Time Preference and Income Convergence in a Dynamic Heckscher–Ohlin Model

This paper shows that income convergence in an open‐economy setting hinges upon how the time discount rate of the households is determined. As opposed to the case of constant time discount rate where cross‐country income divergence may emerge, the small open economy may catch up with the rest of the world if the time discount rate increases with consumption. In contrast, if the time discount rate decreases with consumption, then the small open economy fails to catch up with the rest of the world under free trade of commodities.     

FACTOR PRICE EQUALIZATION IN JAPANESE REGIONS*

This paper tests factor price equalization (FPE) in Japanese regions. I found that FPE is strongly rejected, even when unobserved cross‐regional differences in factor quality and productivity are considered. The wage tends to be low in labour‐abundant regions specializing in labour‐intensive industries. The cross‐regional gap in absolute wage levels remains large, while convergence is observed during the 1990s, a period of wage declines that appeared to be related to deep import penetration. This finding of FPE violation is to be expected, given the restricted interregional labour mobility and distinctive difference in specialization patterns across regions in Japan.     

How Does Foreign Direct Investment Really Affect Developing Countries' Growth?

Two main contributions to literature on foreign direct investment (FDI) and economic growth are made in this paper. First, the paper examines the effect of FDI on economic growth for 44 developing countries using heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors. The main result is that FDI has, on average, a negative effect on growth in developing countries, but there are large differences in the effect across countries. Second, a general‐to‐specific model‐selection approach is used to systematically search for country‐specific factors explaining the cross‐country differences in the growth effects of FDI. The results suggest that the cross‐country heterogeneity in the growth effect of FDI can be explained mainly by cross‐country differences in freedom from government intervention, business freedom, FDI volatility, and primary export dependence.     

Does size matter? Implications of household size for economic growth and convergence

We assess the effects of changes in household size on the long‐run evolution of living standards and on cross‐country convergence. When the observed changes in average household size across countries are taken into consideration, growth in living standards is slower throughout the 20th century as compared to a measure based on per capita GDP. Furthermore, the speed of divergence between different countries before 1950 is faster and the speed of convergence after 1950 is slower after adjusting for the evolution in household size.     

FDI Policy,Greenfield Investment and Cross‐border Mergers

This paper examines a multinational's choice between greenfield investment and cross‐border merger when it enters another country via foreign direct investment (FDI) and faces the host country's FDI policy. Greenfield investment incurs a fixed plant setup cost, whereas the foreign firm obtains only a share of the joint profit from a cross‐border merger under the restriction of the FDI policy. This trade‐off is affected by market demand, cost differential, and market competition, among other things. The host country's government chooses its FDI policy to affect (or alter) the multinational's entry mode to achieve the maximum social welfare for the domestic country. We characterize the conditions shaping the optimal FDI policy and offer intuitions on FDI patterns in developing and developed countries.     

Business Cycle Comovement and Labor Market Institutions: An Empirical Investigation

This paper examines the empirical link between labor market institutions and international business cycle synchronization. Using a data panel of 20 OECD countries over the 1964–2003 period, we evaluate how cross‐country labor market heterogeneity affects business cycle comovement. Our estimation strategy controls for a large set of possible factors influencing cross‐country GDP correlation, which allows a comparison of our results with those found in previous studies. We find that bilateral trade, trade similarity, monetary and fiscal convergence, as well as EMU membership lead to more synchronized cycles. Our results show that labor market regulations affect the extent of business cycle synchronization. Disparities in employment protection laws and direct taxation tend to lower international comovement while divergence in union density, unemployment benefits, and indirect taxation enhance cross‐country correlations. The level of labor market regulations also matters. Heavier employment taxes are found to raise GDP comovement.     

THE ALLOCATION OF OECD DIRECT INVESTMENT BETWEEN CEECS: A DISCRETE CHOICE APPROACH

The choice of the location of foreign direct investment is a complex phenomenon, depending not only on host‐country characteristics, but also on host‐industry and specific source‐firm characteristics. To capture these different influences for foreign investment location decisions into 13 Central and Eastern European Countries (CEECs) over a twelve‐year period, this paper uses a Generalized Nested Logit (GNL) model with firm, industry, and country data. The novel empirical results show that the responsiveness of firms’ decisions regarding where to locate capital in CEECs to country‐level variables differs both across sectors and across firms of different sizes and profitability.     

Two Dimensions of Convergence: National and International Wage Adjustment Effects of Cross-border Outsourcing in Europe

The paper proposes a distinction between the two dimensions of convergence—within and between countries—when analyzing the impact of cross‐border outsourcing on real wage rates in the EU‐15 and the CEEC. In the CEEC, international outsourcing has not affected the adjustment of average real wage rates at the manufacturing industry level, but it has led to a closure of the gap within a typical EU economy. Between‐country convergence is likewise fostered by cross‐border outsourcing, supporting the hypothesis that outsourcing facilitates international factor price equalization.     

Convergence in per-capita GDP across European regions: a reappraisal

This paper studies convergence in per-capita GDP across European regions over the period 1980–2000. We use median unbiased estimators of the rate of convergence to the steady-state growth path, while allowing for unrestricted patterns of heterogeneity and spatial correlation across regions. By permitting the model parameters to be completely different across regions, not only we avoid imposing strong a priori assumptions but we are also able to analyze the spatial patterns in the estimated coefficients. Our results differ from those found using conventional estimators. The main differences are: i) the mean rate of convergence is much lower; ii) for most regions this rate is zero; iii) the number of regions for which we reject equality in trend growth rates is substantially lower. We also find significant evidence of correlation of growth rates across neighbor regions and across regions belonging to the same country.     

Home sweet host: A cross‐country perspective on prudential and monetary policy spillovers through global banks

Prudential regulation of banks is multi‐layered: policy changes by home‐country authorities affect banks’ global operations across many jurisdictions; policy changes by host‐country authorities shape banks’ operations in the host jurisdiction regardless of the nationality of the parent bank. Do these policies create (unintended) cross‐border spillovers? Similarly, monetary policy actions by major central banks may also have effects on the behaviour of banks in other countries. This paper examines the effect that changes in home‐ and host‐country prudential measures have on cross‐border dollar credit provision, and how these interact with US monetary policy. We first run panel regressions with both layers of regulation, to examine which has a greater effect on cross‐border lending. We then use a novel approach to decompose growth in cross‐border bank lending into separate home, host and common components, and then match each with the corresponding home or host policies. Our results suggest that prudential policies can have spillover effects, which depend on the instrument used and on whether a bank's home or host country implemented them. Home policies tend to have larger spillovers on cross‐border US dollar lending than host policies. We also find that a tightening of US monetary policy can compound the spillovers of some prudential measures.     

Half-lives of Deviations from PPP: Contrasting Traded and Nontraded Components of Consumption Baskets

The paper examines the convergence question by contrasting the half‐lives of deviations from purchasing power parity (PPP) across traded and nontraded goods in an exchange rate model with sticky prices. In particular, empirical results show that in most cases the half‐lives of PPP deviations for traded goods are shorter than those for total consumption and for nontraded goods.     

Pane e Cioccolata: The Impact of Native Attitudes on Return Migration

This paper addresses the link between native attitudes and return migration. We exploit the variation in xenophobia using information on media consumption by migrants in Italy. A widely documented crime provides a quasi‐experimental setting to identify the impact of Italian attitudes on migrants’ settlement intentions. Our results suggest a significant effect of anti‐immigrant attitudes on the intended duration of stay in the host country. The impact is more pronounced for low‐skilled migrants, which has consequences for how migration affects the long‐run convergence between sending and destination countries.     

Semi-Nonparametric Estimates of Currency Substitution: the Demand for Sterling in Europe

The paper presents new evidence of significant substitution between European domestic monetary assets and foreign holdings of sterling. The finding of significant cross‐country currency substitution implies reduced costs of transition towards monetary union and easier European policy convergence. Elasticities of substitution, using the Morishima measure, are estimated from the semi‐nonparametric Fourier flexible form.     

TEST OF THE CONVERGENCE HYPOTHESIS ALLOWING FOR CROSS‐SECTIONAL DEPENDENCE

A large empirical literature has investigated whether per capita output converges around a common trend across national and regional economies. The methods used in this literature assume no cross‐sectional dependence even though it is likely to be present and might be important in practice. Chang has devised a promising method of testing for unit roots in heterogeneous panels with cross‐sectional dependence. We apply her method to test whether convergence takes place across three samples of economies: 15 advanced industrial countries; a broader group of 57 countries; and the 48 contiguous US states. We find evidence of convergence for the 15 advanced industrial economies but no evidence of convergence across either the broad group of countries or the US states.     

Peaks vs Components

We analyze the cross‐national distribution of gross domestic product (GDP) per capita and its evolution from 1970 to 2009. We argue that peaks are not a suitable measure for distinct convergence clubs/equilibria in the cross‐country distribution of GDP per capita, because the number of peaks is not invariant under non‐linear strictly monotonic transformations of the data such as the logarithmic transformation. Instead, we model the distribution as a finite mixture, and determine its number of components via statistical testing. We find that the number of components in the cross‐country distribution changes from three to two in the mid 1990s.     

Explaining Export Performance through Inputs: Evidence from Aggregated Cross‐country Firm‐level Data

Which trade barrier related to intermediate inputs forms a greater burden on the export performance of firms in developing countries? Using aggregated cross‐country firm‐level data covering 43 mostly developing economies, this paper estimates the marginal importance of the impact of various intermediate input trade cost barriers, namely tariffs, non‐tariff barriers (NTBs) and services barriers, on firms' export behavior. In a cross‐sectoral setting, this paper takes the firm's export performance in goods as a central focus to study the effects of these different trade barriers through the exporting firm's choice of use of intermediate inputs. The results show that the most significant trade barriers on inputs that impede export performance in developing countries are mainly NTBs and restrictions of services.     

Trade Elasticities

Conventional aggregate trade elasticity estimates hardly vary across countries. We introduce an aggregate elasticity that is implied by theory: It is the value that equates the welfare gains from trade as implied by one‐ and multi‐sector versions of the model in Arkolakis et al. (American Economic Review, 102 (2012):94–130). These estimates are predicated on sector‐level values for trade elasticites, which we provide at three‐digit levels for 28 developed and developing countries. The values for this aggregate elasticity vary greatly across countries, and they do so because of countries' patterns of production and because a given sector‐level elasticity displays considerable cross‐country heterogeneity.     

CONVERGENCE IN THE UK SERVICE SECTOR: FIRM LEVEL EVIDENCE, 1988–1998

Bernard and Jones (1996) have previously argued that similarity in the technologies used by firms in the service sector helps to explain evidence of absolute convergence at the cross‐country level. This paper searches for convergence at the firm level using data for the UK service sector over the period 1988–1998. Initial mixed support for this view is partly explained by strong business cycle effects in the data. Upon closer examination we find evidence that convergence was more likely in industries that had high levels of technology investment, greater exposure to new technologies and high levels of absorptive capacity.     

The effects of cross‐border M&As on the acquirers’ domestic performance: firm‐level evidence

Abstract This paper provides empirical evidence on the effects of cross‐border mergers and acquisitions (M&As) on the acquiring firms’ domestic performance in the U.K. and France. We build a new firm‐level data set that combines a global M&A database with balance sheet data for the years 2000 to 2007. Combining matching techniques with a difference‐in‐differences estimator, we find that cross‐border M&As boost on average acquirers’ domestic sales and investment, and they are not accompanied by a downsizing of the domestic labour force in either country. Further, cross‐border M&As in knowledge‐intensive industries lead to improvements in domestic productivity. Our results display some heterogeneity across industries and types of acquisitions, suggesting a connection between the motives for international M&As and their resulting effects.     

New evidence of regional income divergence in post-reform Russia

This article investigates regional income convergence in Russia during 2000–2008. We test the hypothesis in which income divergence across regions of the country should give place to income convergence as the country moves toward free market economy with strong market institutions. The study contributes to the existing literature by using the exponential smooth autoregressive Augmented Dickey–Fuller (ADF) unit root test in a panel setup, a novel econometric technique, which encompasses cross sectional dependence. Results show strong evidence of on-going regional income divergence in post-reform period.