A vast amount of literature uses cross-country regressions to find empirical links between policy indicators and long-run average growth rates. The authors study whether the conclusions from existing studies are robust or fragile when small changes in the list of independent variables occur. They find that although"policy"appears to be importantly related to growth, there is no strong independent relationship between growth and almost every existing policy indicator. They also find that very few macroeconomic variables are robustly correlated with cross-country growth rates. They clarify the conditions under which one finds convergence of per capita output levels and confirm the positive correlation between the share of investment in GDP and long-run growth. They conclude that all findings using the share of exports in GDP could be obtained almost identically using the total trade or import share and also that few commonly used fiscal indicators are robustly correlated with growth. Finally, the authors highlight the importance of considering alternative specifications in cross-country growth regressions.

A sensitivity analysis of cross-country growth regressions

World Investment Report

The Penn World Table displays a set of national accounts economic time series covering many countries. Its expenditure entries are denominated in a common set of prices in a common currency so that real quantity comparisons can be made, both between countries and over time. It also provides information about relative prices within and between countries, as well as demographic data and capital stock estimates. This updated, revised, and expanded Mark 5 version of the table includes more countries, years, and variables of interest to economic researchers. The Table is available on personal computer diskettes and through BITNET.

https://papers.ssrn.com/sol3/Delivery.cfm/nber_R1562.pdf?abstractid=227455&mirid=1

The Penn World Table (Mark 5): An Expanded Set of International Comparisons, 1950-1987

While much attention has been focused on Japan's meteoric rise as an economic power, South Korea has been quietly emerging as the next industrial giant to penetrate the world market. South Korea is one of a series of countries (ranging from Taiwan, India, Brazil, and Turkey, to Mexico, and including Japan) to have succeeded through borrowing foreign technology rather than by generating new products or processes. Describing such countries as `late-industrializers,' Amsden demonstrates why South Korea has become the most successful of this group. Available in OSO: http://www.oxfordscholarship.com/oso/public/content/economicsfinance/0195076036/toc.html

Asia's Next Giant: South Korea and Late Industrialization

FIRST ARTICULATED by scholars of the ISalamanca school in sixteenth century Spain,1 purchasing power parity (PPP) is the disarmingly simple empirical proposition that, once converted to a common currency, national price levels should be equal. The basic idea is that if goods market arbitrage enforces broad parity in prices across a sufficient range of individual goods (the law of one price), then there should also be a high correlation in aggregate price levels. While few empirically literate economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-run real exchange rates. Warm, fuzzy feelings about PPP are not, of course, a substitute for hard evidence. There is today an enormous and evergrowing empirical literature on PPP, one that has arrived at a surprising degree of consensus on a couple of basic facts. First, at long last, a number of recent studies have weighed in with fairly persuasive evidence that real exchange rates (nominal exchange rates adjusted for differences in national price levels) tend toward purchasing power parity in the very long run. Consensus estimates suggest, however, that the speed of convergence to PPP is extremely slow; deviations appear to damp out at a rate of roughly 15 percent per year. Second, short-run deviations from PPP are large and volatile. Indeed, the one-month conditional volatility of real exchange rates (the volatility of deviations from PPP) is of the same order of magnitude as the conditional volatility of nominal exchange rates. Price differential volatility is surprisingly large even when one confines attention to relatively homogenous classes of highly traded goods. The purchasing power parity puzzle then is this: How can one reconcile the enormous short-term volatility of real exchange rates with the extremely slow rate at which shocks appear to damp out? Most explanations of short-term exchange rate volatility point to financial factors such as changes in portfolio preferences, short-term asset price bubbles, and monetary shocks (see, for example, Maurice Obstfeld and Rogoff forthcoming). Such shocks can have substantial effects on the real economy in the presence of sticky nominal wages and prices. I See Lawrence H. Officer (1982, ch. 3) for an extensive discussion of the origins of PPP theory; see also Dornbusch (1987).

/pdf/the-purchasing-power-parity-puzzle-2mj15yxf16.pdf

The Purchasing Power Parity Puzzle

T HE relationship between direct investment by U.S. firms and the decline in U.S. export trade shares has been a subject of bitter controversy for at least the last twenty years. These changes over time in trade flows have undoubtedly been influenced by other factors such as productivity and monetary and fiscal policy in the United States and elsewhere. All of these were presumably reflected in price and income changes, the effects of which on trade probably have swamped any that might have stemmed from changes in the level of direct investment. One way to disentangle some of these influences might be to disaggregate by country, industry, and even better, by firm. However, we have not yet developed enough disaggregated time series data for this purpose and have therefore chosen to work first with cross-sections by country and industry. The method used here can be summarized by saying that we examine exports to a crosssection of 44 foreign destinations in 1970 by the United States and by 13 other major exporting countries. We relate these exports to characteristics of the destinations and to production in them by affiliates of companies based in the United States and those based in other countries. The destination country characteristics are their size (measured by their Gross Domestic Product (GDP), converted to dollars by exchange rates, or their total imports of manufactures), their membership in the European Economic Community (EEC), and their distance from the United States and from Germany (representing distance from most of the other major exporters). The affiliate activity variables are measures of the output of U.S.-owned manufacturing and nonmanufacturing affiliates and of the number of foreign-owned manufacturing affiliates in each country.' The measures for U.S.-owned affiliates were net sales (total sales less imports from the United States), and estimated net local sales (net sales multiplied by the ratio of local sales to total sales of the affiliate). In effect we have taken the elements of a fairly crude standard trade model (country size, distance, and membership in a trade bloc)2 and added to that some variables describing direct investment by the United States and other countries, to ask whether the latter have any impact on trade beyond that of the country characteristics. The basic assumption implied by this analysis is that the answer to the question "What would have happened if U.S. or foreign companies had not invested in a country or had invested less?" is provided by trade with those countries in which U.S. or foreign firms did not invest, or invested less than in others. The danger in this assumption is obvious: that there are factors which simultaneously affect investment and trade, giving a spurious appearance of a relationship between them. Such spurious relationships could work in the direction of showing that investment either increases or decreases trade. Size of host country, if it were omitted, would work in the former direction of suggesting complementarity between investment and trade, Received for publication October 2, 1980. Accepted for publication October 21, 1980. * National Bureau of Economic Research and Queens College, City University of New York, and National Bureau of Economic Research and Temple University, respectively. The research reported on in this paper was financed by grants to the National Bureau of Economic Research from the National Science Foundation and the Ford Foundation. However, it is not an official National Bureau publication. In particular, it has not been submitted to the Board of Directors for approval. Any opinions, findings, conclusions or recommendations expressed herein are those of the authors and do not necessarily reflect the views of the sponsoring or financing organizations. Mary Boger, Linda Quandt, and Marianne Rey were responsible for data collection and organization and Muriel Moeller for preparation of the manuscript. We are indebted to the Bureau of Economic Analysis of the U.S. Department of Commerce for the use of their data and particularly to Arnold Gilbert and Michael Liliestedt of the BEA for programming and other assistance with these data. Earlier versions of this paper appeared as NBER Working Papers 87 and 131. I No data were available on foreign-owned nonmanufacturing affiliates or on the size of foreign-owned manufacturing affiliates. 2 See, for example, Leamer and Stern (1970), Linneman (1966), Taplin (1967), and Tinbergen (1962).

Foreign Production and Exports in Manufacturing Industries

Foreign Production and Exports of Individual Firms

The purpose of this paper is to call attention to the need for a theory of comparative national price levels and to explore some of the elements that seem to belong to such a theory. Most theoretical discussions have maintained that national price levels tend towards equality and focus on presumably temporary divergences from equality. Yet strong evidence has been accumulating that there are large and long-standing differences inprice levels, the highest of which are more than twice those of countries with the lowest prices. Long-run price level differences are most clearly related to levels of real per capita output, with richer countries having higher price levels.These differences have been explained as resulting from greater advantages in productivity for the wealthier countries in goods production, mostly tradable, than in services production, mostly nontradable. The differences in relative productivity may be in total factor productivity or only in labor productivity, reflecting the greater capital intensity of goods production and possibly a higher elasticity of substitution between capital and labor in goods production.We find in the empirical analysis that a large part of the differences in price levels can be explained by structural factors such as real GDP per capita, the degree of openness of the economy, and the share of nontradable goods in output. The only non-structural factor emerging from a preliminary analysis of several of these was the rate of growth of the quantity of money.

https://www.nber.org/system/files/working_papers/w1034/w1034.pdf

Toward an explanation of national price levels

Home- and Host-Country Effects of Foreign Direct Investment

Direct investment has accounted for about a quarter of total international capital outflows in the 1990s and appears to have grown, relative to other forms of international investment, since the 1970s. The United States was by far the major source of direct investment outflows in the early 1970s, but Europe caught up to the United States in the 1980s and Japan almost did, before fading in the 1990s. The United States shifted from being the largest net supplier of direct investment to absorbing much of the world's supply, especially in the late 1980s, and then reverted to its earlier net supplier role. Direct Investment flows have been the least volatile source of international investment for most countries, the chief exception being the United States, which has flipped back and forth from dominant net supplier to dominant net recipient, and back to dominant net supplier. Particularly for developing countries, direct investment has been the most dependable source of foreign investment.

Robert E. Lipsey

Papers

Foreign Production and Exports in Manufacturing Industries

Foreign Production and Exports of Individual Firms

Toward an explanation of national price levels

Home- and Host-Country Effects of Foreign Direct Investment

The Role of Foreign Direct Investment in International Capital Flows