FDI and the relevance of spatial linkages: do third-country effects matter for Dutch FDI?

The aim of this paper is to test for the relevance of spatial linkages for Dutch (outbound) foreign direct investment (FDI). We estimate a spatial lag model for Dutch FDI to 18 host countries. After controlling for fixed effects, we find for our sample period 1984–2004 that third-country effects matter. Apart from our benchmark spatial lag model, we also estimate various alternative models by looking at European host FDI countries only, by dividing FDI into industry and services FDI, and by estimating a spatial error model.

Saving–investment Correlations in Response to Monetary Policy Shocks: New Insights into the Feldstein–Horioka Puzzle?

In this paper, it is argued that the observed high positive correlation between national savings and investment which is found in the data can in part be explained by shocks to monetary policy. This hypothesis, which is established by reviewing some empirical findings, is tested in a two-country DSGE-model framework in the tradition of the New Open Economy Macroeconomics. The simulation results obtained support the idea that shocks to monetary policy might contribute to the explanation of the Feldstein-Horioka puzzle.

Non-traded Goods,Technical Progress and Wages

We use a general equilibrium model of trade to show that technical improvement may indeed cause a fall in the wages of unskilled workers. Under some modest conditions, the wages of skilled workers may go down too.

An Exploration of Asset Returns in a Production Economy with Relative Habits

This paper explores asset returns in a production economy with habit forming households. We show that a model with capital adjustment costs and relative habits is consistent with salient financial facts, such as the equity premium, the market price of risk, and the riskfree interest rate. These predictions are not at odds with good business cycle predictions. In the model, economy investment is strongly procyclical and more volatile than output, which in turn is more volatile than consumption. Moreover, consumption growth is positively autocorrelated and negatively (positively) correlated with future (past) stock returns.

Policy coordination in East Asia and across the Pacific

In this paper, we construct a macro-econometric model that describes the economic activity in the Asia-Pacific area and provide quantitative insights into the recent policy debates on monetary and currency coordination among the East Asian economies. The model includes a wide variety of monetary and currency policy rules that the East Asian economies adopt and allows for one country's policymaking to have substantial effects on foreign countries. We apply the model to three current policy issues: (1) the desirability of currency basket pegs in East Asia, (2) the anticipated effects of China's currency policy reform, and (3) the non-negativity constraint on Japanese nominal interest rates. The simulation analyses show the external economy effects of policy rules quantitatively and suggest the difficulty of monetary and currency policy coordination among the East Asian economies.

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Trade in Capital Goods and International Co-movements of Macroeconomic Variables

This paper contributes to the ongoing debate on the causes of international co-movements of macroeconomic variables. In particular, existing real business cycle models predict cross-country consumption correlations to be higher than in the actual data, cross-country output correlations to be lower than in the actual data, and cross-country consumption correlations to be relatively higher than the output correlations. We show that cross-country correlations of consumption, investment, employment and output predicted by a standard international real business cycle model are highly sensitive to the share of capital goods in total trade. Our calibrated model shows that when capital goods account for a share of total traded goods greater than 50%, the apparent discrepancy between the data and the simulations is resolved.

Foreign Direct Investment in the Enlarged EU: Do Taxes Matter and to What Extent?

Foreign direct investment is of increasing importance in the European Union. This paper estimates the effect of taxes on foreign direct investment (FDI) flows and on three sub-components of these flows for the countries of the enlarged European Union. The model in the spirit of gravity equations robustly explains FDI flows between the 25 member states. Sample selection needs to be addressed in the estimation. We show that the different subcomponents of FDI should and indeed do react differently to taxes. After controlling for unobserved country characteristics and common time effects, the top statutory corporate tax rate of both, source and host country, turn insignificant for total FDI and investment into equity. However, high source country taxes clearly increase the probability of firms to re-invest profits abroad and lower the percentage of debt financed FDI. This might reflect profit re-allocation to avoid taxes. Market size factors have the expected signs.

Fear of Floating and Pegging: A Simultaneous Choice Model of De Jure and De Facto Exchange Rate Regimes in Developing Countries

We present an analysis of the determinants of de jure and de facto exchange rate regimes based on a panel probit model with simultaneous equations. The model is estimated using simulation-based maximum likelihood methods. The empirical results suggest a triangular structure of the model such that the choice of de facto regimes depends on the choice of de jure regimes but not vice versa. This gives rise to a novel interpretation of regime discrepancies.

Factor mobility, government debt and the decline in public investment

This paper aims at explaining the declining level of public investment in OECD countries. The theoretical framework hints to the relevance of a number of demand and supply factors—ranging from the yield of public investment to institutions like the EU deficit limits. The econometric results indicate that the decline is due to three developments: first to the increase in the public capital stock; second to the pile-up of public debt which has restricted the ability to finance new investment; and third to the increasing mobility of factors adding to the financing difficulties. In contrast to that neither the privatisation process nor EU deficit restrictions of the Maastricht Treaty have a robustly significant impact.

Rational Inattention and Choice Under Risk: Explaining Violations of Expected Utility Through a Shannon Entropy Formulation of the Costs of Rationality

We propose a model of stochastic choice in which the error term is derived from a maximizing framework in which it is costly for agents to make decisions optimally. We argue that the model has testable implications, and is closely related to other models used in the literature on choice under risk. We test this model over experimental data, replicate some conclusions of the existing literature, and show our model to perform well against models in the field in current use.

Supporting the Endogenous Relationship Between Well-Being and Employment for US Individuals

We test the existence of an endogenous relationship between well-being and employment for US individuals. To that end, we use a simultaneous equation generalized Probit model applied to four recent waves of the National Health Interview Survey (1997–2000). Our results do not enable us to accept the hypothesis that there is a significant effect from employment status to subjective well-being. In contrast, we provide evidence that suggest that well-being is positively correlated to the probability of having a job.

On the Equality of Real Interest Rates Across Borders in Integrated Capital Markets

The purpose in this note is first to review briefly the empirical results on the relationship between real interest rates and real exchange rates; this empirical literature provides little support for the hypothesis of Roll that expected real interest rates are equal in general. Our second aim is to discuss the theoretical conditions that have to be met for his hypothesis to hold.

International mixed duopoly and strategic commitments

This paper examines an international mixed model in which a social-welfare-maximizing domestic public firm competes against a profit-maximizing foreign private firm. First, the public firm can adopt either a lifetime employment contract or a wage-rise contract as strategic commitments. Second, the foreign private firm decides whether or not to enter the market. Third, if the foreign private firm enters, each firm independently chooses its actual output, while if the foreign private firm does not enter, the public firm acts as a monopolist. The paper shows the equilibrium of the international mixed model.

On Indexed Bonds and Aggregate Demand Elasticity

Bonds indexed to the price level or inflation have become popular and more common in the industrialized world. This paper examines the impact of indexed bonds on the price level elasticity of aggregate demand. With a model of aggregate demand based on the standard IS-LM framework and expanded to differentiate between bonds which are indexed to the price level and bonds which are not so indexed, we find that the existence of indexed bonds decreases the elasticity of aggregate demand with respect to the general price level.

Do Patent Protection and Technology Transfer Facilitate R&D in Developed and Emerging Countries? A Semiparametric Study

This paper examines if patent protection and technology transfer facilitate R&D in a sample that includes both developed and emerging countries. A semiparametric model is used to estimate the relevant parameters using country level data from 21 countries, of which six are emerging, for the period 1981–1997. The results suggest thresholds in patent protection and technology transfer: patent protection has a positive effect which weakens at high levels of protection, and FDI has a positive effect only if the country depends heavily on FDI.

Minorities’ Fields of Expertise in Economics and Employment Demand in These Fields

Efforts by public and private institutions to increase the number of minorities participating in graduate economics programs has contributed to a growing supply of Ph. D. trained minority economists. However, minorities are still under-represented as faculty members in economics departments. This presidential address explores whether the concentration of minorities in a few fields of specialization creates a demand-supply mismatch for these individuals.

Testing a Model of the UK by the Method of Indirect Inference

We use the method of indirect inference to test a full open economy model of the UK that has been in forecasting use for three decades. The test establishes, using a Wald statistic, whether the parameters of a time-series representation estimated on the actual data lie within some confidence interval of the model-implied distribution. Various forms of time-series representation that could deal with the UK’s various changes of monetary regime are tried; two are retained as adequate. The model is rejected under one but marginally accepted under the other, suggesting that with some modifications it could achieve general acceptability and that the testing method is worth investigating further.

Multinationals: Too Many or Too Few?— The Proximity–concentration Trade-off

The paper builds an analytically tractable model that illustrates the “proximity–concentration trade-off” involved in horizontal multinationals. For low trade costs, firms are single-plant firms, for intermediate costs, some are single-plant firms whereas others are multinationals, for large trade costs, firms are multinationals. Because of the modeling strategy, the model is suited for a welfare analysis of multinationals. It shows that too many firms choose to concentrate their production in only one location. Also, for some transport costs, a reduction in transport costs worsens welfare.

Specialisation patterns and the synchronicity of regional employment cycles in Europe

This paper examines the degree of correlation, i.e. the synchronicity, among EU regional employment cycles and attempts to link it to changing patterns of specialisation. This topic deserves attention since the existing evidence seems to suggest a rather limited role for a region’s industry structure in explaining its employment growth. A dynamic panel data model is estimated for pairs of regions by within groups, i.e., by a standard fixed effects estimator. The results indicate that synchronicity between regions has declined and differences in regional industry structure can be held account for this.

Modeling the Impact of Real and Financial Shocks on Mercosur: The Role of the Exchange Rate Regime

This paper studies to what extent the diversity of exchange rate regimes within Mercosur exerts an influence on the feasibility of a monetary union in this area. A semi-structural vector autoregression model is built for each country, including a set of international and domestic variables. Based on impulse response functions and forecast error decomposition, we conclude that differences in exchange rate regimes explain significantly the divergences of economic dynamics triggered by foreign or domestic shocks. Second, we decompose the structural innovations generated by each country model into unobservable common and idiosyncratic components, using a state-space model. This last exercise, intended to assess the degree of policy coordination between the Mercado Común del Sur members, did not disclose any common component for the structural innovations generated by the three national models.