Entry costs, industry structure, and cross-country income and TFP differences

Entry costs vary dramatically across countries. To assess their impact on cross-country differences in output and TFP, we construct a model with endogenous entry and operation decisions by firms. We calibrate the model to match the U.S. distribution of employment and firms by size. Higher entry costs lead to greater misallocation of productive factors and lower TFP and output. In the model, countries in the lowest decile of the entry costs distribution have 1.32 to 1.45 times higher TFP and 1.52 to 1.75 times higher output per worker than countries in the highest decile. As in the data, higher entry costs are associated with lower entry rates and business density.     

Cross-country income convergence revisited

We reassess convergence of income across countries and its determinants. The ergodic distribution of output per worker features multiple modes. In contrast to previous findings, productivity in the long run is unimodal. The long-run distribution of human capital is multimodal.     

Institutions and growth in limited access societies

We build a dynamic political economy model with a two-class society, workers and the elite, in which the elite formation, the innovation rate and fiscal policy are endogenous. The model generates a mapping between institutions and patterns of growth consistent with empirical evidence. Ex ante, when facing constraints in choosing institutions, the elite may delegate policy control to some of its members, even though such delegation exacerbates the conflict within the elite and causes policy failures. Committing to such institutional arrangements prevents more harmful outcomes, such as rapid entry and subsequent deterioration of the elite?s economic and political power.     

The effects of exchange rate volatility on exports: evidence from Armenia

The article examines how the volatility of exchange rate affected Armenia’s export to its main trading partner, Russia, in the period from January 2007 to February 2016. Along with real foreign income and competitiveness, the exchange rate volatility is considered as a determinant of real export. The estimation results indicate that the exchange rate volatility has negative significant effects on real export both in the long run and in the short run.     

Entry costs and cross-country differences in productivity and output

This paper contributes to the literature on cross-country income differences by studying the effect of entry barriers on productivity and output. Using instrumental variable regressions I show that higher entry costs significantly reduce output per worker and that they do so by lowering total factor productivity. In particular, an increase in entry costs by 80% of income per capita, which is one half of their standard deviation in my sample, is estimated to decrease total factor productivity and output per worker by 22% and 29%, respectively.      

Fiscal policy over the real business cycle: A positive theory

This paper explores the implications of the political economy model of Battaglini and Coate (2008) [8] for the behavior of fiscal policy over the business cycle. The model predicts that fiscal policy is counter-cyclical with debt increasing in recessions and decreasing in booms. Public spending increases in booms and decreases during recessions, while tax rates decrease during booms and increase in recessions. In both booms and recessions, fiscal policies are set so that the marginal cost of public funds obeys a submartingale. When calibrated to the US economy, the model broadly matches the empirical distribution of debt and also its negative correlation with output. However, the predictions of pro-cyclical spending and counter-cyclical taxation do not find empirical support. The calibrated model generates the same fit of the data as a benevolent government model in which the government faces an exogenous lower bound on debt. Nonetheless, the two models have very different comparative static implications.     

Optimum currency area theory: evidence from post-Soviet countries and implications for Eurasian Economic Union

In this article the theory of optimum currency area is applied to post-Soviet and other selected countries. The study finds smaller exchange rate variability when the economies are closely linked by bilateral trade, are subject to similar shocks both on aggregate and at the industry level, have similar inflation rates, are open and smaller in economic size, and have higher labour migration as proxied by remittance flows. The estimation results also substantiate that the US dollar plays a dominant role as an anchor currency. Next, the study shows that economic fundamentals suggest limited prospects of a common currency for post-Soviet countries, particularly for the Eurasian Economic Union (EAEU). It is also found that Moldova, among the post-Soviet countries, better approximates an optimum currency area with Russia. Further, when the government debt-to-GDP ratio is taken into account, only Kazakhstan from the EAEU member countries stands out as having positive prospects for forming a common currency area with Russia.     

Equilibrium with capacity-constrained firms: A classroom experiment

The authors develop a two-stage classroom experiment to illustrate convergence to long-run equilibrium in a market where price-taking firms are capacity-constrained. Once equilibrium in the first stage is established, capacity constraints are introduced by imposing discontinuities in the fixed costs of several firms. The experiment demonstrates that this supply shock yields a higher market price and, under assumed parameterization, several higher-cost firms that otherwise are not able to survive in the long-run equilibrium enter the market and earn positive profits.