nep-opm New Economics Papers
on Open MacroEconomics
Issue of 2008‒03‒15
eleven papers chosen by
Martin Berka
Massey University

  1. Productivity Differences in an Interdependent World By Fadinger, Harald
  2. Testing for the Economic Impact of the U.S. Constitution: Purchasing Power Parity across the Colonies versus across the States, 1748-1811 By Farley Grubb
  3. Global Rebalancing with Gravity: Measuring the Burden of Adjustment By Robert Dekle; Jonathan Eaton; Samuel Kortum
  4. Globalization and the Great Divergence: Terms of Trade Booms and Volatility in the Poor Periphery 1782-1913 By Jeffrey G. Williamson
  5. Globalization and Labor Market Outcomes: Wage Bargaining, Search Frictions, and Firm Heterogeneity By Felbermayr, Gabriel; Prat, Julien; Schmerer, Hans-Jörg
  6. FDI Promotion through Bilateral Investment Treaties: More Than a Bit? By Matthias Busse; Jens Königer; Peter Nunnenkamp
  7. Foreign Direct Investment and Structural Reforms: Evidence from Eastern Europe and Latin America By Campos, Nauro F.; Kinoshita, Yuko
  8. Network analysis of exchange data: Interdependence drives crisis contagion By Matesanz, David; Ortega , Guillermo J.
  9. Export-Oriented FDI, the Euro, and EU Enlargement By Hisham Foad
  10. Decomposition of external capital inflows and outflows in the small open transition economy (The case analysis of the Slovak republic) By Mirdala, Rajmund
  11. Analyzing the Present Sustainability of Turkey’s Current Account Position By Ayla Ogus; Niloufer Sohrabji

  1. By: Fadinger, Harald
    Abstract: This paper studies cross country differences in productivity from an open economy perspective by using a Helpman-Krugman-Heckscher-Ohlin model. This allows to combine tools from development accounting and the trade literature. When simultaneously fitting data on income, factor prices and the factor content of trade, I find that rich countries have far higher productivities of human capital than poor ones, while differences in physical capital productivity are not systematically related to income per worker. I estimate an aggregate elasticity of substitution between human and physical capital that is significantly below one, clearly rejecting a world that consists of a collection of Cobb-Douglas economies and also one where Heckscher-Ohlin trade is important.
    Keywords: Heckscher-Ohlin; Productivity Differences; Development Accounting; Open Economy Growth
    JEL: O11 O41 O47 F11 F43
    Date: 2008–03
  2. By: Farley Grubb
    Abstract: Exchange rates and price indices are constructed to test purchasing power parity between eight British North American colonial locations, five of whom issued their own fiat paper money. Purchasing power parity is then tested between these same locations after six became states politically and monetarily unified under the U.S. Constitution. Purchasing power parity cannot be rejected between all colonial locations or between the six U.S. states, if anything holding with more confidence prior to U.S. political and monetary unification. But it is rejected between U.S. states and nearby British colonies that stayed outside the U.S. union.
    JEL: D02 F15 F54 N11 N21 N41 N71 O24 O51
    Date: 2008–03
  3. By: Robert Dekle; Jonathan Eaton; Samuel Kortum
    Abstract: We use a forty-two country model of production and trade to assess the implications of eliminating current account imbalances for relative wages, relative GDP's, real wages, and real absorption. How much relative GDP's need to change depends on flexibility of two forms: factor mobility and the adjustment in sourcing of imports, with more flexibility requiring less change. At the extreme, US GDP falls by 30 percent relative to the world's. Because of the pervasiveness of nontraded goods, however, most domestic prices move in parallel with relative GDP, so that changes in real GDP are small.
    JEL: F10 F32 F41
    Date: 2008–03
  4. By: Jeffrey G. Williamson
    Abstract: W. Arthur Lewis argued that a new international economic order emerged between 1870 and 1913, and that global terms of trade forces produced rising primary product specialization and de-industrialization in the poor periphery. More recently, modern economists argue that volatility reduces growth in the poor periphery. This paper assess these de-industrialization and volatility forces between 1782 and 1913 during the Great Divergence. First, it argues that the new economic order had been firmly established by 1870, and that the transition took place in the century before, not after. Second, based on econometric evidence from 1870-1939, we know that while a terms of trade improvement raised long run growth in the rich core, it did not do so in the poor periphery. Given that the secular terms of trade boom in the poor periphery was much bigger over the century before 1870 than after, it seems plausible to infer that it might help explain the great 19th century divergence between core and periphery. Third, the boom and its de-industrialization impact was only part of the story; growth-reducing terms of trade volatility was the other. Between 1820 and 1870, terms of trade volatility was much greater in the poor periphery than the core. It was still very big after 1870, certainly far bigger than in the core. Based on econometric evidence from 1870-2000, we know that terms of trade volatility lowers long run growth in the poor periphery, and that the negative impact is big. Given that terms of trade volatility in the poor periphery was even bigger during the century before 1870, it seems plausible to infer that it also helps explain the great 19th century divergence between core and periphery.
    JEL: F01 N7 O2
    Date: 2008–03
  5. By: Felbermayr, Gabriel (University of Tuebingen); Prat, Julien (University of Vienna); Schmerer, Hans-Jörg (University of Tuebingen)
    Abstract: We introduce search unemployment à la Pissarides into Melitz’ (2003) model of trade with heterogeneous firms. We allow wages to be individually or collectively bargained and analytically solve for the equilibrium. We find that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves aggregate productivity net of transport costs. We show that this condition is likely to be met by a reduction in variable trade costs or the entry of new trading countries. On the other hand, the gains from a reduction in fixed market access costs are more elusive. Calibrating the model shows that the positive impact of trade openness on employment is significant when wages are bargained at the individual level but much smaller when wages are bargained at the collective level.
    Keywords: trade liberalization, unemployment, search model, firm heterogeneity
    JEL: F12 F15 F16
    Date: 2008–02
  6. By: Matthias Busse; Jens Königer; Peter Nunnenkamp
    Abstract: Policymakers in developing countries have increasingly pinned their hopes on bilateral investment treaties (BITs) in order to improve their chances in the worldwide competition for foreign direct investment (FDI). However, the effectiveness of BITs in inducing higher FDI inflows is still open to debate. It is in several ways that we attempt to clarify the inconclusive empirical findings of earlier studies. We cover a much larger sample of host and source countries by drawing on an extensive dataset on bilateral FDI flows. Furthermore, we account for unilateral FDI liberalization, in order not to overestimate the effect of BITs, as well as for the potential endogeneity of BITs. Employing a gravity-type model and various model specifications, including an instrumental variable approach, we find that BITs do promote FDI flows to developing countries. BITs may even substitute for weak domestic institutions, though not for unilateral capital account liberalization.
    Keywords: FDI, Multinational Corporations, Bilateral Investment Treaties
    JEL: C F21 F23
    Date: 2008–02
  7. By: Campos, Nauro F. (Brunel University); Kinoshita, Yuko (International Monetary Fund)
    Abstract: This paper investigates the role of structural reforms – privatization, financial reform and trade liberalization – as determinants of FDI inflows based on newly constructed dataset on structural reforms for 19 Latin American and 25 Eastern European countries between 1989 and 2004. Our main finding is a strong empirical relationship from reforms to FDI, in particular, from financial liberalization and privatization. These results are robust to different measures of reforms, split samples, and potential endogeneity and omitted variables biases.
    Keywords: privatization, financial reform, trade liberalization, foreign direct investment, Latin America, transition economies
    JEL: H11 F21 O16
    Date: 2008–02
  8. By: Matesanz, David; Ortega , Guillermo J.
    Abstract: In this paper we detect the linear and nonlinear co-movements presented on the real exchange rate in a group of 28 developed and developing countries that have suffered currency and financial crises during 15 years. We have used the matrix of Pearson correlation and Phase Synchronous (PS) coefficients and an appropriate metric distance between pairs of countries in order to construct a topology and hierarchies by using the Minimum Spanning Tree (MST). In addition, we have calculated the MST cost and global correlation coefficients to observe the co-movements dynamics along the time sample. By comparing Pearson and phase synchronous information we address a new methodology that can uncover meaningful information on the contagion economic issue and, more generally, in the debate around interdependence and/or contagion among financial time series. Our results suggest some evidence of contagion in the Asian currency crises but this crisis contagion is due to previous and stable interdependence.
    Keywords: econophysics; linear co-movements; phase synchronous co-movements; MST; interdependence and contagion
    JEL: F40 C82 F31
    Date: 2008–03–12
  9. By: Hisham Foad (Department of Economics, San Diego State University)
    Abstract: Since 1999, the UK’s share of FDI heading into Europe has declined dramatically, while the Euro-Zone’s share has increased. I argue that the timing of this divergence is not coincidental. The formation of the Euro-Zone has eliminated nominal exchange rate volatility between member-states, increasing export market access intra-union. For source countries outside of Europe, Euro-Zone countries have become more attractive destinations for export-oriented FDI, as operations within the union are insulated from currency fluctuations. As exchange rate volatility between a non-Euro country and local export markets increases, or as the market size of the euro-zone increases, more and more investment will be diverted towards Euro-Zone countries. This theory is tested in two stages using detailed data on the operations of foreign affiliates of US multinationals across seventeen European countries from 1983 – 2004. A host country’s export market access is first estimated with an augmented gravity model. This export series is then included in a dynamic panel with US to host market exchange rate volatility and a range of FDI determinants to explain inflows of FDI from the US to European countries. Potential endogeneity issues are addressed using the Arellano and Bond (1991) GMM procedure. The ability to export from a particular host country has a positive and significant effect on inflows of FDI. Additionally, unobserved features of Euro-Zone membership (beyond the elimination of currency risk) have a positive effect on inflows. A counterfactual experiment sheds light on how much FDI the UK “lost” by not adopting the euro in 1999. Re-estimating the trade and FDI relations under the assumption that the UK had adopted the euro, I estimate that the UK has lost approximately $33 billion (2% of GDP) worth of FDI from the US. Similarly, the flight of FDI to the new EU accession countries has been slowed by these countries staying out of the Euro-Zone.
    Date: 2007–05
  10. By: Mirdala, Rajmund
    Abstract: The main objective of the proceeding is to perform a logical decomposition of the structure of external capital inflows and outflows in the Slovak republic in order to analyze the main trends in the external financial integration and its development through the period of 1994-2006. In order to fulfill our objective we observe the changes in the structure of external financial assets and liabilities in order to provide the explanation of main trends in the external capital portfolio of the Slovak republic. Finally, we explore the implications of the accumulated stock of external capital for future trade and current account balances.
    Keywords: financial integration; external capital structure; foreign financial assets; foreign financial liabilities; transition economies
    JEL: F15 F41 F36
    Date: 2007–11
  11. By: Ayla Ogus (Department of Economics, Izmir University of Economics); Niloufer Sohrabji (Department of Economics, Simmons College)
    Abstract: In this paper we assess the present sustainability of Turkey’s current account position using the framework provided by Milesi-Ferretti and Razin (1996) based on the ability-to-pay and willingness-to-lend model. This framework allows us to assess the structural features and macroeconomic policy indicators. We extend this framework by considering global sustainability indicators as well. Using data for three periods, 1991-1993, 1998-2000 and 2004-2006 we evaluate the present sustainability in light of the prior two crises (1994, 2001). Based on our analysis of these factors in the extended framework, we conclude that Turkey’s internal structure and macroeconomic conditions (such as exports and the fiscal position) have improved that are allowing Turkey to continue having large and increasing current account deficits. However, there is vulnerability from global factors namely the impending U.S. recession and a potential global slowdown. This might require some adjustments in policy to continue accumulating large deficits.
    Keywords: Current account sustainability, predictors of crisis, Turkey
    JEL: F32 F41
    Date: 2008–03

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