Trade Liberalization and International Performance of Australian Manufacturing Industries and Its

Trade liberalization has played a pivotal role in improving the export orientation of the various Australian manufacturing industries (at the two-digit level) in the period 1974/75-2000/01. However, those industries subjected to industry-specific assistance measures — for example, the textile, clothing and footwear and the machinery and equipment industries (motor vehicle industry component) — have exhibited a superior export-oriented performance. The important lesson emanating from this result for the information technology sector is that although it is also subjected to these measures, their expansion can help alleviate the weak and stagnant export performance in information technology goods thereby helping to combat the projected large balance of trade deficit. Moreover, stronger output and employment growth will arise because of the significant contribution of these goods to the economy.

Evolution of the Euro and Currency Competition in the Global ICT Age

This chapter focuses on the function of international currencies as foreign exchange vehicles, which has a character of the network externality. On January 1999, the euro was introduced in Europe where the functions of the euro are limed as a currency. After January 2002, the euro had perfect functions, while the competition between the euro and the U.S. dollar was keen as the dominant international currency. We present the currency competition model with a decreasing transaction cost that reflects the character of the network externality, to investigate the competition between the euro and the dollar. We suggest the impact of introduction of the euro is the determinant for competition winner between the euro and the dollar.

Financial Innovation and Economic Growth

In this chapter, we assess the contribution of financial development to saving and economic growth in the UK in the 20th century. Financial development in this century has been by leaps and bounds along with a number of infamous crashes like the ones in the 1920s and in 1987. Using annual time-series data for the whole century, we find that financial growth has helped saving and economic growth in the UK throughout the 20th century. The unprecedented increase in money holding in 1965 and various forms of financial innovation and liberalisation initiated in the 1980s raised both the level and the rate of economic growth. Money-stock elasticity of GDP has been positive and statistically significant. There are long-run and unique co-integrated relations of GDP with productivity of capital and financial depth in the 20th century. The financial crash of Black Monday in 1987 upset equilibrium relations and led to a negative money-stock elasticity of economic growth.

Investment in IT and the Business Performance of Financial Companies

Global information technology and competitive financial alliances are helping to reshape the business landscape. Information technology (IT) and well functioning financial markets play a crucial role in increasing economic growth and prosperity. The purpose of this study is to empirically investigate the relationship between investment in IT and the business performance of financial companies. A vector autoregressive (VAR) model is used to test hypotheses one (increased spending on IT increases financial performance) and two (increased financial performance increases spending on IT) where financial performance is assumed to be adequately measured by stock price returns. Control variables for general business cycle conditions are included in the analysis. Our results show that the greatest benefits from increases in technology accrue to insurance and other financial companies. Managers of these companies could increase their business performance through strategic investment and use of IT.

Money is What Money Does

Despite of amazing progress in information technology that has taken place in recent years, the electronic money failed to live to the expectations and has made little headway into payments systems. The gap between expectations and reality is especially pronounced in Japan. The reason behind the failure of electronic money in Japan is two-fold. First, typical use of electronic money is in general rather limited as long as conventional money is required as a unit of account and a store of value for the former operation. Second, Japanese financial institutions chose very limited standards for their electronic money systems that could not compete with near the monopolistic position the credit card companies enjoy in cashless payment markets. On the contrary, Germany adopted a wide standard that fully utilises the advantages of electronic money as a medium of payment.

Recent Developments of Digital Cash Projects in Japan

Most discussions and analyses regarding Japanese financial institutions during the 1990s have focused on the lingering effects of the collapse of the bubble economy, including huge non-performing loans and large-scale bank failures. Thus, it is natural for foreign observers to fail to acknowledge that many Japanese banks and other non-bank enterprises have conducted forward-looking projects despite their financial difficulties. One of these projects has been to develop digital cash technology and promote its usage. Because people in Japan tend to use cash for daily payments more often than people in other nations, if the Japanese begin using digital cash instead of traditional cash (i.e., Bank of Japan’s notes and coins), we anticipate that digital cash will have a larger potential effect on the society and economy in Japan than in other nations. Efforts to establish digital cash projects made discernible progress in the early 2000s, and digital cash is more commonly used now in Japan than in other IT-advanced countries. This chapter attempts to provide an overview of the recent development of digital cash projects in Japan, and to discuss the issues involved in the further growth of digital cash usage. This chapter is organized as follows. Section 1 presents the introduction. In Section 2, we explain the historical developments of digital cash projects in Japan. Section 3 discusses what factors led to remarkable progress in digital cash usage in the early 2000s. Section 4 describes the remaining issues that must be addressed for further growth of digital cash usage. Finally, Section 5 concludes the chapter.

Volatility Spillover Structure of Stock and Foreign Exchange Market between Korea, Japan, and Hong Kong

Highly developed IT technology can be the source of volatility spillover between markets located in other countries. In this chapter, we investigate the interrelationship between stock returns in North East Asian countries and the effect of foreign exchange rate volatility on the interrelationship between stock returns. We bring out clear simultaneous interrelationship between stock return and foreign exchange volatility. Focusing on covariance of each asset returns, if we do not take foreign exchange rate volatility into account when we evaluate our international portfolio, the portfolio risk might be underevaluated. The analysis shows that foreign exchange market turbulence might be accompanied by increase in covariance between stock returns. Just after the Asian currency crisis, the relationship between stock returns and foreign exchange turbulence might have changed. For managing international portfolio risk, we should be aware of foreign exchange risk and structural change in covariance between stock returns.

Legal Concerns Against Auctions and Securities Conventions

This chapter introduces the two newly emerging issues in the C2C and B2B area in the Japanese IT laws: (a) anti-fraud measures in Internet auctions and (b) treatment of the Hague Securities Convention. An auction provider’s liability for a tenant’s fraud beyond the freedom of contracts is not clear. If consumers bear risk, adequate disclosure should be promoted. In addition, as this issue is complex, several measures including advertisement regulations against the small business consumers and development of escrow payment techniques, should be promoted. Regarding the Hague Securities Convention, the United States pushes other countries to ratify it but the EU questions to ratify it. This chapter considers that the ratification of the Hague Convention for unifying the conflict of laws and the UNIDROIT Convention for unifying the substantive laws should be done at the same time, in order to avoid some side effects.

The Role and Future of Local Currency and IT

The use of local currency has been spreading gradually since the 1990s. It has been introduced by nonprofit organizations (NPOs) and similar groups in some countries around the world. Welfare, nursing and nonpaying work, such as childrearing, are among the most popular reasons for introducing local currency. Recently, one local currency has appeared related to preventing environmental problems and protective and nursing industries. In some countries, local currencies have supported expectations for economic recovery. Promoting the spread of local currency is thought to be important. Information technology (IT) has contributed to the spread of local currency and may create new areas of usage and value. Various problems accompany the spreading use of local currencies. Local currency will not create major obstacles to economic activity as long as the sizes of transactions do not increase greatly, so governments and financial authorities have little reason to prohibit its use unless the currency issue authority in the country is seriously threatened. The exchange of digital value through IT (e.g., IC cards and the diffusion of the local currency) has significant value but also increases risks. To promote efficiency and convenience in local currency by introducing IT, governments, public administrations and municipalities should cooperate with a strategy for the information and communication technology (ICT) development. Alliances among many institutions should be considered.

Malliavin Calculus for the Estimation of the U.S. Dollar/Euro Exchange Rate When the Volatility is Stochastic

The tendency of exchange rates to fluctuate markedly and regularly is often referred as currency market volatility. The extent of currency market volatility is a major element of market risk. For financial transactions, volatility represents both costs and profit opportunities. Increased currency market volatility implies higher currency option premia and, therefore, higher hedging costs for investors and importers/exporters. However, for banks and other investment houses dealing in options, an increase in option prices may contribute to higher profits. It has been well established that the volatility of exchange rates changes with time. In recent years, various stochastic volatility models have been proposed in the literature that try to capture the exchange-rate volatility dynamics. In turn, several methods have been developed to estimate the parameters of such stochastic volatility models, with varying results. In this chapter, we propose another method for the estimation of the parameters of an exchange rate function when the volatility follows a stochastic process. Stochastic volatility is represented by a geometric Brownian motion. Using Malliavin calculus, we are able to find an explicit expression for the likelihood function of the observations. Numerical integration methods (Monte-Carlo simulations) and numerical optimization methods (generic algorithms) enable us to find an estimate for the unknown parameters and the volatility. This estimation method is then applied to the U.S. dollar/euro exchange rate. Specifically, first we formulate a U.S. dollar/euro exchange rate equation with a stochastic volatility model. We assume that the observed U.S. dollar/euro exchange rate follows a stochastic differential equation with random volatility, while the unobserved volatility follows a different stochastic differential equation. Then, we obtain the likelihood function of the observations by applying Malliavin calculus. The estimation of the unknown parameters is achieved through the maximization of the likelihood function. Using weekly U.S. dollar/euro exchange rates for the period April 28, 2000, to March 26, 2001, we obtain estimates of the parameters of the U.S. dollar/euro exchange rate function (i.e., the constant of the drift) and the assumed stochastic volatility model (i.e., the constants of the diffusion process). Application of the estimated model to out-of-sample data for the U.S. dollar/euro exchange rate shows a significantly high accuracy of the proposed method, as indicated by the very low root mean square error for the estimated exchange rate. This method can also be applied to other models of financial variables that follow similar processes.