"To have a good work, Economic Research should contain a great deal of econometric concepts". This statement is clearly understandable. One can regard Economics as the subject of logic. Pure comprehension about Cause and Effect is something that those who would like to study Economics have to be aware of as necessary factor of being academic success. Econometric subject was introduced to fulfill such need. It helps us make some rational experiment or test for some explainable relations among selected variables in learning Economics.
It is not easy to put this kind of instrument into practice for the purpose of performing some single study which is full of imaginative opinions and creative rationales behind academic description. The wider scope of empirical matters that we analyze, the more difficult it is in applying econometric into the analytical processes. I think we could expect to see larger contribution of the paper and therefore get a well-done job unless we put much emphasis on econometric-derived equation.
Personally, what economic work require student to do is not motivating me. I felt that keeping strict on econometric tool would depart you from creating fascinating language for your own work. From this, as economics student, I might encounter the difficulty in preparing a good-looking paper required for the fulfillment of my program if I do not rely on conventional method of study. To reach compromise with what most professor require, it is necessary for me to put an econometric process into the paper as a dominantly-controlling methodology, together with making fact-based judgment as extensively descriptive interpretations. This is what quite challenged me.
Fortunately, I got valuable advice from Prof. Paitoon, international finance lecturer, that examining the US's interest rate behaviors and focusing on its international effects might be fit my preferred methodology of study. By doing so, I will be demonstrating some prominent idea of Mr. Alan Greenspan, long-time dominating policy maker of US Federal Reserve, utilizing empirical analysis for the paper without ignorance of using econometric tool. Some one may want to point me that the US is so big that none of economic determinant chosen can influences it; therefore, I would be distorting econometric use and running in a confusing direction. You may not expect to see a great contribution from my individual research accordingly. I wish that l will not make no contribution. At least, I can anticipate to gain more profound understanding in the US monetary system than I do today.
It seems a bit disappointing for me to follow conventional way of doing research of which methodology is rigidly strict on a use of econometric instrument. This was always preferable to those graders. However, anything that has been left open for further study is meaningful. Recommendation part of my paper may be able to challenge some one, at least its owner like me for sure. What we were already understood is the significant impact of capital inflows on the U.S. long rates, while what we find even more important is how sustainable such inflows are. In econometric sense, measurements of exchange rate risk in the U.S. (USD risk) would play a crucial role in explaining sustainability of indirect investment on USD-denominated assets. On the other hand, there are a lot of factors determining it and they are not measurable.
One of my respected professor, Ajan Bangorn, said that United States is so big country that no variable is able to simply influence her domestic prices and interest rates significantly. After checking out empirical works, I, in turn, agreed for that telling. USD currency risk alone cannot make sustainability of a purchase of the U.S. assets difficult. A number of aspects can erode long-living role of the dollar in being world key currency. Emerging Asian economies’ willingness to finance U.S trade deficit still remain strong, but it does not mean those lenders would be happy to do that forever. They might find that export-led growth strategy is no longer seen to be sustainable. Keeping their currency competitive, especially Yuan devaluation, is proven not to promote long term growth. From this, reserve stockpiling, which has been major source of financing U.S. deficit, is not necessary anymore and they would turn attention to adherence of demand-led growth instead. Since banking sectors and financial markets in Asia has been increasingly enhanced, Asian economies can come up with alternative investment strategy that would discourage USD share of holding in their portfolio. In addition, they can absorb domestic savings more efficiently due to financial market development. This will result in a reduction of trade surplus and the absorption will instead go to demand for investment and consumption in a country. It is foreseeable for China particularly to be interested in this process. Those above- stated phenomenon is seen as structural change that contributes to long-run significant impact on the sustainability of U.S. current account deficit.
Currently, the saying “capital movement reversal” is what many of us perceive as weird flow of capital from scarce region toward abundant country where offers a lower return. This violates what appear on international trade textbooks. However, this trend is anticipated to reverse again. Capital inflows itself help increase government budget position in the U.S... Her government spending has been larger in the face of crisis. Private sectors who seek for higher return would relieve excess demand by moving capital into abroad, going to emerging markets. They now start to export capitals. This is seen to be positive aspect of current account improvement. In East Asian side, by providing more robust infrastructures and easier access to domestic financial market, these emerging economies tend to be capital receivers. Even if capital flights from the west face some restriction imposed by those Asian policy makers who would like maintain ability to use both monetary policy and foreign exchange market intervention independently, direct form of inflow like FDI is now prospering. This prospect can happen because the successful talks in multilateral stage like WTO, which foster the higher degree of access of those return seekers to China’s resource exploitation in return for the reduction of their farm subsidy. The existing excessive labor supplies also accelerate this mechanism as well as an increasing awareness of China and Japan to rely on demand-led boom instead of export-oriented growth as mention earlier. China, which is intensely forced to revalue its currency, would have no problem in reducing its dependence on export. This alternative aspect could be possible if those Asian markets realize the decline of need to build up continuous amount of reserve. Once this structural change happens, one can imply that the U.S. current account deficit would become unsustainable. With regard to structural change in the U.S., one may expect to see an improvement of household saving behaviors. Further, it is time for the US as a big borrower to think about limited ability to bear interest rates payments. Amount of such payments is considered so significantly large that adversely affects national wealth and in turn erode macroeconomic variable, such as government expenditure. It should be aware of this so that it can decrease dependence on oversea financing. These two behavioral changes will be able to prevent U.S. from confronting a problem about withdrawals of capital that may cause the collapse of the USD currency and possible recession. If the U.S. continues to create trade deficit, the new downturn may occur more quickly than expected because the disruptive sentiment would lead to massive outflows without requiring any change in Asian countries.
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