34th International Seminar on Macroeconomics

June 17 and 18, 2011
Jeffery A. Frankel of Harvard's Kennedy School and Christopher Pissarides of the London School of Economics, Organizers

Barry Eichengreen and Andrew K. Rose, University of California at Berkeley and NBER
Flexing: Effects of Abandoning Fixed Exchange Rates

Eichengreen and Rose identify 51 instances since 1957 when a country or territory abandoned a fixed exchange rate and reasonably could have been expected to see its exchange rate appreciate. After "flexing," these countries experienced a wide variety of macroeconomic responses. Those with high investment rates and rapidly growing trade tended to experience sharper declines in growth, while the more open economies and countries with more international reserves tended to experience a sharper fall in inflation. These patterns have obvious implications for the current economic circumstances and prospects of China.

Alejandro Justiniano, Federal Reserve Bank of Chicago, and Claudio Michelacci, CEMFI
The Cyclical Behavior of Unemployment and Vacancies in the U.S. and Europe

Justiniano and Michelacci set up a real business cycle model with search and matching frictions driven by several shocks. The model nests full Nash Bargaining and wage rigidity as special cases, and includes other transmission mechanisms suggested by the literature for the propagation and amplification of disturbances. They then estimate the model using full information methods for two Anglo-Saxon countries (the United States and the United Kingdom), two Continental European countries (France and Germany), and two Scandinavian countries (Norway and Sweden). The researchers conduct inference with mixed frequency data, combining quarterly series for unemployment, vacancies, GDP, consumption, and investment, with annual data on unemployment flows. Parameters and shocks are estimated separately for each country, which can then vary in terms of search and hiring costs, workers' bargaining power, unemployment benefits levels, wage rigidity, and the stochastic properties of disturbances. Overall, the structural model accounts reasonably well for differences in labor market dynamics observed between the two sides of the Atlantic and within Europe. These estimates indicate that there is considerable cross-country variation in the contribution of technology shocks to the cyclical fluctuations of the labor market. Technology shocks alone replicate remarkably well the volatility in vacancies, unemployment, and finding probabilities observed in the United States, with mixed success in Europe. In contrast, matching shocks and job destruction shocks play a larger role in most European countries relative to the United States, with mixed success in Europe.

Enrico Spolaore, Tufts University and NBER, and Romain Wacziarg, University of California at Los Angeles and NBER
Long-Term Barriers to the Diffusion of Innovations

Spolaore and Wacziarg document the empirical relationship between cross-country adoption of technologies and long-term historical relatedness between human populations. They measure historical relatedness using genetic distance -- that is, the time since two populations' last common ancestors. The authors find that the relevant measure of relatedness for technology adoption is not the simple genetic distance between populations but rather genetic distance relative to the world technological frontier. This evidence is consistent with a barrier effect of long-term historical distance, whereby societies that are more distant from the technological frontier tend to face higher imitation costs. The results can help to explain current differences in total factor productivity and income per capita across countries.

Julian di Giovanni, International Monetary Fund, and Andrei Levchenko, University of Michigan and NBER

The Risk Content of Exports: A Portfolio View of International Trade (NBER Working Paper No. 16005)

It has been suggested that countries that export in especially risky sectors will experience higher output volatility. di Giovanni and Levchenko develop a measure of the riskiness of a country's pattern of export specialization and illustrate its features across countries and over time. Their exercise reveals large cross-country differences in the risk content of exports. The measure is strongly correlated with terms-of-trade and output volatility but does not exhibit a close relationship to the level of income, overall trade openness, or other country characteristics. The researchers then propose an explanation for what determines the risk content of exports, based on the theoretical literature exemplified by Turnovsky (1974). Countries with comparative advantage in the safe sectors, or strong enough comparative advantage in the risky sectors, will specialize; countries whose comparative advantage in the risky sectors is not too strong will diversify their export structure to insure against export income risk. The authors use both non-parametric and parametric techniques to demonstrate that these theoretical predictions are strongly supported by the data.

Gilles St. Paul, Toulouse School of Economics
Toward a Political Economy of Macroeconomic Thinking

Within a simplified macro context, St. Paul investigates the joint determination of the (incorrect) perceived model and the equilibrium. He assumes that the model is designed by a self-interested economist who knows the true structural model but reports a distorted one so as to influence outcomes. This model influences the people and the government: the latter tries to stabilize an unobserved demand shock and will make different inferences about that shock depending on the model it uses. The choice of a model is constrained by a set of "autocoherence conditions" that state that, in equilibrium, if everybody uses the model then it must correctly predict the moments of the observables. St. Paul then studies, in particular, how the models devised by the economists vary depending on whether they are "progressive" versus "conservative". The predictions depend greatly on the specifics of the economy being considered, but in many cases they are plausible. For example, conservative economists will tend to report a lower Keynesian multiplier and a greater long-term inflationary impact of output expansions. On the other hand, the economists' margin of maneuver is constrained by the auto-coherence conditions. Here, a "progressive" economist who promotes a Keynesian multiplier larger than it really is must, to remain consistent, also claim that demand shocks are more volatile than they really are. Otherwise, people will be disappointed by the stabilization performance of fiscal policy and reject the hypothesized value of the multiplier. In some cases, auto-coherence induces the experts to make, loosely speaking, ideological concessions on some parameter values. The analysis is illustrated by empirical evidence from the Survey of Professional Forecasters.

Joshua Aizenman, University of California at Santa Cruz and NBER, and Yothin Jinjarak, University of London
The Fiscal Stimulus in 2009-11: Trade Openness, Fiscal Space and Exchange Rate Adjustment

Aizenman and Jinjarak study the cross-country variation of the fiscal stimulus and the exchange rate adjustment propagated by the global crisis of 2008-9, indentifying the role of economic structure in accounting for the heterogeneity of response. They find that greater de facto fiscal space prior to the global crisis and lower trade openness were associated with a higher fiscal stimulus/GDP during 2009-10 (where the de facto fiscal space is the inverse of the average tax-years it would take to repay the public debt). Lowering the 2006 public debt/average tax base from the level of low-income countries (6) down to the average level of the Euro minus the SWEAP countries (2) was associated with a larger crisis stimulus in 2009-11 of 2.8 GDP percentage points. Joint estimation of fiscal stimuli and exchange rate depreciation indicates that higher trade openness was associated with a smaller fiscal stimulus and a higher depreciation rate during the crisis. Overall, the results are in line with the predictions of the Mundell-Fleming approach.

Gianmarco Ottaviano, Bocconi University
Pricing-to-market, Intra-Industry Reallocations and Macroeconomic Dynamics

Ottaviano presents a theory of endogenous aggregate productivity through firm selection, focusing on the determination of aggregate output per worker when firms with heterogenous efficiency react in terms of entry and exit to exogenous changes in labor productivity. The main result is that higher labor productivity makes survival easier for a larger number of less efficient firms. Accordingly, both the number of entrants and the number of producers increase. As the average firm efficiency decreases because of a composition effect, higher labor productivity is associated with higher average price and average markup as well as with lower average output. These findings carry over to the open economy. Crucially, however, the selection effect is stronger in open economy than in closed economy and its strength increases as trade gets freer and the scope for price discrimination, and therefore pricing-to-market, gets smaller.

Giancarlo Corsetti, University of Cambridge

Nontraded Goods Prices, Terms of Trade, and Risk Sharing

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