Statement of Objectives

Statement of Objectives (Extended Version)
Taro Okamoto

The PhD program in Economics, the Department of Economics
December 2006

This statement has four sections. The first section briefly describes my intellectual background and interests. The second section gives the reasons for applying to the Department of Economics at (Withheld), and the third section elaborates on my proposed research topics. Finally I state what I expect as my future career.


1. My Intellectual Background and Interests

While pursuing undergraduate study in economics at (Withheld) I was fascinated by two lectures: Macroeconomics and American economy.

They both had a lot of interesting topics. The lecture in Macroeconomics illuminated very realistic issues: what caused the recession and deflation in the 1990s in Japan and what expansionary fiscal policy and ultraloose monetary policy did.

And the lecture on the American economy exposed me to many interesting economists and their thoughts such as Paul R. Krugman and John K. Galbraith. I read their books with much excitement. Then the U.S. economy was booming due to the advance of information technology, whereas the Japanese economy was in prolonged recession. This contrast intrigued me and heightened my interests in the study of macroeconomics and macroeconomic policy. I wrote an essay on the booming American economy, which won the prize in the Student Essay Contest at the Department of Economics. This experience made me believe that economics helps clear up our ideas about the economy in which we live.

So I decided to pursue further study in economics and read N. Gregory Mankiw’s best-selling textbook Macroeconomics, which was easy to read and had a lot of case studies about macroeconomics as well as data on the American economy.

After obtaining a BA degree from (Withheld), I entered the Graduate School of Economics at (Withheld). There I wanted to acquire basic knowledge of quantitative analysis since I did not take any such courses when I was in (Withheld). So I took the core graduate-level courses on econometrics and statistics. I also took the course on international finance and became interested in various issues in this area.

In this course, I read some intriguing empirical articles and began to reflect on the exchange rate policy. This lecture was a key to my decision to do a master's thesis in this area. In this regard I was also lucky to have had an opportunity to take part in the relevant research project as a summer internship for two weeks at (Withheld), one of the most prominent private consulting firms in Japan.

There I helped research the economic relationship between China and Kansai region which is the west area of the Japanese Islands, and could see the actual business interaction between China and Japan. I found that the economic activities of China influence heavily those of Japan.

After receiving an MA degree in applied economics and policy from the Graduate School of Economics at (Withheld), I worked at a private company for a while. However, my desire to study economics was getting stronger day by day and so was my interest in research of the Asia-Pacific economy.

2. Proposed Research Topics

The experience of taking part in a research project on Japan's economic interaction with China at (Withheld) heightened my interest in the study of economic activities in the East-Asia region.

Japan is now highly integrated with China, ROK and many other countries in the East-Asia region. These countries have become interested in accelerating regional integration through, say, an economic partnership agreement (EPA). In addition, there has been a lively debate as to whether a common currency should be adopted.

Empirical work in this regard has been focused on the question of whether the East-Asia region constitutes an optimum currency area (OCA): Alesina, Barro and Tenreyro (2002), for example, shows empirically that there exists no clear yen area, based on the historical data on inflation, trade and co-movements of prices and outputs. Looking around the world, we can see many examples of movements toward multinational currencies: 12 countries in Europe have adopted a single currency (Euro), and 6 oil-producing countries such as Saudi Arabia, Oman and so on, have declared their intention to form a currency union by 2010.

International economic integration has advanced since Mundell (1961) first developed the concept of OCA. In today’s globalized world, it is natural for policy makers to think of adopting a common currency. In theory the exchange rate uncertainty is a serious impediment to international trade. Adoption of a common currency does away with this source of uncertainty and hence reduces the transactions costs associated with trading goods, services and assets. The resulting boost to trade integration may also promote co-movements in income, that is, business cycle symmetry.

Some economists suggest a theoretical possibility that if most trade is inter-industry, then trade integration results in greater specialization and thus asymmetric business cycles. In this case, adopting a common currency, and hence a common monetary policy, is not beneficial for the participating countries. Frankel and Rose (1998), however, found a strong positive relationship between trade integration and synchronization of business cycles, suggesting that most trade is intra-industry rather than inter-industry.

To judge an OCA, economists generally examine four linkages between countries: (1) the extent of trade integration, (2) similarity of the shocks and cycles, (3) the degree of labor mobility, and (4) the system of risk-sharing, through fiscal transfers. The greater any of the four linkages between the countries, the more suitable they are to adopt a common currency. In a way similar to Lucas Critique (1976), Frankel and Rose suggests that the traditional judgments on the fitness for OCA do not adequately take into account the impact of adopting a common currency on trade integration. Frankel and Rose thus argues that some of the criteria to determine OCA are endogenous.

In my master's thesis at (Withheld), I summarized the relevant issues on OCA from a somewhat different point of view from Frankel and Rose: Based on the research of Kawai (1993), I used a framework of game theory and tried to consider theoretically how the choice of exchange rate regimes is optimally made by each country’s monetary policymaker who pursues national objectives like low inflation and high economic growth. Specifically, I examined how the monetary policy conducted by each country affects the choice of regimes and thus the formation of currency union. The ability of each monetary authority to make a policy commitment (e.g. not to inflate or to fix the exchange rate) is essential for the nature of the regimes chosen: If all the policy makers of the participating countries can make a fully credible commitment, currency union would be both Pareto-optimal and sustainable.

As the next step I would like to pursue this line of research first by extending a literature search in this area. I then build a theoretical model, derive propositions from the model and conduct an empirical research by using econometric methods. It would be interesting to see how the conflicting interests between the participating countries affect the path towards the formation of currency union. Through the studies on the OCA and their application to the East-Asia and Pacific region, I would like to carry out a research on policy issues regarding the inter-connections between international integration, currency system and the economic structures in the countries in this region.

Looking further into the future, I hope to widen the scope of my research effort to other issues, such as the impact on domestic and neighboring economies of increased international labor mobility and of economic structural change and reform.

4. My Career Goals　

After my PhD, I would like to be a researcher and a teacher specialized in international finance with particular interests in the Asia-Pacific area. I hope to be able to contribute to a sound development of the Asian-Pacific economy in general and its financial system in particular through a policy-analytic research, sometimes in collaboration with international financial institutions as well as the governmental and private think-tanks.

In addition, by speaking at seminars and writing articles for non-academic journals I would like to heighten the public awareness of the problems in international economy lying ahead of us, thereby facilitating the adoption of a sound policy to deal with them.

Reference

1 Alberto Alesina, Robert J. Barro, Silvana Tenreyro (2002), “Optimal Currency Areas”, NBER Working Paper 9072, National Bureau of Economic Research. http://www.nber.org/papers/w9072

2 Jeffrey A. Frankel and Andrew K. Rose (1998), “The Endogeneity of the Optimum Currency Area Criteria”, The Economic Journal, 1009-1025.

3 Masahiro Kawai (1993), “Optimal and Sustainable Exchange Rate Regimes: A Two-Country Game-Theoretic Approach”, IMF staff papers, 329-368.

4 Richard E. Caves, Jeffrey A. Frankel, Ronald W. Jones (2003), “World Trade and Payments: An Introduction”, Addison Wesley.

5 Robert Mundell (1961), “A Theory of Optimum Currency Areas”, American Economic Review, vol.51, 509-517.

6 Robert E. Lucas (1976), “Econometric Policy Evaluation: A Critique”, Carnegie-Rochester Conference Series on Public Policy, Amsterdam: North-Holland, 19-46.