The US Tech Pulse, sock prices, and exchange rae dynamics: Evidence from Asian developing counries Akihiro Kubo Graduae School of Economics, Osaka Ciy Universiy, 3-3-138 Sugimoo, Sumiyoshi-ku, Osaka 558-8585, Japan E-mail address: kubo@econ.osaka-cu.ac.jp Absrac This paper empirically invesigaes he economic relaionship beween he US and Asian economies during he pos-crisis period in Indonesia, Korea, he Philippines, Singapore, and Thailand, employing a vecor error correcion model approach. Based on he empirical resuls, we conclude ha he inerdependence beween he US and hese Asian economies has inensified especially in informaion echnology markes, and ha heir sock markes are inegraed. On he oher hand, he relaionship beween he domesic sock and foreign exchange markes is found o be differen in each counry. JEL Classificaion: C32; F31; F36 Key Words: Tech Pulse; Sock marke; Exchange rae dynamics; Asian developing counries I would like o hank Masanaga Kumakura and Siripim Vimolchalao for heir helpful and useful commens on a previous version. The paper has also benefied from seminar paricipans commens and suggesions a he Japan Associaion for Asian Sudies annual meeing, Kobe Universiy, he Korea Inernaional Economic Associaion annual meeing, Osaka Universiy of Economics and Law, and Jilin Universiy. 1
1. Inroducion The US high-echnology secor has winessed increasing developmen and has been of vial imporance o he US as well as he inernaional economy. Paricularly, he new economy of informaion echnology (IT), including companies ha make and use inensively compuer hardware, sofware, he oher IT-relaed goods, and elecommunicaions equipmen, has been a cenral force in he US business cycle of booms and buss (IMF, 2001). Therefore, an accurae and imely undersanding of he US IT indusry aciviies is necessary for economiss, policy makers, and business praciioners. Above all, he US Tech-Pulse index, which is consruced by he Federal Reserve Bank (FRB) of New York, is a coinciden index of hese very aciviies, assising in he US economy forecasing effors (Hobijn e al., 2003). In addiion, he US has invesed in he IT indusry in he Eas and Souheas Asian developing counries and has impored mos of heir IT producs since he 1990s (Hsiao e al., 2003). As a resul, he economic inerdependence beween he US and he Asian developing counries has inensified more han ever. The US IT secor aciviies appear o have been affecing he exchange rae behavior while simulaneously influencing he Asian economies hrough rade, invesmen, and sock markes considerably. Conversely, a flucuaion in he exchange rae may affec he balance of rade posiion in he counry in which i occurs, consequenly influencing is domesic sock price. The exchange rae dynamics has also played an imporan role in he economies of he Asian developing counries since mos of heir cenral banks adoped he floaing or he more flexible exchange rae regime afer he currency crisis. Therefore, sudying no only he inerdependence beween he US and Asian developing counries bu also heir exchange rae dynamics has recenly gained imporance among inernaional moneary economiss. For example, Phylakis and Ravazzolo (2005), who used monhly daa over he period 1980 1998, found ha a posiive relaionship beween he sock and foreign exchange markes in he Asian developing counries. However, here are few empirical sudies concerning he pos-crisis period. The aim of his paper is o empirically invesigae he economic relaionship beween he US and Asian developing counries during he pos-crisis period. Thus, we esimae a vecor error correcion model (VECM) in he case of five Asian developing counries, namely, Indonesia, Korea, he Philippines, Singapore, and Thailand. More specifically, we explore wheher he domesic sock price has long-run relaionships wih he US IT indusry aciviies, he US sock price, and he exchange rae dynamics, employing a coinegraion mehodology. We also explore he effecs of he domesic sock price o economic shocks, especially IT-relaed shocks, in he VECM, based on he esimaed impulse response funcions. The empirical resuls sugges ha he economic relaionship beween he US and he Asian developing counries has inensified, paricularly in he IT indusries, and ha all he sock markes are inegraed wih he US marke. However, we also find ha he relaionship beween he domesic sock price and he real exchange rae behavior is negaive in some counries. This paper is organized as follows. Secion 2 describes real economic and financial linkages 2
beween he US and Asian developing economies. Secion 3 explains mehodological issues and daa. Secion 4 presens he empirical resuls derived from he coinegraion mehodology and he impulse response funcion analysis. Secion 5 provides some concluding remarks. 2. Background Over he pas wo decades, economic linkages beween developed and developing counries have inensified, which has generaed faser ransmission of macroeconomic flucuaions across counries (Akın and Kose, 2008). 1 Specifically, he recen rapid growh of semiconducor and IT equipmen producion has srenghened he real economic linkage hrough foreign direc invesmen (FDI) and rade as well as he financial linkage hrough sock markes across counries specializing in IT producion. Such srong economic inerdependence has increasingly enabled he US o derive he macroeconomic benefis and o accelerae he FDI in emerging marke economies in he Eas and Souheas Asia, even in siuaions of he booms and buss in he US and Asian financial markes since he 1990s (IMF, 2001). 2 In recen imes, he US economic growh appears o be consisen wih he behavior of he IT indusry, such as echnological developmens in he power of semiconducor chips (Jorgenson, 2001). The rapid decline in semiconducor prices due o he advances in is science echnology has led o an increase in is demand in he US. In addiion, he invesmen of large US IT firms o domesic and foreign IT companies has also increased because of he overseas expansion of hese IT firms. In paricular, he US FDI o Asian developing economies increased considerably in he 1990s (Hsiao e al., 2003; Bonham e al., 2004). This explains why he linkage hrough FDI beween he US and he Asian developing counries has been much sronger, especially in he IT indusries. 3 On he oher hand, in he Eas and Souheas Asian developing counries, he producion and expors of IT equipmen have been highly specialized and have increasingly played an imporan role in he economic growh of hese counries. Moreover, mos of he IT producs are expored o he US (Hsiao e al., 2003). In fac, he posiive global IT demand shocks from 1999 o 2000 led o an increase in IT producion, and his helped he Asian economies o rapidly recover from he Asian currency crisis of 1997 (IMF, 2001). Table 1 presens he bulk of he expors of he IT producs in he Asian developing counries. The recen expor raios in he counry s oal merchandise expors have considerably increased 1 Some previous sudies suppor he role of rade inegraion in explaining business cycle comovemens (Baxer and Kouparisas, 2005; Imbs, 2006; Kose and Yi, 2006). Jansen and Sockman (2004) emphasize he imporance of FDI in addiion o rade. 2 Kumakura (2006) suggess ha he elecronics indusry has played a relaively imporan role in driving business cycle comovemens in Asia. 3 Jorgenson and Vu (2005) invesigae he impac of invesmen in he IT indusry on he recen world economics, concluding ha he conribuions of is invesmen have remarkably increased only in advanced counries, such as he US, and in Asian developing counries. 3
in all he counries, as compared wih he raio of 1990. However, all he counries, wih he excepion of Korea, show a downrend afer around 2002, afer reaching a peak a around 2001. Though heir down raios are diverse ranging from 10% o 50% he changes in he raios are surely consisen wih he evidence of he boom and sump in he US IT indusry. This implies ha he expors and economic growh of hese counries have come o depend on he global, especially he US, IT demand condiions. 4 A he same ime, he performance of he IT-relaed firms has played a leading role in he curren economic growh and ends o rely heavily on equiy finance; hus, hese firms become he main arge of sock or porfolio invesmen across he developed and developing counries. Accordingly, changes in he US sock prices, driven mainly by he global IT business cycle, appear o have significan effecs on he sock price behavior of he Asian developing counries. This implies ha he financial linkage hrough sock markes has also inensified due o he more srenghened economic relaionship beween he US and he Asian developing counries. As is shown in Fig. 1, i appears ha he sock marke movemens in hese counries have increasingly inegraed since he lae 1990s. 3. Empirical mehodology and daa 2.1. VECM Now, consider he following simple VECM: p 1 i 1 x = µ + Γ x e, (1) i + Πx p + where x is an n-dimensional vecor of he variables of I(1), represens he firs difference operaor, µ is an n-dimensional vecor of consans, Γ marices denoe coefficiens, e is an n-dimensional vecor of error erms wih zero means and covariance marix Σ e, and Πx -p is he error correcion erm. 5 The rank of Π is equal o he number of coinegraing vecors. If he rank of Π is zero, he variables in x will no be coinegraed, since here is no linear combinaion of all variables ha are saionary. In conras, if Π is full of rank, Πx -p is defined o be an error correcion erm. In order o impose resricions on coinegraing vecor(s), we decompose Π ino α and β marices: Π = α β. (2) Moreover, his can be rewrien as 4 Mazier e al. (2008) argue ha China is a significan imporer from oher Asian counries; moreover, i reexpors o he US. This suggess ha he expor of oher Asian counries o China also depends on he US business cycle movemen afer all. 5 We assume ha Γ is a lower riangular marix for shor-run dynamics. 4
x p 1 i 1 = µ + Γ x e, (3) i + αβ x p + where β is he marix of coinegraing vecor(s) characerizing he resriced relaionship based on he economic heory, and α is he marix of he loading vecor(s) characerizing he speed of he equilibrium adjusmen on he variables. 2.2. Daa In his paper, we explore wheher he domesic sock price has long-run relaionships wih he US IT indusry aciviies, he US sock price, and he exchange rae dynamics, also exploring he effecs of he domesic sock price o economic shocks, for seleced five Asian developing counries: Indonesia, Korea, he Philippines, Singapore, and Thailand. Thus, o invesigae he coinegraing vecors and o obain he impulse response funcions, we esimae a four-variable VECM ha includes he US Tech-Pulse index as a proxy for he US high-echnology secor aciviies. 6 Fig. 2 shows he aciviy of he US Tech Pulse, which is hough of as represening he influence of he recen world IT business cycle. The variables ha included in he VECM are he US Tech-Pulse index (TP), he US Nasdaq (or New York) sock price index (P US ), he sock price index of he Asian developing counry (P ADC ), and he domesic bilaeral spo real exchange raes (E ADC ), in his order. Here, E ADC is defined as E ADC = S + CPI CPI, (4) ADC US ADC where S ADC is he nominal exchange rae expressed as he domesic local currency per US dollar, CPI US is he consumer price index for he US, and CPI ADC is he consumer price index for he Asian developing counry. Accordingly, an increase in E ADC denoes he depreciaion of he real exchange rae of he Asian developing counry. The daa se is monhly for he period January 1999 Sepember 2007 for he Philippines and January 1999 December 2007 for Indonesia, Korea, Singapore, and Thailand. 7 All he daa are considered in naural logarihms. 4. Empirical resuls 6 The US Tech-Pulse index is consruced by he FRB of New York, based on diverse informaion in hree dimensions: supply, demand, and employmen. More specifically, five daa series are chosen o capure he hree dimensions flucuaions. Firs, supply is comparable o indusrial producion in high-echnology secors and shipmens of manufacures of compuers and communicaion equipmen. Second, demand is comparable o privae fixed invesmen in IT and personal consumpion expendiures on compuers and sofware. And hird, employmen is comparable o he number of employees in high-echnology secors (Hobijn e al., 2003). 7 All daa wih he excepion of he US Tech-Pulse index are obained from he IMF, Inernaional Financial Saisics. The US Tech-Pulse index is obained from he FRB of New York s web sie. 5
3.1. Coinegraion analysis We employ Johansen s (1995) procedure, analyzing he rank of Π and is decomposiion in Eq. (1) o find he coinegraing relaionships beween variables. Firs, he opimal lag lengh of he unresriced vecor auoregression model is se a k in each case (Table 2), by referring o he Akaike informaion crierion. Hence, he lag lengh for he firs differenced series in he VECM is k 1. Nex, we apply Johansen s (1988) coinegraion es based on he race saisics, in order o invesigae he number of coinegraing vecors. 8 In Table 2, here appears o be a leas one coinegraing vecor in approximaely every case, which implies ha none of he variables are individually saionary. 9 However, he only excepion is Singapore. We replace he US Nasdaq sock price index wih he US New York sock price index o rejec he null hypohesis ha he rank of Π is zero. The coinegraing relaionship can be normalized wih respec o P ADC, as follows: ADC US P b0 + b1tp + b2p + b3 = E. (5) Table 3 repors he esimaion resuls for he long-run equilibrium relaionship (Eq. 5). Firs, we find ha he aciviy of he US Tech Pulse is posiively relaed o he domesic sock price of each Asian developing counry. This implies ha he boom in he US IT indusry leads o an increase in he expors of he Asian developing counries, which posiively affecs he real economies and leads o an increase in he domesic sock prices. Second, he US sock price is also posiively relaed o he domesic sock price of each of he Asian developing counries. This indicaes ha hese markes are inegraed. 10 Finally, we find ha he real exchange rae behavior is posiively associaed wih he domesic sock price in he wo cases of he Philippines and Singapore. This resul suggess ha an appreciaion of he exchange raes of he Asian developing counries caused by an increase in he US impors or in he expors of hese wo Asian counries, leads o an increase in he domesic sock prices, according o he sandard economic heories (e.g., Dornbusch and Fisher, 1980). Thus, i appears ha he rade linkage beween he US and hese wo Asian developing counries is more subsanial. In conras, in Indonesia, Korea, and Thailand, he real exchange raes are negaively relaed o he domesic sock prices. This resul may be due o he appreciaion effecs 11 of he dollar over he currencies of hese hree counries. The US sock price necessarily rises wih a rise in he domesic sock prices because all he sock markes are ADC 8 Deerminisic consan is allowed in he coinegraing space. 9 Moreover, given he resuls of some uni roo ess (no repored), all variables appear o be I(1). A copy of hese resuls is available upon reques. 10 This resul is consisen wih hose of previous sudies. For example, Ng (2000) found significan spillovers from he US economy o he Asian developing counries. Phylakis and Ravazzolo (2005) also found ha he sock price of hese Asian counries were inegraed wih he US sock price. However, hese sudies deal mainly wih he pre-crisis period. 11 A rise in he sock price leads o an appreciaion of he exchange rae since he excess demand for money leads o a rise in he ineres raes, according o he porfolio-balance models (e.g., Frankel, 1983). 6
inegraed. Moreover, following Phylakis and Ravazzolo (2005), we confirm ha an imporan variable, such as he influence of he recen world marke is included in our sysem. In he conex of previous sudies ha invesigaed he relaionship beween domesic sock price and exchange rae dynamics, Phylakis and Ravazzolo (2005) indicae ha he US sock price variable was omied from he sysem. In his paper, we assume ha he US Tech Pulse as a proxy for he US IT indusry aciviies is also an imporan variable in relaion o he recen period as well as he US sock price. Thus, o examine he imporance of including he US Tech Pulse in he sysem, we invesigae wheher here are coinegraing relaionships beween he variables from which he US Tech Pulse is excluded. The resuls are shown in able 4. We canno rejec he null hypohesis ha here are zero coinegraing vecors in each counry. Thus, his appears o imply ha his sysem could be incomplee as a resul of he omission of an imporan variable, and ha he US Tech Pulse should be included in our sysem. 3.2. Impulse responses analysis Fig. 3 illusraes he impulse responses of he domesic sock price of each Asian developing counry o he posiive shocks of he US Tech Pulse, he US sock price, and he real exchange rae. The horizonal axis measures he number of monhs following he shock. We find ha an increase in he US Tech Pulse leads o an increase in he domesic sock prices of approximaely all he Asian developing counries. This implies ha he US IT and high-echnology secor aciviies posiively influence he expors of he Asian developing counries o he US, which consequenly affecs heir sock prices. Neverheless, he US Tech Pulse does no affec he Indonesian sock price o a grea exen; his is consisen wih he fac ha he expor of is IT producs is relaively small. We also find ha a rise in he US sock price leads o a rise in all he domesic sock prices. This resul reconfirms he previous resul ha he sock markes of he US and Asian developing counries are inegraed. Finally, we observed wo conradicory responses in he domesic sock price o a real exchange rae shock. In he cases of he Philippines and Singapore, a rise in he real exchange raes lead o a decrease in he domesic sock prices. This could imply ha he US conracionary moneary policy causes he dollar o appreciae and leads o a decrease in he US economy and sock price. Due o he inegraion of he sock markes of he Philippines and Singapore wih he US, he sock prices of hese counries also decrease. In conras, in he cases of Korea, Thailand, and Indonesia, a rise in he real exchange raes lead o an increase in he domesic sock prices. This may imply ha he domesic expansionary moneary policy causes he domesic currency o depreciae and leads o an increase in he domesic economy and sock price; moreover, he domesic currency depreciaion simulaes he demand for expors, a leas in he shor run, due o he J-curve effec, which also leads o a rise in he domesic sock marke. 7
4. Conclusion In his paper, we invesigae he relaionship beween he US and Asian economies during he pos-crisis period in Indonesia, Korea, he Philippines, Singapore, and Thailand, employing he VECM approach. The resuls indicaed ha he aciviy of he US Tech Pulse and he US sock price are posiively relaed o he domesic sock prices of all hese counries in Asia. I is also found ha he shock caused by he US Tech Pulse has a posiive impac on all he domesic sock prices, wih he excepion of Indonesia, and ha he US sock price posiively influences every domesic sock price. Based on hese empirical resuls, we conclude ha he economic relaionship beween he US and Asian developing counries has inensified, paricularly in he IT markes, and ha all he sock markes are inegraed wih he US marke. On he oher hand, we find ha he relaionship beween he domesic sock price and he real exchange rae behavior is differen in each counry. References Akın, Ç., and Kose, M.A., 2008. Changing naure of Norh Souh linkages: Sylized facs and explanaions. Journal of Asian Economics 19, 1-28. Baxer, M., and Kouparisas, M.A., 2005. Deerminans of business cycle comovemen: A robus analysis. Journal of Moneary Economics 52, 113 157. Bonham, C., Gangnes, B., and Assche, A.V., 2004. Fragmenaion and Eas Asia s Informaion Technology Trade. Universiy of Hawaii Economics Working Paper No. 04-9. Dornbusch, R., and Fisher, S., 1980. Exchange raes and he curren accoun. American Economic Review 70, 960-971. Frankel, J.A., 1983. Moneary and porfolio balance models of exchange rae deerminaion. In: Bhandari, J.S., and Punam, B.H., (Eds.), Economic Inerdependence and Flexible Exchange Raes. MIT press, Cambridge, MA. Hobijn, B., Siroh, K.J., and Anoniades A., 2003. Taking he pulse of he ech secor: A coinciden index of high-ech aciviy. Curren Issues in Economics and Finance 9. Federal Reserve Bank of New York. Hsiao, F.S.T., Hsiao, M.W., and Yamashia, A., 2003. The impac of he US economy on he Asia-Pacific region: does i maer? Journal of Asian Economics 14, 219-241. Imbs, J., 2006. The real effecs of financial inegraion. Journal of Inernaional Economics 68. 296-324. Inernaional Moneary Fund, 2001. The informaion echnology revoluion. World Economic Oulook. Washingon, DC: Inernaional Moneary Fund. Jansen, W.J., and Sockman, A.C.J., 2004. Foreign direc invesmen and inernaional business cycle comovemen. European Cenral Bank Working Paper 401. Johansen, S., 1988. Saisical analysis of coinegraion vecors. Journal of Economic Dynamics and Conrol 12, 231-254. 8
Johansen, S., 1995. Likelihood-based inference in coinegraed vecor auoregressive models. Oxford Universiy Press. Jorgenson, D.W., 2001. Informaion Technology and he U.S. Economy. American Economic Review 91, 1 32. Jorgenson, D.W., and Vu, K., 2005. Informaion Technology and he World Economy. Scandinavian Journal of Economics 107, 631 650. Kose, M.A., and Yi, K-M., 2006. Can he sandard inernaional business cycle model explain he relaion beween rade and co-movemen? Journal of Inernaional Economics 68, 267 295. Kumakura, M., 2006. Trade and business cycle co-movemens in Asia Pacific. Journal of Asian Economics 17, 622 645. Mazier, J., Oh, Y., and Saglio, S., 2008. Exchange raes, global imbalances, and inerdependence in Eas Asia. Journal of Asian Economics 19, 53-73. Ng, A., 2000. Volailiy spillover effecs from Japan and he US o he Pacific-Basin. Journal of Inernaional Money and Finance 19, 207-233. Phylakis, K., and Ravazzolo, F., 2005. Sock prices and exchange rae dynamics. Journal of Inernaional Money and Finance 24, 1031-1053. 9
Table 1 The share of office machines and elecom equipmen in he oal merchandise expors (in percen) 1990 1999 2000 2001 2002 2003 2004 2005 2006 Indonesia 0.5 6.1 11.7 10.5 10.8 9.1 9.1 7.9 6.0 Korea 22.1 29.7 29.9 29.4 32.2 34.9 32.5 29.1 25.7 Philippines 22.7 63.0 60.6 64.6 62.7 62.7 60.3 57.9 55.4 Singapore 36.5 52.8 53.7 50.7 50.2 48.0 48.0 44.3 43.4 Thailand 15.3 26.1 27.7 24.9 24.6 24.2 22.0 21.7 22.5 Source: WTO, Inernaional rade saisics Table 2 Resuls of he Johansen's coinegraion es lag (k ) Trace saisics for coinegraing rank (r ) r = 0 r 1 r 2 r 3 A. he US ech pulse, he US Nasdaq sock price, domesic sock price, and he real exchange rae Indonesia k = 5 55.697** 26.493 13.706 1.569 Korea k = 5 49.584** 22.466 8.168 0.501 Philippines k = 4 51.548** 19.782 8.333 0.398 Singapore k = 4 44.410 23.892 9.465 0.011 Thailand k = 5 54.960** 23.881 7.931 0.010 B. he US ech pulse, he US New York sock price, domesic sock price, and he real exchange rae Singapore k = 4 51.188** 30.456** 10.370 0.096 ** denoes he rejecion of he null hypohesis a he 5% level of significance. 10
Table 3 ADC US ADC The long-run coinegraing vecor: P = b 0 + b 1 TP + b 2 P + b 3 E b 0 b 1 b 2 b 3 Indonesia -28.721 2.007 0.150 0.854 Korea -119.306 4.351 0.241 9.692 Philippines 0.923 1.724 0.648-5.436 Singapore -3.475 0.567 0.525-2.658 Thailand -40.198 1.767 0.731 5.331 Table 4 Resuls of he Johansen's coinegraion es lag (k ) Trace saisics for coinegraing rank (r ) r = 0 r 1 r 2 A. he US Nasdaq sock price, domesic sock price, and he real exchange rae Indonesia k = 5 29.179 11.679 0.074 Korea k = 2 24.118 7.349 1.037 Philippines k = 2 26.512 11.999 0.338 Thailand k = 2 25.923 13.384 3.862** B. he US New York sock price, domesic sock price and he real exchange rae Singapore k = 2 23.910 10.633 0.105 ** denoes he rejecion of he null hypohesis a he 5% level of significance. 11
US Nasdaq Indonesia Korea Philippines Singapore Thailand Fig. 1. The sock marke movemens in he US and Asian developing counries. Source: IMF, Inernaional Financial Saisics. Annualized growh rae Tech Pulse Fig. 2. Growh in he real Tech-Pulse Index. Source: FRB of New York. 12
Indonesia Korea.06.06.04.04.02.02.00.00 -.02 5 10 15 20 25 30 35 -.02 5 10 15 20 25 30 35 TP shock USPN shock INE shock TP shock USPN shock KOE shock Philippines Singapore.12.06.08.04.04.00 -.04.02.00 -.08 -.02 -.12 5 10 15 20 25 30 35 -.04 5 10 15 20 25 30 35 TP shock USPN shock PHE shock TP shock USP shock SIE shock Thailand.06.04.02.00 -.02 5 10 15 20 25 30 35 TP shock USPN shock THE shock Fig. 3. Impulse response funcions of he domesic sock price o shocks for up o 36 monhs. 13