The relationship between R&D,innovation and productivity in emerging economies: CDM model and alternatives

CDM (Crépon, Duguet and Mairesse, 1988) is a workhorse model in the economics of innovation, which explains productivity in a three-stage procedure driven initially by R&D and leads to patents and then to productivity improvements. Based on the logic of this model, an increasing number of papers applies it to emerging economies but modifies the original model without being explicit about the nature and implications of this modification. We argue in this paper that, in its original form, CDM does not capture stylized facts of the determinants of productivity in emerging economies and that we need alternative models. Accordingly, we are critical of papers that try to maintain the validity of the model but actually change it. For that purpose, we test the original CDM model and its two alternatives: investment and production capability–driven models. Our research is based on a large sample of firms in Central and Eastern Europe, former Soviet republics and Turkey, and we show that the alternative models are much closer to the stylized facts of innovation activities and technology upgrading in these and other emerging economies. Our conclusions have important policy implications, which we discuss.     

Macroeconomic responses of emerging market economies to oil price shocks: An analysis by region and resource profile

We analyze the impact of oil price shocks on the macroeconomic fundamentals in emerging economies in three regions that have different resource endowments. The existing literature on emerging economies remains inconclusive on how regional factors and resource characteristics affect the response of macroeconomic variables to oil price shocks. We show that (1) exports in Europe and Central Asia are driven by oil more than East Asia and the Pacific and that (2) policy makers in East Asia and the Pacific should be concerned about real exchange appreciation following a positive oil shock to mitigate losses in the non-oil export market. Analysis by resource endowment further reveals that, in less-resource-intensive economies, an oil price shock causes large variations in consumption and has a negative and persistent impact on the real gross domestic product (GDP). In mineral-exporting economies, real GDP and interest rates are driven largely by oil price shocks. The response of real GDP in mineral-exporting economies is short lived. In oil-exporting economies, only real GDP has a large variation in response to oil price shocks. Our findings highlight the need for customized policy responses to oil price shocks, depending on resource endowments, as we show that a “one size fits all" policy does not exist.     

The down-payment constraint and UK housing market: Does the theory fit the facts?

This paper considers empirical implications of the down-payment constraint for the UK housing market. It shows that, at the aggregate-level, models of the housing market with this constraint are consistent with a number of stylized facts. The paper then exploits variation across local housing markets and considers how leverage affects the response of house price inflation to shocks. The evidence, based on data for 147 district-level housing markets for the period 1993–2002, suggests that a large incidence of households with high leverage (loan-to-value ratios) raises the sensitivity of house prices to a shock. This is also consistent with the down-payment constraint model.     

Investigating properties of commodity price responses to real and nominal shocks

This paper studies dynamic adjustments of 49 world commodity prices in response to innovations in the nominal exchange rate and the world real GDP. After we estimate the dynamic elasticity of the prices with respect to these shocks, we obtain the kernel density of our estimates to establish stylized facts on the adjustment process of the commodity price toward a new equilibrium path. Our empirical findings imply, on average, that the law of one price holds in the long-run, whereas the substantial degree of short-run price rigidity was observed in response to the nominal exchange rate shock. The real GDP shock tends to generate substantial price fluctuations in the short-run because adjustments of the supply can be limited, but have much weaker effects in the long-run as the supply eventually counterbalances the increase in the demand. Overall, we report persistent long-lasting effects of the nominal exchange rate shock on commodity prices relative to those of the real GDP shock.     

By force of demand: Explaining cyclical fluctuations of international trade and government spending

This paper explores the role of demand shocks, as an alternative to productivity shocks, in driving both domestic and international business cycles within the international real business cycle (IRBC) framework. In addition to those well-documented domestic business cycle fluctuations (e.g., the volatility and cyclicality of output, consumption, investment, labor hours, and labor productivity) and international business cycle properties (e.g., the countercyclical net export and the comovement puzzle), this paper focuses on two additional stylized facts in the industrialized countries: the procyclical trade openness (the GDP fraction of trade volume) and the countercyclical government size (the GDP fraction of government spending). Using a parsimonious dynamic stochastic general equilibrium model, we show that the model׳s predictions under productivity shocks are not consistent with these facts. Instead, a demand-shock-driven model replicates the above facts while matching other domestic and international business cycle properties. An estimated version of the model confirms the quantitatively important impacts of demand shocks.     

Comovements and heterogeneity in the euro area analyzed in a non‐stationary dynamic factor model

This paper establishes stylized facts on comovements and heterogeneity of individual euro area countries' output and price developments in the past two decades. For this purpose, a non‐stationary structural dynamic factor model is fitted to a large dataset of euro area macroeconomic variables. The main results are as follows. Both common factors and idiosyncratic components are important in explaining individual countries' output and price developments in the euro area and are also both very persistent. Idiosyncratic shocks and adjustments to these shocks are mainly responsible for cross‐country heterogeneity. The asymmetric transmission of common shocks plays a minor role. Finally, there is no strong evidence that some common shocks lead to greater heterogeneity than others. Copyright © 2009 John Wiley & Sons, Ltd.     

Housing investment: What makes it so volatile? Theory and evidence from OECD countries

This paper explains how mortgage market liberalization can introduce greater volatility in the housing market, which is a stylized fact documented from OECD countries, with a DSGE model where households face a credit constraint and housing is used as collateral. The housing collateral constraint creates a link between the housing market and borrowing capacity, a link that amplifies the response of housing demand to technology shocks and strengthens in economies with more liberalized mortgage markets.     

Regional or global shock? A global VAR analysis of Asian economic and financial integration

This study employs a global vector autoregressive (GVAR) model to empirically investigate the viability of regional monetary arrangements in Asia. In marked contrast to the previous studies, we analyzed whether recent regional economic and financial integration in Asia were driven by global (U.S.) shock or regional (Japanese and Chinese) shock, using the GVAR model that allows global inter-linkages between domestic and foreign variables. By estimating generalized impulse responses of Asian economies’ real outputs and interest rates to global and regional shocks, we found that the Chinese shock exerted more real and financial influences on Asian economies than the U.S. shock. Another regional shock, i.e., the Japanese shock, had a far smaller influence on Asian economies. The relative importance of regional shocks originating from China needs to be considered when establishing regional monetary arrangements in Asia.     

Information interaction,behavioral synchronization and asset market volatility

This paper focuses on the synchronization of trading behavior caused by interactions among traders. The study begins with an agent-based model in which most agents make investment decisions based on three types of information (neighbor, public and private information) according to their heterogeneous personal preferences. Considering the influence of the social relationship network in reality, traders in our model are connected by a complex network. We use four different types of networks. The simulated results of this model reproduce several stylized facts about the asset market. Simulated results show that when preference of traders for neighbor information increases, the level of trust among traders will gradually increase and then there will be a “leap” at a certain point. The mutual trust among traders is achieved through coupling effect in the network. Moreover, with the frequent synchronization of traders’ behavior, extreme phenomena in financial markets will emerge. In addition, our numerical simulations show that when the average degree of network is higher, behavioral synchronization will emerge at a lower level of dependence on neighbor information. The degree distribution of the network will also have a significant influence on the convergence processes of behavioral synchronization. The more heterogeneous the degree distribution is, the easier the behavioral synchronization process will occur. In our simulations, the mode of agent behavior expectation will also enhance the effect of network structure to behavioral synchronization. Finally, this paper affirms the important role of public information and learning mechanism (expectation formation mode) in the process of behavioral synchronization.     

Migration and the wage and unemployment gaps between urban and non-urban sectors: A dynamic general equilibrium reinterpretation of the Harris–Todaro equilibrium

This paper offers a dynamic general equilibrium reinterpretation of the static partial migration equilibrium by Harris and Todaro [Harris, J., Todaro, M., 1970. Migration, unemployment and development; a two-sector analysis. American Economic Review 60, 126–142], under (i) flexible urban and rural wages and (ii) free mobility of workers and free entry of firms. The proposed model accounts for the set of stylized facts in developing countries: rural to urban migration and higher urban wages and unemployment.The model allows us to view the wage gap as a compensating differential for the negative amenities associated with job destruction and subsequent costly search on the consumption side, which can also be seen as a match-specific premium based on a sectoral productivity differential on the production side. Our model predicts the comovements among urban and non-urban wages and migration flows to the urban sector, an empirical regularity observed over the urbanization process of developing economies. Finally, we also conduct a welfare analysis.     

Transmission of US financial and trade shocks to Asian economies: Implications for spillover of the 2007–2009 US financial crisis

This paper describes an investigation of the transmission of US shocks to Asian economies with consideration of financial linkages and trade linkages. Using the sign restriction vector autoregression (VAR) approach during 2000–2012, our empirical results can be summarized as follows. First, both US financial and trade linkages exert a significant impact on production in Asian economies. Second, through both financial and trade linkages, US spillover shocks account for around 50% of the production fluctuation in Asian economies. Third, during the episodes of 2007–2009 US financial crisis, the impact of financial shocks is greater than that of trade shocks. Results suggest that (i) Asian economies are not decoupled with US; and (ii) different from conventional findings, financial linkages between US and Asian economies are strong, especially for highly developed Asian economies. Therefore, investors and policymakers of Asian economies should take account of US financial conditions.     

Volatility, growth, and welfare

This paper constructs an endogenous growth model driven by self-fulfilling expectation shocks to explain the stylized fact that the average growth rate of GDP is related negatively to volatility and positively to capacity utilization. The implied welfare gain from further stabilizing the U.S. economy is about a quarter of annual consumption, which is consistent in order of magnitude with estimates based on the empirical studies of Ramey and Ramey (1995) and Alvarez and Jermann (2004). Hence, policies designed to reduce fluctuations can generate large welfare gains because smaller fluctuations are associated with permanently higher rates of growth.     

Supersize It: The Growth of Retail Chains and the Rise of the “Big‐Box” Store

This paper documents and explains the recent rise of “big‐box” general merchandisers. Data from the Census of Retail Trade for 1977–2007 show that general‐merchandise chains grew much faster than specialist retail chains, and that general merchandisers that added the most stores also made the biggest increases to their product offerings. We explain these facts with a stylized model in which a retailer’s scale economies interact with consumer gains from one‐stop shopping to generate a complementarity between a retailer’s scale and scope.     

UK term structure decompositions at the zero lower bound

This paper employs a zero lower bound (ZLB) consistent shadow‐rate model to decompose UK nominal yields into expectation and term premium components. Compared to a standard affine term structure model, it performs relatively better in a ZLB setting by capturing the stylized facts of the yield curve. The ZLB model is then exploited to estimate inflation expectations and risk premiums. This entails jointly pricing and decomposing nominal and real UK yields. We find evidence that medium‐ and long‐term inflation expectations are contained within narrower bounds since the early 1990s, suggesting monetary policy credibility improved after the introduction of inflation targeting.     

Labor Market Dynamics: A Time‐Varying Analysis

This paper studies how key labour market stylized facts and the responses of labour market variables to technology shocks vary over the US postwar period. It uses a benchmark dynamic, stochastic, general equilibrium model enriched with labour market frictions and investment‐specific technological progress that enables a novel identification scheme based on sign restrictions on a SVAR with time‐varying coefficients and stochastic volatility. Key findings are: (i) the volatility in job finding and separation rates has declined over time, while their correlation varies across time; (ii) the job finding rate plays an important role for unemployment, and the two series are strongly negatively correlated over the sample period; (iii) the magnitude of the response of labour market variables to technology shocks varies across the sample period.     

International propagation of shocks: A dynamic factor model using survey forecasts

This paper studies the pathways for the propagation of shocks across the G7 and major Asia-Pacific countries using multi-horizon forecasts of real GDP growth from 1995 to 2017. We show that if the forecasts are efficient in the long run, the results obtained using these forecasts are comparable to those obtained from the actual outturns. We measure global business cycle connectedness and study the impacts of both country-specific shocks and common international shocks using a panel factor structural VAR model. Our results suggest that there is a strong convergence of business cycles within the group of industrialized countries, as well as within the group of developing economies during non-recessionary periods. In particular, we find an increased decoupling between the industrialized and developing economies after the 2008 recession. However, the direction of shock spillovers during recessions and other crisis periods varies, depending on the nature and origin of the episode.     

A model of the topology of the bank – firm credit network and its role as channel of contagion

This paper proposes a stochastic model of a bipartite credit network between banks and the non-bank corporate sector that encapsulates basic stylized facts found in comprehensive data sets for bank-firm loans for a number of countries. When performing computational experiments with this model, we find that it shows a pronounced non-linear behavior under shocks: the default of a single unit will mostly have practically no knock-on effects, but might lead to an almost full-scale collapse of the entire system in a certain number of cases. The dependency of the overall outcome on firm characteristics like size or number of loans seems fuzzy. Distinguishing between contagion due to interbank credit and due to joint exposures to counterparty risk via loans to firms, the later channel appears more important for contagious spread of defaults.     

Modelling contagion of financial crises

Inspired by the empirical findings, we include international traders to capture linkage between markets and propose a two-market heterogeneous agents model to simulate financial crisis with contagion effect. This paper manages to calibrate sudden crash behavior of US and UK stock markets during “Black Monday” of 1987 besides smooth crisis and disturbing crisis categorized in literature. It is implied that financial crisis and its contagion could be endogenous, which supports a scenario of over-valuation causing a financial crisis. In addition, the model shows that financial system could be fragile in which small shock(s) hitting individual market’s fundamental could cause financial crisis spreading to the other market. This also supports a scenario of external shock triggering a financial crisis. Lastly, to demonstrate the relevance of our model to financial markets, we manage to match typical stylized facts, especially cross-correlation which is exclusive to a multiple-market case.     

Productivity dispersion: facts,theory, and implications

This paper discusses the stylized facts, the theory, and the remaining problems of productivity dispersion, which is essentially related to the concept of equilibrium in the neoclassical theory. Empirical study of data relating to Japanese firms shows that they all obey the Pareto law, and also that the Pareto index decreases with the level of aggregation. In order to explain these two stylized facts we propose a theoretical framework built on the basic principle of statistical physics and on the concept of superstatistics, an approach that accommodates fluctuations of aggregate demand. We show that the allocation of production factors depends crucially on the level of aggregate demand, and that the higher the level of aggregate demand, the closer the economy is to the frontier of the production possibility set.     

Interbank loans,collateral and modern monetary policy

This study develops a novel agent-based model of the interbank market with endogenous credit risk formation mechanisms. We allow banks to exchange funds through unsecured and secured transactions, which facilitates the flow of funds to the most profitable investment projects. Risk premiums result from banks׳ forecasting rules and depend on past performance of the benchmark risk factors and interest rates. Our model confirms basic stylized facts of the interbank interest rates and volumes. We also find that network structures within the secured market segment are characterized by the presence of dealer banks, while we do not observe similar patterns in the unsecured market. We perturb the model with exogenous shocks and policy scenarios which correspond to unconventional monetary policies.