RAJAN’S OP-EDS

SPP Professor Ramkishen Rajan

SPP’s Ramkishen S. Rajan, an Associate Professor of International Economics who joined the faculty this spring, recently co-wrote two op-ed pieces. The first, “Exchange Rate Pass-through Mechanism,” was published in The Financial Express (South Asia) on March 12, 2005, and co-authored by Amit Ghosh, a research scholar at the Claremont Graduate University in California. The second, “A Basket Case,” appeared in The Wall Street Journal Asia on March 27, 2006, and was co-written by Tony Cavoli, a Lecturer of Economics at the Queensland University of Technology in Brisbane, Australia. Both articles are based on recently completed research papers hat have been submitted to journals.

“Many small and open countries in Asia and elsewhere have historically been averse to allowing more than a moderate degree of exchange rate flexibility because of concerns about how such movements might feed into domestic prices,” write Rajan and Ghosh in the opening of their piece. They go on to delineate a number of reasons why firms might choose to engage in strategic pricing in international trade in response to exchange rate variations. For instance: “if an import destination has a history of low inflation and relatively stable prices, exporters to that nation may refrain from passing on exchange rate changes substantially, especially when the magnitude of the exchange rate change is small.” They conclude by remarking that policy makers are particularly concerned about the extent and speed of exchange rate pass-through. “If pass-through is low, adjustment in the exchange rate to improve the trade balance may be relatively ineffective,” they note. “This is a concern in the case of the persistent US trade deficit despite secular declines in the US dollar. Conversely, low exchange rate pass-through implies that there may be less need to be concerned about the potential inflationary consequences of exchange rate fluctuations.”

“A Basket Case” concerns Singapore’s so-called “currency basket” and the interest of other Asian countries in emulating the Singapore exchange rate regime. But, as Rajan and Cavoli note, “Singapore’s ‘currency basket’ never was as simple as the pundits thought. And its system may not be as easily transferable, either.” They point out that Singapore’s model has certainly been successful; for instance, when compared to Hong Kong, which has experienced similar business cycles, Singapore has experienced lower and less volatile inflation. “But the factors behind [Singapore’s] success are quite unique to the city-state,” they write. For one thing, other Asian countries “probably don’t have the other set of supply-side tools that Singapore has to manage its economy. In the tiny city-state, the central bank can fine-tune the economy by tinkering with the employers’ contributions to the national pension system (Central Provident Fund), cutting wages and salaries, and changing land costs and corporate tax rates. Since the Singapore government generally cuts these business costs—sometimes quite drastically—during a downturn, the Monetary Authority of Singapore isn’t forced to depreciate the Singapore dollar to maintain the city-state’s short term competitiveness.” The authors conclude that policy makers in other countries have reason to pause before attempting to entirely replicate the Singapore exchange rate system.

Professor Rajan, who is on the editorial boards of various academic journals, is currently editing a two-volume “Princeton Encyclopedia of the World Economy” with his SPP colleague, Professor Ken Reinert.

Learn more about him by visiting his web page: Click here.