Publications by Date

1991
Frankel J. The Cost of Capital in Japan: Update. Business Economics. 1991;26 (2) :25-31. Publisher's Version
Frankel J. The Japanese Cost of Finance: A Survey. Financial Management. 1991;20 (1) :95-127. Publisher's VersionAbstract

This paper surveys the extensive literature on whether the cost of capital is low in Japan. Along the way, it considers: the leverage of Japanese firms, dividend payout, equity price/earnings ratios, corporate taxation, cross-ownership, land price/rental ratios, speculative bubbles, the household saving rate, international capital mobility, the lower cost of financing investment internally and through "main bank" relationships, and the move to a more marketoriented system as these relationships break down. The conclusion that emerges from the literature is that the cost of finance in the 1980s was indeed lower in Japan than in the United States, by a variety of measures. But trends of domestic and international liberalization, followed by the events of 1990, have now raised the cost of capital in Japan to the U.S. market level.

Frankel J. Japanese Finance in the 1980s: A Survey. In: Krugman P Trade with Japan: Has the Door Opened Wide? Chicago: University of Chicago Press ; 1991. pp. 225-268. Publisher's VersionAbstract

Five sets of questions puzzle observers of Japanese financial markets, particularly from the U.S. viewpoint. They concern: the apparently low corporate cost of capital, low real interest rates, high equity prices, high land prices, and the rising real yen. The paper surveys writings on these issues, in brief enough form that one can see how the questions fit together.

Topics covered include: the leverage of Japanese firms, dividend payout, equity price/earnings ratios, corporate taxation, cross-ownership, land price/rental ratios, speculative bubbles, the household saving rate, international capital mobility, expected real appreciation of the yen, the lower cost of financing investment internally and through "main bank" relationships, and the move to a more market-oriented system as these relationships break down.

Conclusions include: (1) the real interest rate in Japan may remain below that in the United States, despite international arbitrage, (2) the main relevant effect of the internationalization in Japan may have been to accelerate the process whereby corporate finance becomes market-oriented, so that (3) affiliated firms are losing the special privilege of borrowing at a cheaper rate, while (4) unaffiliated firms are able to borrow more cheaply than before, and (5) the increased availability of funds for asset-market arbitrage allowed the great run-up in equity and land prices in the 1980s.

1990
Frankel J, Froot K. Chartists, Fundamentalists, and the Demand for Dollars. In: Private Behaviour and Government Policy in Interdependent Economies. Oxford, UK: Clarendon Press ; 1990. Publisher's Version
Frankel J, Froot K. Chartists, Fundamentalists, and Trading in the Foreign Exchange Market. American Economic Review. 1990;80 (2) :181-185. Publisher's Version
Frankel J. Zen and the Art of Modern Macroeconomics: The Search for Perfect Nothingness. In: Monetary Policy for a Volatile Global Economy. Washington, DC: American Enterprise Institute ; 1990. Publisher's Version
Frankel J, Froot K. Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market. International Monetary Fund Working Paper 90/43. 1990. Publisher's Version
1989
Frankel J, Froot K. Forward Discount Bias: Is it an Exchange Risk Premium?. Quarterly Journal of Economics. 1989;104 (1) :139-161. Publisher's Version
Frankel J. Flexible Exchange Rates: Experience versus Theory. Journal of Portfolio Management. 1989;15 (2) :45-54. Publisher's Version
1988
Frankel J. International Capital Flows; and Domestic Economic Policies. In: The United States in the World Economy. Chicago: University of Chicago Press ; 1988. pp. 559-627. Publisher's Version
Frankel J. Recent Estimates of Time-Variation in the Conditional Variance and in the Exchange Rate Premium. Journal of International Money and Finance. 1988;7 :115-125. Publisher's Version
1987
Frankel J, Froot K. Short-term and Long-term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data. Journal of the Japanese and International Economies . 1987;1 (3) :249-274. Publisher's VersionAbstract

Three surveys of exchange rate expectations allow us to measure directly the expected rates of return on yen versus dollars. Expectations of yen appreciation against the dollar have been (1) consistently large, (2) variable, and (3) greater than the forward premium, implying that investors were willing to accept a lower expected return on dollar assets. At short-term horizons expectations exhibit bandwagon effects, while at longer-term horizons they show the reverse. A 10 percent yen appreciation generates the expectation of a further appreciation of 2.4 percent over the following week, for example, but a depreciation of 3.4 percent over the following year. At any horizon, investors would do better to reduce the absolute magnitude of expected depreciation. The true spot rate process behaves more like a random walk.

Frankel J, Stock J. Regression vs. Volatility Tests of the Efficiency of Foreign Exchange Markets. Journal of International Money and Finance. 1987;6 (1) :49-56. Publisher's Version
Frankel J, Froot K. Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations. American Economic Review. 1987;77 (1) :133-153. Publisher's Version
Frankel J, Meese R. Are Exchange Rates Excessively Variable?. NBER Macroeconomics Annual. 1987.
Frankel J, Dooley M, Mathieson D. International Capital Mobility in Developing Countries vs. Industrialized Countries: What Do Saving-Investment Correlations Tell Us?. IMF Staff Papers. 1987;34 (3) :503-530. Publisher's VersionAbstract
The finding of Feldstein and Horioka (1980) that countriesf investment rates are highly correlated with their national saving rates has by now been confirmed by many subsequent studies, even though their inference that international capital mobility nust be low has not been as widely accepted. This paper examines the statistical relationship between national saving and investment in a sample that includes not only 14 industrialized countries, but also 50 developing countries. The paper addresses some of the econometric critiques that have been aimed at the Feldstein-Horioka work. Contrary to what one would expect from consideration of capital mobility, the coefficient appears higher for industrialized countries than for developing countries, and higher after 1973 than before. Our interpretation of the saving-investment evidence is that the hypothesis of a high degree of substitutability for claims on physical capital located in different countries is not supported by the data. International substitutability for financial capital may be nigh, but this is a separate condition (which is properly tested by looking directly at rates of return). High international substitutability for bonds would imply high international substitutability for physical capital if capital were perfectly substitutable for bonds within each country, but there is no reason for this to hold, any more than there is for all goods to be perfect substitutes.
1985
Frankel J, Hardouvelis G. Commodity Prices, Money Surprises, and Fed Credibility. Journal of Money, Credit and Banking. 1985;17 (4) :427-438. Publisher's VersionAbstract
The general price level does not provide a sensitive indicator of whether monetary policy is tight or loose, because mostprices are sticky. Interest rates are free to move, but they are an ambiguous indicator of monetary policy: one does not know whether changes in the interest rate are due to changes in the expected inflation rate or the real interest rate.Commodity prices provide the ideal sensitive indicator.This paper has two distinct aims. First, a theoretical model of "over-shooting" in commodity markets is presented. A known change in the money supply is shown to cause an instantaneous change in commodity prices that is greater than the proportionate change that describes long-run equilibrium.Second, we take the occasion of the Fed's Friday money supply announcements to test the theory. We find that an unexpectedly large money announcement causes significant negative reactions in prices of six commodities. This supports at once the sticky-price or overshooting view, and the notion that the market has confidence in the Fed's commitment to correct any deviations from its money growth targets.
commoditypricesmoneysurprises-jmcb.pdf

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