreneurs may harm economic growth of the home country in short-run and long-run. The ambiguous effects of transaction costs and MRS between domestic and foreign consumption on the home country’s economic growth result from the role of financial intermediaries. If the effect via inflow probability dominates, conducting FDI in a host country with a more liberalized capital account, or with a higher capital return rate may promote the home country’s economic growth rate. This is consistent with the findings in the outward FDI in European Union since 1970s.
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    Capital controls, capital flows, and banking crises
    (Te Herenga Waka—Victoria University of Wellington, 2013) Chang, Chia-Ying
    Capital controls have been adopted by emerging economies to change the volume and the composition of capital flows and to protect the economy from sudden stops. The effectiveness measured by empirical studies has remained inconclusive, due to the limitation of the available data. This paper adopts a theoretical model to examine whether capital controls could achieve these goals effectively. Consequently, this paper finds that capital controls on outflows and inflows may not achieve the goals on changing the volume and the composition of capital flows and on protecting the economy from banking crises and sudden stops. To be more specific, controls on capital outflows and inflows could change the volume of capital flows at the time when the controls are imposed. However, the ability of capital controls on changing composition of capital flows and to protect the country from banking crises and sudden stops is limited, regardless of symmetric or asymmetric controls across countries. It is concluded that capital controls may not be the way to protect the economy from sudden stops. It is overcoming the liquidity problems and offering affordable rates, rather than competitive rates, that are crucial to protect the economy from crises and sudden stops.
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    Job matching, family gap and fertility choice
    (Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying; Laing, Derek; Wang, Ping
    This paper concentrates on the role of job matching frictions in influencing the interactions between fertility choice and wage offers and show that job market frictions are a crucial factor in wage differentials among female workers. The goals of this paper are to examine how the home-stay alternative and asymmetric market frictions influence this wage differential and whether the well documented negative correlation between fertility choice and female earnings still holds in the face of life-cycle choices. To address these questions, we develop a search-theoretic model that incorporates fertility and job decisions and assume that the workers with children face a lower job matching rate and a higher job quitting rate relative to the rates faced by the workers without children. As a result, we find that a wider wage differential is associated with more asymmetric market frictions and that the wage differential has a positive effect from output differential, a positive scale effect from the output of mothers and a negative effect from the utility from staying home. The wage differential is positively correlated with both fertility and home-stay rates and negatively correlated with market thickness and matching technology. Furthermore, by having both fertility and home-stay choices endogenously determined, we can show that a tighter market will enhance the fertility rate and the home-stay rate and a better job matching technology would not only increase the home-stay rate but decrease the fertility rate. In general equilibrium, the effects of both market tightness and the matching technology on the wage differential are indeterminate. These results indicate that the home-stay choice actually gives workers with children not only an alternative but also the power to negotiate higher wages. This shrinks the wage differential. Finally, the result that a higher fertility rate enlarges the wage differential also implies a negative relationship between the fertility rate and the earnings of workers with children. This result is consistent with standard empirical findings.
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    New entries and economic growth
    (Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying; Hansen, Vera
    The main goal of this paper is to construct a theoretical model that provides an explanation for the relationship between growth and new entry that is consistent with empirical evidence. The model is a four sector endogenous growth model in which there is a technologically advanced and a technologically laggard consumption goods which are imperfect substitutes. The production of each good requires its own stock of human capital and physical capital. The accumulation of physical capital and human capital in each industry is modelled by a Cobb-Douglas production function. The main result of the model is that new entries have a positive effect on the fraction of the existing stock of human capital devoted to the accumulation of human capital in both the advanced and laggard sectors. However, this effect is stronger in the advanced sectors than in the laggard sectors. This result is consistent with empirical evidence.
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    The role of market frictions on the price differential: A search-theoretical approach
    (Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying
    To shed light on how market frictions and the waiting time of imitators affect prices and how effective research subsidy and patent protection affect the price differential, this paper adopts a direct search-theoretical approach to capture the searching behaviors of consumers and producers in the innovative and imitative markets. As a result, this model shows that the price differential with endogenous market frictions would react to the change of quality the least. A shorter durability would result in a wider price differential in the model without the extra state for imitators than in the model with the extra state. While a research subsidy shrinks the price differential, and improve consumers’ flow values, the patent protection widens the price differential, hurts imitators’ profits and may not improve the consumers’ flow values. The innovators could take the advantage of the effects of durability on price differential by inventing products which might influence the durability of the products currently hold by the consumers. This finding might provide an explanation on why the latest versions of computer products are invented less likely convertible to older versions of Windows or associated software.
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    When banking systems meet currencies
    (Te Herenga Waka—Victoria University of Wellington, 2012) Chang, Chia-Ying
    In this paper, we examine the link of investment portfolio decisions of households and investment on international capital flows. I extend Bencivenga and Smith (1991)’s overlapping generation model to an open economy and combine with capital market imperfections in Kiyotake and Moore (1997) to address how the portfolio decisions of one countrty might affect that of the other country. In this general equilibrium framework with flexible exchange rate, I find that the investment portfolio deicisions of households are crucial for the directions of capital inflows. In other words, the portfolio decision of individuals in one country is crucial for the deposit and loan rate, which would affect where the capital inflows from the foreign investors.