Showing papers in "Review of International Economics in 2003"
TL;DR: A selective and critical review of the literature on purchasing power parity and real exchange rates, with special reference to the literature of the last two decades, can be found in this paper.
Abstract: The paper provides a selective and critical review of the literature on purchasing power parity and real exchange rates, with special reference to the literature of the last two decades.
177 citations
TL;DR: In this article, the gravity model is used to assess the impact of disintegration on trade among the former constituent republics of three demised federations in central and eastern Europe: the Soviet Union, Yugoslavia, and Czechoslovakia.
Abstract: The gravity model is used to assess the impact of disintegration on trade among the former constituent republics of three demised federations in central and eastern Europe: the Soviet Union, Yugoslavia, and Czechoslovakia. The authors find evidence of a very strong home bias around the time of disintegration, with trade exceeding normal trade intensity 24-fold (for Slovenia and Croatia) to 43-fold (the former Soviet Union and Czechoslovakia). Disintegration was followed by a sharp fall in trade intensity, although the legacy of a common past remains strong. By 1998, trade relations still exceeded the normal level 2-fold in the case of Slovenia and Croatia, 7-fold for the former Czechoslovakia, 13-fold for the Baltics, and 30-fold for Belarus, Russia, and Ukraine. Such trade intensities surpass the effects of formal preferential trade areas such as the EU or the impact of reunification on trade between East and West Germany.
162 citations
TL;DR: In this paper, a theory of relation-based governance is proposed to explain both the East Asian miracle and the Asian crisis, which provides foundations for studies of East Asian catching-up and economic development in general.
Abstract: The paper aims to establish a theory of relation-based governance to explain both the “East Asian miracle” and the Asian crisis. The author first defines “relation” and “relation-based governance” in terms of information and enforcement, and then analyzes the nature and dynamics of relation-based governance, comparing its benefits and costs with that of “rule-based governance” in terms of observability/verifiability, commitment, and transaction costs. The theory is applied to examine a particular relation-based governance system—the Japanese model—to explain both the East Asian miracle and the Asian crisis. The framework provides foundations for studies of East Asian catching-up and economic development in general.
120 citations
TL;DR: In this article, the implications of institutional efficiency on the pattern of foreign direct investment (FDI) are investigated. But the authors assume that domestic agents have a comparative advantage over foreign agents in overcoming some of the obstacles associated with corruption and weak institutions.
Abstract: This paper models and tests the implications of institutional efficiency on the pattern of foreign direct investment (FDI). We posit that domestic agents have a comparative advantage over foreign agents in overcoming some of the obstacles associated with corruption and weak institutions. We model these circumstances in a principal-agent framework with costly ex-post monitoring and enforcement of an ex-ante labor contract. Expost monitoring and enforcement costs are assumed to be lower for domestic entrepreneurs than for foreign ones, but foreign producers enjoy a countervailing productivity advantage. Under these asymmetries, multinationals pay higher wages than domestic producers, in line with the insight of efficiency wages and with the evidence about the ‘multinationals wage premium.’ FDI is also more sensitive to increases in enforcement costs. We then test this prediction for a cross section of developing countries. We use Mauro’s (1995) index of institutional efficiency as an indicator of the strength of property rights enforcement within a given country. We compare institutional efficiency levels for a large cross section of countries in 1989 to subsequent FDI flows from 1990 to 1999. We find that institutional efficiency is positively associated with the ratio of subsequent foreign direct investment flows to both gross fixed capital formation and to private investment. This finding is true for both simple cross-sections and for cross-sections weighted by country size.
99 citations
TL;DR: The authors introduced comparative advantage into the core-periphery model of economic geography, and showed that when a pattern of comparative advantage exists, integration may lead to international specialization of production.
Abstract: The paper returns to a familiar topic in international trade, comparative advantage, introducing it into Krugman's classic, core-periphery model of economic geography. This extra force of dispersion radically changes the stability properties of the model. Instead of the familiar result that trade liberalization leads to increased industrial concentration, lowering trade costs leads initially to increased concentration and then to dispersion of production. When a pattern of comparative advantage exists, integration may lead to international specialization of production. This may be good news for peripheral countries, which may be able to retain industry despite the attraction of the core.
70 citations
TL;DR: In this paper, the authors analyzed the growth of US imports from different source countries and found strong support for Krugman's model, in which faster-growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade.
Abstract: Most macroeconomic models imply that faster income growth tends either to lower a country’s trade balance by raising its imports with little change to its exports or to reduce its terms of trade in order to maintain balanced trade. Krugman (1989) proposed a model in which countries grow by producing new varieties of goods. In his model, faster-growing countries are able to export these new goods and maintain balanced trade without suffering any deterioration in their terms of trade. This paper analyzes the growth of US imports from different source countries and finds strong support for Krugman’s model.
55 citations
TL;DR: In this article, the authors investigate the choice of currency of invoicing in international trade under exchange rate fluctuations and find that the relative size of a country plays a role in determining the currency of invoice.
Abstract: The authors investigate the choice of currency of invoicing in international trade under exchange rate fluctuations. Predictions derived from a model developed by Donnenfeld and Zilcha in 1991, and others, regarding the optimal choice of currency of invoice are tested for imports into Canada. The authors employ a unique dataset from Customs Canada that covers a six-year period and lists all currencies used for invoicing by industry. The empirical results support the hypothesis that there is a positive relationship between the extent of invoicing in the importer's national currency and exchange rate risk, and a negative relationship between invoicing in the exporter's currency as well as invoicing in a third currency and exchange rate risk. The empirical results further indicate that relative size of a country plays a role in determining the currency of invoicing.
50 citations
TL;DR: In this paper, three possible causes are posited for this growth: outsourcing, global sourcing, and the increasing importance of MNE networks, which are examined in two analytical frameworks: one using OECD input-output table data and one using German time-series data.
Abstract: Growth in trade is often seen to have played a dominant role in integrating national economies. Analyses of this role have, however, almost exclusively been based on trade in final goods. This paper attempts to address this problem by analyzing recent growth in intermediate goods. Three possible causes are posited for this growth: outsourcing, global sourcing, and the increasing importance of MNE networks. These are examined in two analytical frameworks: one using OECD input–output table data and one using German time-series data. Results from both frameworks give strong support to the hypothesis that international production plays a great role in explaining the strong increase in intermediate inputs imports of developed countries. The evidence for the hypothesis that the increasing importance of the MNE network causes the growing trade in intermediate goods is especially strong. The outsourcing hypothesis receives also some support.
50 citations
TL;DR: In this article, the authors investigate whether free capital mobility leads a government to tighten its budget deficit for fear of being penalized from the international capital market, and they test the hypothesis using three-stage least squares (3SLS), which can control for the endogenous nature of capital account liberalization.
Abstract: The paper investigates whether free capital mobility leads a government to tighten its budget deficit for fear of being penalized from the international capital market. The author tests the hypothesis using three-stage least squares (3SLS), which can control for the endogenous nature of capital account liberalization. Even the conservative measure shows that, if capital account liberalization were exogenously imposed, ceteris paribus, government budget deficit would be reduced by 2.275% of GDP. Furthermore, 3SLS results show that this disciplinary effect is stronger for countries under a fixed exchange rate regime or for countries with weak central bank independence. The disciplinary effect is also found to be stronger in more recent periods—the 1990s—during which capital market integration has been most prevalent.
34 citations
TL;DR: In this paper, the authors formalized the notion that GATT exceptions such as antidumping and escape clause actions can act as insurance for import competing sectors affected by adverse price shocks and showed that sector-specific contingent protection measures are superior to uniform contingent tariffs as an insurance mechanism.
Abstract: The paper formalizes the notion that GATT exceptions such as antidumping and escape clause actions can act as insurance for import competing sectors affected by adverse price shocks. The authors use a general-equilibrium model with several import competing sectors and assume incomplete markets so that agents cannot contract insurance. It is shown that sector-specific contingent protection measures are superior to uniform contingent tariffs as an insurance mechanism. A tax-cum-subsidy policy (i.e., taxing all sectors in order to subsidize the shocked sector) also improves welfare and is superior to contingent protection.
34 citations
TL;DR: For an oligopolistic industry, the effects of mergers on the domestic country's optimal trade policy are analyzed in this paper. But the authors do not consider the effect of foreign mergers in the context of an oligopoly.
Abstract: For an oligopolistic industry, the effects of mergers on the domestic country's optimal trade policy are analyzed. If the domestic country pursues an optimal trade policy then it will always lose as a result of a foreign merger. The optimal domestic response to a foreign merger is to decrease (increase) the tariff if demand is concave (convex) and to increase the production subsidy. The foreign merger reduces foreign welfare when the domestic country pursues its optimal trade policy. The optimal domestic response to a domestic merger is to leave the tariff unchanged and to increase the production subsidy.
TL;DR: This article analyzed the sector bias of price changes induced by changes in US tariffs and transportation costs and found that, in both the 1970s and 1980s, cuts in tariffs and transport cost levels were concentrated in unskilled-intensive sectors.
Abstract: To gauge the effect of international trade on the rising US skill premium, the paper analyzes the sector bias of price changes induced by changes in US tariffs and transportation costs. It is found that, in both the 1970s and 1980s, cuts in tariffs and transportation cost levels were concentrated in unskilled-intensive sectors. Despite this suggestive evidence, the authors estimate that price changes induced by tariffs or transportation costs mandated a rise in inequality that was mostly statistically insignificant. Thus, they do not find strong evidence that falling tariffs and transport costs, working through price changes, mandated rises in inequality.
TL;DR: In this article, the authors examined the impact of the emergence of regional blocs on the patterns of interbloc and intrabloc trade when firms have the option to engage in foreign direct investment (FDI).
Abstract: The paper examines the impact of the emergence of regional blocs on the patterns of interbloc and intrabloc trade when firms have the option to engage in foreign direct investment (FDI). For exogenously given external tariffs, when firms have the option to engage in FDI, all interbloc trade may cease—complete trade diversion that is replaced by interbloc FDI investment creation. In such an event the volume of world trade declines but this is more than offset by the increase in world output due to direct investment. The paper also investigates the optimal tariff that a trading bloc levies on imports from nonmember countries. The tariffs are restricted by the option to engage in two-way direct investment; hence, the regional blocs are hampered from mutually harming one another through an escalation in the tariff war. Finally, the formation of two regional blocs enhances the welfare of all countries.
TL;DR: This paper developed a model that can help to interpret the differences in both the longer run trends in inflation and real exchange rates in Hong Kong and Singapore as well as the short differences in macroeconomic and real currency volatility.
Abstract: Hong Kong has maintained a pegged exchange rate since 1983, while Singapore has been on a floating regime since the early 1970s. This paper provides an interpretation of the different performance of the Hong Kong and Singapore economy that could be attributable to the differences in their exchange rate regime. We develop a model that can help to interpret the differences in both the longer run trends in inflation and real exchange rates in Hong Kong and Singapore as well as the short differences in macroeconomic and real exchange rate volatility. The difference in the response of the two economies to the Asian crisis is also consistent with our model.
TL;DR: In this article, the authors examined the impact of efficiency-seeking FDI on factor prices, employment, and output, and showed that when transportation costs fall, companies start relocating labor-intensive production processes to low-wage countries.
Abstract: The paper examines the impact of efficiency-seeking FDI on factor prices, employment, and output. The analysis shows that when transportation costs fall, companies start relocating labor-intensive production processes to low-wage countries. But this does not necessarily hurt workers in the high-wage country. The paper demonstrates an employment-depressing \"relocation effect\" and an employment-enhancing \"efficiency effect.\" Employment is more likely to rise if the internationality of production is high and if the supply of capital is elastic. Furthermore, the model is capable of explaining intraindustry cross-hauling.
TL;DR: In this article, the authors evaluate the costs and benefits of a single currency area within a unified framework and find that either regime may dominate, although the utility differences between the two regimes are very small.
Abstract: The paper evaluates the costs and benefits of a single currency area within a unified framework. Conventionally, it is argued that a single currency area carries a welfare loss owing to the sacrifice of exchange rate adjustment in the presence of country-specific shocks. But in 1973 Mundell argued that a single currency area offers risk-sharing benefits when capital markets are limited in their ability to facilitate consumption insurance. The authors construct a simple model and compare a system of independent national currencies to a single currency area. The presence of country-specific shocks may either reduce or enhance the benefits of a single currency area, depending on the importance of exchange rate adjustment relative to risksharing. In a simple quantitative analysis, we find that either regime may dominate, although the utility differences between the two regimes are very small. There has been a wide debate documenting the pros and cons of a single currency area. Broadly speaking, most of the critics of the euro area argued that Europe did not comprise an “optimal currency area.” In the sense of Mundell (1961), McKinnon (1963), and Kenen (1969), an optimal currency area is defined as an area in which factor mobility is sufficiently great, or economic shocks are sufficiently common, that there is little need for relative price adjustment between different regions within the area. The proponents, on the other hand, argued for the transactions and efficiency benefits of eliminating national currencies, as well as the “noneconomic” benefits associated with enhancing the European Union. It is fair to say, however, that at an analytical level there has been much more attention paid to the costs of a single currency area, in terms of the absent adjustment role of the exchange rate, and the lack of independent monetary policy, than there has been to the economic benefits of a single currency. 1 Recently, McKinnon (2002) has highlighted a less well-known contribution by Mundell (1973), who developed an argument for a single currency based on the risksharing benefits of using a common means of exchange among regions that are hit by idiosyncratic shocks. Mundell’s (1973) perspective is implicitly one where consumption insurance via the use of international private capital markets is difficult or impossible to attain, owing to financial market incompleteness. Then, in a system of independent national currencies, a negative shock has to be absorbed within a country, while under a common currency regime a country can run a balance of payments deficit by running down its holdings of the international currency.
TL;DR: This paper examined the relationship between transitory terms-of-trade shocks and private saving and found that intertemporal substitution of consumption and intratemporal substitution between tradables and nontradables both have large effects on private saving.
Abstract: The paper examines the relationship between transitory terms-of-trade shocks and private saving. Using a model allowing for nonseparability between the consumption of tradables and nontradables, the paper estimates the intertemporal elasticity of substitution while accounting for the intratemporal elasticity of substitution between the consumption of tradables and nontradables. Empirical analysis of data for five industrial countries indicates that in response to transitory terms-of-trade shocks, intertemporal substitution of consumption and intratemporal substitution of consumption between tradables and nontradables both have large effects on private saving.
TL;DR: In this paper, the authors model a multiple-stage game where waste is generated in an industrialized country as a byproduct of production, and potentially is exported to some less-developed countries, if not abated locally, or imposed on local residents at a cost of an environmental tax.
Abstract: The paper deals with international trade in hazardous waste products when there is an international oligopoly market for waste, and both waste-importing and waste-exporting countries act strategically to utilize national environmental policies to attach rents arising from trade in waste. The authors model a multiple-stage game where waste is generated in an industrialized country as a byproduct of production, and potentially is exported to some less-developed countries, if not abated locally, or imposed on local residents at a cost of an environmental tax. In the market for waste, an oligopolistic supply is assumed. The demand for waste is perfectly competitive, with waste-processing firms guided by marginal disposal costs and environmental taxes levied by foreign countries. With each country playing Nash, the analysis finds domestic and foreign taxes to be distorted from the Pigouvian taxes in such a way that the domestic (waste-exporter) tax rate is set below, and the foreign tax rate is set above, the Pigouvian taxes. However, a global welfare optimum requires tax distortions in the opposite direction, in the sense that foreign environmental taxes must be set below the Pigouvian tax rate.
TL;DR: In this article, the authors use a model of an endogenous market structure, where the number of firms is determined by a zero-profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of companies fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality.
Abstract: With direct trade barriers banned, governments may be tempted to use indirect policy tools to interfere with trade, such as environmental taxes. The author uses a model of an endogenous market structure, where the number of firms is determined by a zero-profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of firms fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality (if pollution is transboundary). Moreover, owing to the absence of a terms-of-trade effect, it diverts from the classical strategic tax rule. The author argues that both governments arguably fix their equilibrium emission taxes “too low,” meaning that tax competition plausibly leads to “ecological dumping.”
TL;DR: In this article, the impact of more transparency on the risk-sharing opportunities in the foreign exchange market and the associated implications on ex ante welfare is studied. But the authors focus on the exchange rate market and do not consider the risk sharing opportunities in general.
Abstract: The paper studies the impact of more transparency on the risk-sharing opportunities in the foreign exchange market and the associated implications on ex ante welfare. Transparency is measured in this model by the informational content of publicly observable signals about exchange rate developments. The authors find that in this model more transparency improves welfare in economies that are poorly endowed with capital and/or where investors are not very risk-averse, while welfare is reduced in economies with large capital endowments and/or where investors are highly risk-averse.
TL;DR: In this article, a simultaneous-equations model is developed for the reciprocal relationship among bilateral trade value, conflict, and cooperation by modeling the actions of exporters, importers, and governments.
Abstract: A simultaneous-equations model is developed for the reciprocal relationship among bilateral trade value, conflict, and cooperation by modeling the actions of exporters, importers, and governments. The model is estimated separately for each of the dyads among the US, the USSR, China, Japan, and (West) Germany for the yearly data from 1948 to 1992. The direction of the effects of conflict or cooperation on trade and that of trade on conflict or cooperation are generally mixed, as expected. Certain reciprocal relationship patterns emerge depending on whether countries belong to the East or West block.
TL;DR: The authors used a three-factor (capital, low-and high-skill labor), two-household (low and high skill individuals) and two-sector trade model to analyze the determinants of voter attitudes towards immigration under direct democracy, and identify factors that would be coherent with both the observed increase in the skilled-unskilled wage differential and stiffening attitudes towards low-skill capital-poor immigration.
Abstract: The paper uses a three-factor (capital, low- and high-skill labor), two-household (low- and high-skill individuals), two-sector trade model to analyze the determinants of voter attitudes towards immigration under direct democracy, and to identify factors that would be coherent with both the observed increase in the skilled–unskilled wage differential and the stiffening attitudes towards low-skill capital-poor immigration. If the import-competing sector is intensive in the use of low-skill labor, and capital is the middle factor, an improvement in the terms of trade or neutral technical progress in the exporting sector leads nationals to oppose immigration of capital-poor low-skill households. An increase in income inequality is also likely to stiffen attitudes towards this type of capital-poor, low-skill immigration prevalent in Europe until recently.
TL;DR: The authors examined exchange rate passthrough into US import prices for 29 manufacturing industries using eight exchange rate indexes and found that major currency indexes perform better than their broad currency counterparts when using a major currency index, industry-specific exchange rate index are preferred to aggregate indexes.
Abstract: We examine exchange rate passthrough into US import prices for 29 manufacturing industries using eight exchange rate indexes. These indexes vary by the number of currencies included; whether the weight on each currency is based on total trade with the United States or solely imports; and, whether the weights vary by industry. Our results indicate that passthrough is generally incomplete but varies across industries. Moreover, passthrough is sensitive to the exchange rate index. Using bootstrapped J-tests we show that major currency indexes perform better than their broad currency counterparts. When using a major currency index, industry-specific exchange rate indexes are preferred to aggregate indexes.
TL;DR: In this article, the authors examine a firm's cost of expropriation risk in a framework that links it to the government's incentive to expropriate, and develop a pricing model for the firm's costs of risk that includes the positions of both government and firm.
Abstract: The paper examines a firm's cost of expropriation risk in a framework that links it to the government's incentive to expropriate. The author develops a pricing model for the firm's cost of expropriation risk that includes the positions of both government and firm. The government's decision to expropriate is modeled as an American-style call option. The cost of expropriation risk is modeled as the value of an insurance policy that pays off all losses resulting from expropriation. The firm's cost of expropriation risk is determined by the government acting to optimize the value of its option to expropriate. The author identifies the parameters that link the government's option to expropriate to the firm's cost of expropriation risk, and shows how the model can be used in capital budgeting decisions and the ongoing management of expropriation risk.
TL;DR: This paper found that the ultimate source of declining real gross national product since 1974 is a decrease in trade liberalization of the North Korean economy, which is consistent with the conventional model in which free trade stimulates economic growth.
Abstract: New growth theories suggest that an economy's increased openness raises domestic productivity, and hence must have a positive effect on the living standards of a nation. The North Korean economy, isolated from world trade for several decades and its economy devastated, provides a test for this implied causality. The possibility that the ultimate source of declining real gross national product since 1974 is a decrease in trade liberalization of the North Korean economy cannot be rejected. The results are more definitive when the sample is split into two subperiods, pre–1974 and post–1974. These findings are generally consistent with the conventional model in which free trade stimulates economic growth.
TL;DR: In this article, the authors studied firms' proliferation behavior in a differentiated product market using an oligopolistic competition model with multiproduct firms and showed that if the elasticity of substitution across different firms increases, firms proliferate more and the number of firms in the market decreases.
Abstract: Firms’ proliferation behavior in a differentiated product market is studied using an oligopolistic competition model with multiproduct firms. The model has the following characteristics: (1) the elasticity of substitution across firm's own products and the elasticity of substitution across different firms are allowed to differ; (2) the product managers of the same firm behave cooperatively rather than independently; (3) the number of firms is determined by a free-entry condition and so is endogenous. If the elasticity of substitution across the firm's own products increases, it is shown that the firm proliferates less and the number of firms in the market increases. If the elasticity of substitution across different firms increases, firms proliferate more and the number of firms in the market decreases.
TL;DR: In this paper, the forward rate is an unbiased predictor of the future spot rate and the rejection of this hypothesis could occur because market behavior is inconsistent with rational-expectations or because there exists a risk premium.
Abstract: The hypothesis that the forward rate is an unbiased predictor of the future spot rate has been rejected in many empirical studies. The rejection of this hypothesis could occur because market behavior is inconsistent with rational-expectations or because there exists a risk premium. Equations describing the forward premium and the change in the exchange rate are estimated jointly, and tests of both the rationalexpectations and no-risk-premium hypotheses are conducted. Empirical estimates, obtained using quarterly data for the yen‐dollar exchange rate, reject the rational-expectations hypothesis and suggest that there exists a time-varying risk premium.
TL;DR: In this article, the authors used a two-sector efficiency-wage model to analyze the consequences of immigration for a small open economy with a dual labor market, where immigrants are characterized by an (exogenous) return probability.
Abstract: The paper uses a two–sector efficiency–wage model to analyze the consequences of immigration for a small open economy with a dual labor market. Immigrants are characterized by an (exogenous) return probability. Legal regulations impose preferential hiring of natives or “old” immigrants. As a result, there is sectoral segregation between natives and immigrants, leading to discrimination of the type equal pay for equal work,but unequal “work.” In the short run (with sector–specific capital), immigration has a positive first–order impact on natives' welfare if migration policy favors segregation through high return rates or restrictive hiring practices (“guest–worker system”). In the long run, its effect is only determined by factor intensities (2 ¥ 2 model). Finally, the improved integration of migrants yields efficiency gains and improves aggregate welfare of all residents.
TL;DR: In this article, the authors build a trade model that renders tractable the process in which imperfect competition in a country's downstream sector affects the rest of the world through international trade.
Abstract: The authors build a trade model that renders tractable the process in which imperfect competition in a country's downstream sector affects the rest of the world through international trade. For this purpose, internationally traded goods are viewed as middle products in the vertical chain of production, in which middle products are produced upstream and transformed into final consumption goods downstream. Suppression of competition in a country's downstream sector may serve as a beggar-thy-neighbor policy, increasing that country's own utility while reducing that of its trading partner countries.
TL;DR: The welfare effects of the strategic alliance are in general ambiguous as mentioned in this paper, and the degree of lessening of competition depends on the firms' ability to commit to output levels, in the case where the firms can credibly commit to outputs, the alliance effectively becomes a cartel, restoring prices to the monopoly level.
Abstract: As an alternative to exporting, a firm can enter a foreign market by forging a strategic alliance with its foreign counterpart. The alliance eliminates transportation costs and duplications in product distribution networks. At the same time, strategic alliance lessens competition between the firms so that it leads to smaller outputs and higher prices. The degree of lessening of competition depends on the firms’ ability to commit to output levels. In the case where the firms can credibly commit to output levels, the alliance effectively becomes a cartel, restoring prices to the monopoly level. On the other hand, if such commitment is not credible or not possible, prices will be lower than the monopoly level but will still be higher than that if firms had exported to each other's market directly. The welfare effects of the strategic alliance are in general ambiguous.