This paper summarizes and explains the main events of the liquidity and credit crunch in 2007-08. Starting with the trends leading up to the crisis, I explain how these events unfolded and how four different amplification mechanisms magnified losses in the mortgage market into large dislocations and turmoil in financial markets.

/pdf/deciphering-the-liquidity-and-credit-crunch-2007-08-3myt1ozynd.pdf

Deciphering the Liquidity and Credit Crunch 2007-08

The financial market turmoil in 2007 and 2008 has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies At the same time, the stock market capitalization of the major banks declined by more than twice as much While the overall mortgage losses are large on an absolute scale, they are still relatively modest compared to the $8 trillion of US stock market wealth lost between October 2007, when the stock market reached an all-time high, and October 2008 This paper attempts to explain the economic mechanisms that caused losses in the mortgage market to amplify into such large dislocations and turmoil in the financial markets, and describes common economic threads that explain the plethora of market declines, liquidity dry-ups, defaults, and bailouts that occurred after the crisis broke in summer 2007 To understand these threads, it is useful to recall some key factors leading up to the housing bubble The US economy was experiencing a low interest rate environment, both because of large capital inflows from abroad, especially from Asian countries, and because the Federal Reserve had adopted a lax interest rate policy Asian countries bought US securities both to peg the exchange rates at an export-friendly level and to hedge against a depreciation of their own currencies against the dollar, a lesson learned from the Southeast Asian crisis of the late 1990s The Federal Reserve Bank feared a deflationary period after the bursting of the Internet bubble and thus did not counteract the buildup of the housing bubble At the same time, the banking system underwent an important transformation The

/pdf/deciphering-the-liquidity-and-credit-crunch-2007-2008-3612pahtil.pdf

Deciphering the Liquidity and Credit Crunch 2007-2008

Since the seminal work of Krugman (1979), product variety has played a central role in models of trade and growth. In spite of the general use of love-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper we show that the unmeasured growth in product variety from US imports has been an important source of gains from trade over the last three decades (1972-2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of four. We also estimate the elasticities of substitution for each available category at the same level of aggregation, and describe their behavior across time and SITC-5 industries. Using these estimates we develop an exact price index and find that the upward bias in the conventional import price index is approximately 1.2 percent per year – double the estimated impact due to hedonic adjustments on the CPI. The magnitude of this bias suggests that the welfare gains from variety growth in imports alone are 2.8 percent of GDP per year.

/pdf/globalization-and-the-gains-from-variety-3t7kyqz9ei.pdf

Globalization and the gains from variety

Large economies export more in absolute terms than do small economies. We use data on shipments by 126 exporting countries to 59 importing countries in 5,000 product categories to answer the question: How? Do big economies export larger quantities of each good (the intensive margin), a wider set of goods (the extensive margin), or higher-quality goods? We find that the extensive margin accounts for around 60 percent of the greater exports of larger economies. Within categories, richer countries export higher quantities at modestly higher prices. We compare these findings to some workhorse trade models. Models with Armington national product differentiation have no extensive margin, and incorrectly predict lower prices for the exports of larger economies. Models with Krugman firm-level product differentiation do feature a prominent extensive margin, but overpredict the rate at which variety responds to exporter size. Models with quality differentiation, meanwhile, can match the price facts. Finally, models with fixed costs of exporting to a given market might explain the tendency of larger economies to export a given product to more countries.

/pdf/the-variety-and-quality-of-a-nation-s-exports-d30ayb5k1z.pdf

The Variety and Quality of a Nation's Exports

Since the seminal work of Krugman (1979), product variety has played a central role in models of trade and growth. In spite of the general use of love-of-variety models, there has been no systematic study of how the import of new varieties has contributed to national welfare gains in the United States. In this paper we show that the unmeasured growth in product variety from US imports has been an important source of gains from trade over the last three decades (1972-2001). Using extremely disaggregated data, we show that the number of imported product varieties has increased by a factor of four. We also estimate the elasticities of substitution for each available category at the same level of aggregation, and describe their behavior across time and SITC-5 industries. Using these estimates we develop an exact price index and find that the upward bias in the conventional import price index is approximately 1.2 percent per year. The magnitude of this bias suggests that the welfare gains from variety growth in imports alone are 2.8 percent of GDP.

/pdf/globalization-and-the-gains-from-variety-1xq8uo2x2z.pdf

Globalization and the Gains from Variety

The effects of the Uruguay Round are quantified using a numerical general equilibrium model which incorporates increasing returns to scale, 24 regions, 22 commodities, and steady state growth effects. We conclude that the aggregate welfare gains from the Round are in the order of 96 billion per year in the short run, but could be as high as 171 billion per year in the long run after capital stocks have optimally adjusted. Despite these global gains, we identify some developing countries that lose from the Round in the short run. In the long run, almost all gain, and the Round will allow developing countries to gain further through their own unilateral liberalisation.

Available as the journal article at
http://www.blackwell-synergy.com/loi/ecoj

Quantifying the Uruguay Round

Part 1 Recent issues in U.S. foreign trade policy: policy issues why a general equilibrium model? previous studies of the cost of protection. Part 2 Trade policy analysis in a one-sector general equilibrium model with product differentiation: product differentiation and specialization a one-sector model with differentiated trade comparative statics - a graphical analysis of terms-of-trade, transfer, and tariff changes a digression - choice of numeraire and the real exhange rate costs of protection in the one-sector model trade policy and resource shifts in the presence of product differentiation. Part 3 The basic general equilibrium trade model: overview of the model equations of the basic trade model modeling of quantitative restrictions welfare measure definition of the welfare measure the real exchange rate. Part 4 Quota premium rates and rent capture: who captures the quota rents? quota rent estimates in textiles and apparel quota rent estimates for automobiles from Japan and Europe voluntary export restraints on steel. Part 5 Welfare costs of U.S. quotas in textiles and apparel, automobiles, and steel in the basic model: elasticity specification removing quotas on textiles and apparel removing voluntary export restraints on Japanese automobiles imposing voluntary export restraints on steel joint removal of quotas in the three sectors introducing terms-of-trade effects comparisons with earlier estimates liberalization with endogenous quota permia and sectoral rationing of steel. Part 6 Welfare costs of quantitative restrictions under different factor market assumptions: labour-leisure choice welfare costs of quotas in steel and automobiles in the presence of wage distortions modeling labour unions in the automobile and steel sectors short-run welfare costs of quotas in textiles and apparel, automobiles and steel welfare costs of quotas with international capital mobility the welfare measure and labour-leisure trade-off derivation of labour union wage differential. Part 7 Welfare costs of quantitative restrictions with imperfect competition in automobiles and steel: evidence on economies of scale and pricing rules in steel and automobiles modifications to the basic model to accommodate imperfect competition welfare costs of quantitative restrictions with imperfect competition derivation of the price elasticity of demand. Part 8 Revenue-raising taxes - evaluation of alternative strategies for taxing petroleum industries: recent proposals for taxing petroleum industries adaptation of the basic model to the energy sector revenue and welfare effects of tax proposals efficient taxation of petroleum industries. Part 9 Conclusions: summary of results costs per job protected by quota protection estimated costs of all quantitative restrictions computation of tariffs with a welfare cost equivalent to that of quotas directions for future research.

A general equilibrium analysis of US foreign trade policy

Foreign producer services can provide substantial benefits for domestic firms. We build on earlier monopolistic-competition models of intermediate producer services in this paper. Results show that: (1) while foreign services are partial-equilibrium substitutes for domestic skilled labour, they may he general-equilibrium complements, (2) service trade can provide crucial missing inputs that reverse comparative advantage in final goods, (3) the ‘optimal’ tax on imported services may be a subsidy, and (4) in our dynamic formulation, there may be earnings losses for immobile workers along a transition path that suggest potentially important equity consequences of reform.

Trade and direct investment in producer services and the domestic market for expertise

https://www.pep-net.org/sites/pep-net.org/files/typo3doc/pdf/Russia_final.pdf

Poverty Effects of Russia’s WTO Accession: Modeling “Real” Households and Endogenous Productivity Effects

. Foreign producer services can provide substantial benefits for domestic firms. We build on earlier monopolistic-competition models of intermediate producer services in this paper. Results show that: (1) while foreign services are partial-equilibrium substitutes for domestic skilled labour, they may be general-equilibrium complements, (2) service trade can provide crucial missing inputs that reverse comparative advantage in final goods, (3) the ‘optimal’ tax on imported services may be a subsidy, and (4) in our dynamic formulation, there may be earnings losses for immobile workers along a transition path that suggest potentially important equity consequences of reform. JEL classification: F12, F16, F23



Commerce international et investissement direct dans les services de production et le marche interieur de l’expertise.  Les services de production en provenance de l’etranger peuvent engendrer des avantages substantiels pour les entreprises domestiques. Dans ce memoire, les auteurs construisent sur la base de certains modeles anterieurs de concurrence monopolistique de services de production intermediaires. Les resultats montrent que: (1) alors que les services de l’etranger sont des substituts pour le travail domestique specialise en equilibre partiel, en equilibre general, ils peuvent etre des complements; (2) le commerce de services peut fournir des intrants cruciaux qui manquent et ce faisant renverser les avantages comparatifs dans les produits finaux; (3) la fiscalite optimale imposee sur les services importes peut etre une subvention; et (4) dans la formulation dynamique du modele, il peut y avoir perte de revenus pour les travailleurs immobiles le long du sentier de transition, ce qui suggere qu’il peut y avoir des consequences importantes au plan de l’equite associees a certaines reformes.

/pdf/trade-and-direct-investment-in-producer-services-and-the-1het036q03.pdf

David G. Tarr

Papers

Quantifying the Uruguay Round

A general equilibrium analysis of US foreign trade policy

Trade and direct investment in producer services and the domestic market for expertise

Poverty Effects of Russia’s WTO Accession: Modeling “Real” Households and Endogenous Productivity Effects

Trade and direct investment in producer services and the domestic market for expertise