Democratization is the driving force for technological and economic change

The purpose of this paper is to analyze the relationship between democratization and technological innovation. In primis, the paper shows, through economic history, that democratization is an antecedent process (cause) to technological and economic change (effect). In particular, the primary finding is that democratization is a driving force for technological change: most free countries, measured with liberal, participatory, and constitutional democracy indices, have a higher level of technology than less free and more autocratic countries. In fact, “democracy richness” generates a higher rate of technological innovation with fruitful effects for the wellbeing and wealth of nations. These findings and predictions lead to the conclusion that policy makers need to be cognizant of positive associations between democratization and technological innovation paths in order to support the modern economic growth and future technological progress of countries.     

ON DECREASING MARGINAL IMPATIENCE*

One of the most controversial assumptions in endogenous time preference theory is that the degree of impatience is marginally increasing in wealth. We examine the implications of an empirically more relevant specification whereby time preference exhibits decreasing marginal impatience (DMI). With DMI, there are multiple steady‐state non‐satiated and satiated equilibria. In a constant interest rate economy, the non‐satiated steady‐state point is necessarily unstable. In a capital economy with decreasing returns technology, both the non‐satiated and satiated steady‐state points can be saddlepoint stable. The model is used to examine policy implications for the effects of capital taxation and government spending.     

ESTIMATES OF INTANGIBLE INVESTMENT BY INDUSTRY AND PRODUCTIVITY GROWTH IN JAPAN

In estimating intangible investment in Japan at the industry level, we find a high intangible investment/gross value added ratio in the information technology (IT) sector and negative growth rates in intangible capital in 13 industries over the decade from 2000. When we examine the impacts of intangible investment on total factor productivity growth, we find a significant and positive effect on total factor productivity growth in the market economy. In a revised estimation that considers intertemporal knowledge spillovers, the estimated rate of return on intangibles in the IT sector is quite high after the IT revolution. The results imply that intangible assets have been underinvested in the IT sector.     

Smoothing sudden stops

Emerging economies are often exposed to sudden shortages of international financial resources. Yet domestic agents do not seem to take preventive measures against these sudden stops. We highlight the central role played by the limited development of ex ante (insurance) and ex post (spot) domestic financial markets in generating this collective undervaluation of international resources. We study several policies to counteract the external underinsurance. We do this by solving for the optimal mechanism given the constraints imposed by limited financial development, and then considering the main financial policies—in terms of the model and practical relevance—that implement this solution.     

On `indirect' trade-related R&D spillovers

An influential literature argues that trade promotes knowledge flows and technology transmission between trading partners. This literature focuses on `direct' research and development (R&D) spillovers which are related to the levels of R&D produced by the trading partners. In this paper, we argue that `indirect' trade-related R&D spillovers also take place between countries, even if they do not trade with each other. These `indirect' spillovers are associated with available rather than with produced levels of R&D. Our empirical results suggest that these `indirect' trade-related spillovers are at least as important as the `direct' ones, and strengthen the view that trade does matter for the international transmission of R&D. They also suggest that, due to the existence of these `indirect' effects, bilateral trade patterns are relatively less important determinants of the level of foreign R&D spillovers acquired through trade.     

On the static and dynamic costs of trade restrictions for small developing countries

We analyze the costs of trade restrictions for a small developing economy (LDC). Intermediate goods invented elsewhere are only introduced on the LDC market if it is profitable to do so. The LDC economy evolves to a balanced growth path in which income, welfare, and the share of available goods increase if trade restrictions fall. The adjustment path is asymmetric: an increase in trade restrictions leads to a slow-down of economic growth, while a decrease may lead to a rapid catch-up process. The dynamic costs of trade restrictions are in general substantially larger than the static costs.     

Introduction to special issue: Macroeconomics with frictions

This is an introduction and overview of the special issue on “Macroeconomics with frictions”.     

Normalization in cointegrated time series systems

Abstract .  A method for normalizing cointegrating vectors is proposed for cointegrated time series systems containing multiple cointegrating vectors, a method requiring that an identity matrix appear in the normalized cointegrating matrix with unit coefficients attached to the endogenous or choice variables. The preferred method causes the normalized cointegrating matrix and the adjustment matrix to be consistent with the implications of static and dynamic economic theory. Alternative normalizations generate cointegrating and adjustment matrices that do not match up well with economic theory and do not reveal the testable restrictions implied by static economic theory.     

Introduction to monetary and macro economics

This introduces the symposium on monetary and macro economics.     

Finance–Growth Nexus and the P‐bias: Evidence from OECD Countries

Recent studies provide new empirical evidence confirming that financial development is linked to economic growth in OECD countries. Using new dynamic panel regression techniques, these appraisals indicate that within the group of high‐income countries stock market size as a measure of financial advancement contributes significantly to overall economic activity. Applying the same advanced techniques, this paper questions this conclusion by showing that the findings of these studies seem to be not only not robust with respect to adding new observations but also likely to be plagued by a severe price bias which belittles the information content of the used financial indicator (stock market capitalization). We provide evidence that anticipative price effects (i.e. expectations of future growth, reflected in current stock prices) may be driving the statistical relationship between stock market activities and economic growth in high‐income countries to a much larger extent than recent analyses of the finance– growth link in OECD countries suggest .     

Did colonization matter for growth?: An empirical exploration into the historical causes of Africa's underdevelopment

We investigate the impact of 20th-century European colonization on growth. We find that colonial heritage, as measured by the identity of the metropolitan ruler and by the degree of economic penetration, matters for the heterogeneity of growth performances in Africa. Colonial indicators are correlated with economic and sociopolitical variables that are commonly employed to explain growth and there are growth gains from decolonization. Colonial indicators also add significant explanatory power to worldwide growth regressions and are correlated with the Sub-Saharan Africa and the Latin America dummies.     

The Costs of Financial Crises: Resource Misallocation,Productivity, and Welfare in the 2001 Argentine Crisis

Financial crises in emerging market countries appear to be very costly: both output and a host of partial welfare indicators decline dramatically. The magnitude of these costs is puzzling both from an accounting perspective – factor usage does not decline as much as output, resulting in large falls in measured productivity – and from a theoretical perspective. With the aim of resolving this puzzle, we present a framework that allows us to do the following. First, we account for changes in a country's measured productivity during a financial crisis as the result of changes in the underlying technology of the economy, the efficiency with which resources are allocated across sectors, and the efficiency of the resource allocation within sectors, driven both by reallocation amongst existing plants and by entry and exit. Second, we measure the change in the country's welfare resulting from changes in productivity, government spending, the terms of trade, and a country's international investment position. We apply this framework to the Argentine crisis of 2001 using a unique establishment level dataset and we find that more than half of the, roughly, 10 percent decline in measured total factor productivity can be accounted for by deteriorations in the allocation of resources both across and within sectors. We measure the decline in welfare to be of the order of one‐quarter of one year's gross domestic product.     

Trade costs, international production shifting, and growth

In this paper I present a North-South endogenous growth model in which the impact of globalization on production location and growth can be analyzed. In the model the skilled-labor abundant North is the only innovator in the world. Using the model, I illustrate a scenario that is particularly interesting. Globalization (a reduction in trade costs) leads to a relocation of production to the South in a differentiated-product sector. As a result, more resources are shifted to R&D in the North, and the growth rate in the world increases. The model has several empirically consistent implications, such as rising relative wages of skilled to unskilled labor under globalization in both the North and South. I also discuss the welfare impact of globalization in this model.