Degree of openness and the choice of exchange rate regimes [Elektronische Ressource] : a re-evaluation with value-added based openness measures / von Lars Wang

Degree of openness and the choice of exchange rate regimes [Elektronische Ressource] : a re-evaluation with value-added based openness measures / von Lars Wang

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Aus dem Institut für Volkswirtschaftslehre Universität Hohenheim Fachgebiet: Außenwirtschaft Prof. Dr. Ansgar Belke Degree of Openness and the Choice of Exchange Rate Regimes – A Re-Evaluation with Value-Added Based Openness Measures Dissertation zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaften der Fakultät Wirtschafts- und Sozialwissenschaften von Lars Wang aus Waiblingen 2005 Die vorliegende Arbeit wurde am 24.02.2005 von der Fakultät Wirtschafts- und Sozialwissenschaften der Universität Hohenheim als „Dissertation zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaften“ angenommen. Tag der mündlichen Prüfung: 14.03.2005 Dekan: Prof. Dr. Michael Ahlheim Berichterstatter, 1. Prüfer: Prof. Dr. Ansgar Belke Mitberichterstatter, 2. Prüfer: Prof. Dr. Harald Hagemann 3. Prüfer: Prof. Dr. Dr. h.c. Franz Heidhues Table of contents List of figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1List of tables . . . . . . . 2List of symbols . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Glossary . . . . . . . . . . . 121. Introduction . . . . 152. Significance of the degree of openness for the choice of exchange rate regimes . . . . 262.1 Synopsis of the term ‘degree of openness’ . . . . . .

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Aus dem Institut für Volkswirtschaftslehre
Universität Hohenheim
Fachgebiet: Außenwirtschaft Prof. Dr. Ansgar Belke





Degree of Openness and the Choice of Exchange Rate Regimes –
A Re-Evaluation with Value-Added Based Openness Measures








Dissertation
zur Erlangung des Grades eines Doktors
der Wirtschaftswissenschaften


der Fakultät Wirtschafts- und Sozialwissenschaften




von
Lars Wang
aus Waiblingen
2005 Die vorliegende Arbeit wurde am 24.02.2005 von der
Fakultät Wirtschafts- und Sozialwissenschaften der Universität Hohenheim als
„Dissertation zur Erlangung des Grades eines Doktors der Wirtschaftswissenschaften“
angenommen.


Tag der mündlichen Prüfung: 14.03.2005
Dekan: Prof. Dr. Michael Ahlheim
Berichterstatter, 1. Prüfer: Prof. Dr. Ansgar Belke
Mitberichterstatter, 2. Prüfer: Prof. Dr. Harald Hagemann
3. Prüfer: Prof. Dr. Dr. h.c. Franz Heidhues Table of contents
List of figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
List of tables . . . . . . . 2
List of symbols . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Glossary . . . . . . . . . . . 12
1. Introduction . . . . 15
2. Significance of the degree of openness for the choice of exchange rate regimes . . . . 26
2.1 Synopsis of the term ‘degree of openness’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.1.1 Definition of openness to trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.1.2 Determinants of an economy’s openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.1.3 Alternative measures of openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
2.1.4 Applications of trade openness in economic research . . . . . . . . . . . . . . . . 39
2.2 Traditional indicators of openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.2.1 Characterization of trade shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.2.2 Measures of openness towards international trade . . . . . . . . . . . . . . . . . . . 46
2.2.3 Bilateral openness indices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.3 The choice of exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2.3.1 Alternative exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
2.3.2 Criteria for the choice of an exchange rate arrangement . . . . . . . . . . . . . . 52
2.3.3 The standard cost-benefit analysis of monetary integration . . . . . . . . . . . 52
3. Innovative measures of openness to international trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.1 Motivation: Enhancement of the traditional openness concept . . . . . . . . . . . . . . . 55
3.2 Economic analysis of the process of production . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.2.1 Characterization of input-output economics . . . . . . . . . . . . . . . . . . . . . . . . . 65
3.2.2 The input-output table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
3.2.3 Input-output models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
3.3 The input-output framework for constructing the new openness indices . . . . . . 70
3.3.1 Representation of economic interconnections . . . . . . . . . . . . . . . . . . . . . . . 70
3.3.2 Calculation of income generated by trade . . . . . . . . . . . . . . . . . . . . . . . . . . . 76


3.4 Value-added based measures of openness towards international trade . . . . . . . . 82
3.4.1 Outline of adjusted shares of trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
3.4.2 The significance of domestic value added due to trade . . . . . . . . . . . . . . . 83
3.4.3 The significance of value added abroad due to trade . . . . . . . . . . . . . . . . . 84
3.4.4 The significance of income of production factors due to trade . . . . . . . . 86
3.4.5 The significance of the value of imported intermediates due to trade . . 87
4. The relationship between the degree of openness and the choice of exchange rate
regimes: An empirical re-assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
4.1 Motivation: Is actual openness a better forecaster for the commitment to
exchange rate regimes than traditional openness? . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
4.2 Survey on empirical studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
4.3 The data set . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.3.1 Degrees of openness based on traditional and actual openness . . . . . . . . 90
4.3.2 Classifications of exchange rate arrangements . . . . . . . . . . . . . . . . . . . . . . . 97
4.4 Characterization of actual openness towards international trade . . . . . . . . . . . . . . 97
4.4.1 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
4.4.2 Results and interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
4.5 Influence of the actual openness concept on the explanation of the choice of
exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
4.5.1 Methodology 107
4.5.2 Test results and interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5. New indices of bilateral trade openness 110
5.1 Value-added based adjustment of traditional shares of trade . . . . . . . . . . . . . . . . . 110
5.2 An extended input-output framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
5.2.1 The multi-regional input-output table with three regions . . . . . . . . . . . . . 112
5.2.2 Input-output analysis of bilateral trade relationships . . . . . . . . . . . . . . . . . 114
5.3 Actual openness of bilateral trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
5.3.1 Value-added based measures of openness towards an integration area 120
5.3.2 easures of openness towards the rest of the world 122
5.3.3 Derivation of the actual openness of international trade . . . . . . . . . . . . . . 123
5.4 Composition of traditional openness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
5.4.1 Traditional openness indices of bilateral trade . . . . . . . . . . . . . . . . . . . . . . . 124
5.4.2 Traditional concepts of openness to international trade . . . . . . . . . . . . . . . 127

6. Central and Eastern European countries’ (CEECs) adoption of the euro: A re-
evaluation with value-added based indices of openness . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
6.1 Motivation: Influence of actual openness on results of the cost-benefit analysis
of monetary integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
6.2 Comparison of the EU members’ degrees of openness based on traditional and
actual openness towards bilateral trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
6.2.1 The data set . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
6.2.2 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
6.2.3 Outcomes and interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
6.3 Computable general equilibrium analysis with the Global Trade Analysis
Project (GTAP) model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
6.4 Scenario of the CEECs’ trade integration in the European Union for 2008 . . . 147
6.4.1 The simulation design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
6.4.2 Results of the simulation and interpretation . . . . . . . . . . . . . . . . . . . . . . . . . 151
6.5 Should the CEECs adopt the euro in the year 2008? 153
6.5.1 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
6.5.2 Results of the analysis of monetary integration and interpretation . . . . 156
7. Conclusions and outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
References . . . . . . . . 209
List of figures
Figure 1: Stylized cost-benefit analysis of a monetary integration . . . . . . . . . . . . . . . . . . . . . 54
Figure 2: Scheme of an input-output table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Figure 3: Multi-regional input-output table with two regions . . . . . . . . . . . . . . . . . . . . . . . . . 73
Figure 4: Actual and traditional openness on the export side for 53 countries, 2001 . . . . 101
Figure 5: Actual and traditional openness on the import side for 53 countries, 2001 . . . . 102
Figure 6: Structure of traditional openness on the export side of 53 countries, 2001 . . . . 103
Figure 7: Multi-regional input-output table with three regions . . . . . . . . . . . . . . . . . . . . . . . . 113
Figure 8: Actual and traditional openness of the EU-25, 1997 136
Figure 9: Structure of traditional openness on the export side of the EU-25, 1997 . . . . . . 138
Figure 10: Relative intra-regional trade orientation of the EU-25, 1997 . . . . . . . . . . . . . . . 140
Figure 11: Value flows in the multi-regional multi-sector GTAP model 145
Figure 12: Estimated changes in the regional trade integration of the CEEC-8, 2008 . . . 152
Figure 13: Stylized impact of actual openness on the degree of openness . . . . . . . . . . . . . . 154
Figure 14: Stylized impact of actual openness on the assessment of monetary integration 154

-1- List of tables
Table 1: Overview of determinants of exchange rate regimes . . . . . . . . . . . . . . . . . . . . . . . . . 52
Table 2: Openness based on the ER measure of 56 countries, 1989-2002 . . . . . . . . . . . . . . 93
Table 3: Openness based on the IR m 94
Table 4: Openness based on the EDR m. . . . . . . . . . . . 95
Table 5: Openness based on the IFR m. . . . . . . . . . . . . 96
Table 6: Actual and traditional openness to international trade for 53 countries, 2001 . . 99
Table 7: Frequency distribution analysis of openness of 56 countries, 1989-2002 . . . . . . 104
Table 8: Rank order correlation analysis of openness of 56 countries, 1989-2002 . . . . . . 105
Table 9: Regression analysis of openness of 56 countries, 1989-2002 . . . . . . . . . . . . . . . . . 106
Table 10: Estimation results of openness on the export side . . . . . . . . . . . . . . . . . . . . . . . . . . 107
Table 11: Regression analysis of exchange rate regimes of 54 countries, 1989-2000 . . . 108
Table 12: Estimation results of the EDR measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
Table 13: Actual and traditional openness to bilateral trade of the EU-25, 1997 . . . . . . . . 131
Table 14: Rank order of actual and traditional openness of the EU-25, 1997 . . . . . . . . . . . 134
Table 15: Frequency distribution analysis of openness of the EU-25, 1997 . . . . . . . . . . . . 141
Table 16: Rank order correlation analysis of openness of the EU-25, 1997 141
Table 17: Regression analysis of openness of the EU-25, 1997 . . . . . . . . . . . . . . . . . . . . . . . 142
Table 18: Estimation results of the IEDR measure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
Table 19: Aggregation of regions, commodities and production factors for the
simulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
Table 20: Estimation of economic growth of the regions for the simulation, 1998-2008 150
Table 21: Simulated actual and traditional openness of the CEEC-8, 2008 . . . . . . . . . . . . 151
Table 22: Simulated regional trade integration of CEEC-8 compared to Euro-12 . . . . . . 156
Table 23: Relative intra-regional trade orientation of CEEC-8 compared to Euro-12 . . . 157
Table A-1: List of regions within the GTAP 5.4 Data Base . . . . . . . . . . . . . . . . . . . . . . . . . . . 161
Table A-2: List of commodities within the GTAP 5.4 Data Base . . . . . . . . . . . . . . . . . . . . . . 163
Table A-3: Aggregation of commodities for the calculation of the degrees of openness 165
Table A-4: Openness based on the ER measure of 56 countries, 1989-2002 . . . . . . . . . . . 166i
Table A-5: Openness based on the IR m 172i
Table A-6: Openness based on the EFR m. . . . . . . . . . 178
Table A-7: Openness based on the IDR m 179
Table A-8: Openness based on the EDR m. . . . . . . . . 180g
Table A-9: Openness based on the IFR measure of 56 countries, 1989-2002 . . . . . . . . . . 187g
Table A-10: Openness based on the EFR m. . . . . . . . 194i
-2- Table A-11: Openness based on the IDR measure of 56 countries, 1989-2002 . . . . . . . . . 200i
Table A-12: Actual and traditional openness of the EU-25, 1997 . . . . . . . . . . . . . . . . . . . . . 206
Table A-13: Implementation of the model experiment with RunGTAP . . . . . . . . . . . . . . . . 207
Table A-14: Simulated actual and traditional openness of the CEEC-8, 2008 . . . . . . . . . . 208
-3- List of symbols
a non-negative inter-industry coefficient, quantity of the ith commodity which is ijk
on average required in the jth industry for the production of one unit of the jth
commodity in region k
A direct requirements table of the production processes in region k, non-negative k
square matrix of inter-industry coefficients in region k of order four
B identity matrix of order four
B benefits curve of monetary integration
-1(B-A ) total requirements table of the production processes in region k, non-negative k
square matrix of interdependence coefficients in region k of order four
b element of identity matrix with row index r and column index s rs
ĉ , ĉ estimator in estimation equation 1 2
C value of goods and services purchased by private households to fulfill current
wants is called consumption
C costs curve of monetary integration
c non-negative technical coefficient of the imported intermediate inputs in region ijlk
k, quantity of the ith commodity imported from region l which is essential in
the jth industry for the production of one unit of the jth commodity in region k.
C direct requirements table of imported intermediate products in region k, non-lk
negative square matrix of technical coefficients of the imported intermediate
inputs in region k of order four
D value of goods and services demanded by domestic and foreign residents
d break-even degree of openness 0
d degree of openness based on the traditional openness concept 1
d degree of openness based on the actual openness concept 1'
d non-negative technical coefficient of the domestic production factors in region gjk
k, share of total expenditure of industry j which is spent to compensate produc-
tion factor g in region k
D direct requirements table of domk, non-k
negative matrix of technical coefficients of the domestic production factors in
region k
e component of final demand in
1: home country
-4- 2: aggregated foreign country
or
1: home country
2: aggregated integration area
3: aggregated rest of the world
EDR value-added in home country created by exports of home country to aggregated
foreign country as share of gross domestic product of home country within a
year in percent
EDR income of production factor g in home country created by exports of home g
country to aggregated foreign country as share of gross domestic product of
home country within a year in percent
EEDR value-added in home country created by exports of home country to aggregated
rest of the world as share of gross domestic product of home country within a
year in percent
EEDR income of production factor g in home country created by exports of home g
country to aggregated rest of the world as share of gross domestic product of
home country within a year in percent
EEER value-added in aggregated rest of the world created by exports of home country
to aggregated rest of the world as share of gross domestic product of home
country within a year in percent
EEER value of commodity i in aggregated rest of the world created by exports of i
home country to aggregated rest of the world as share of gross domestic prod-
uct of home country within a year in percent
EEIR value-added in aggregated integration area created by exports of home country
to aggregated rest of the world as share of gross domestic product of home
country within a year in percent
EEIR value of commodity i in aggregated integration area created by exports of home i
country to aggregated rest of the world as share of gross domestic product of
home country within a year in percent
EER value of goods and services of home country for aggregated rest of the world as
share of gross domestic product of home country within a year in percent
EER value of commodity i of home country for aggregated rest of the world as share i
of gross domestic product of hom
-5-