The Behaviour of Real Exchange Rates: The Case of Japan

This study examines the convergence rate of mean reversion by estimating the half‐lives of sectoral real exchange rates using an extensive product price panel for Japan (with the USA as the numéraire). We find that the half‐lives of sectoral real exchange rates are remarkably distorted when the grouped half‐life is measured inappropriately and the cross‐sectional dependence and potential trend breaks are ignored. After taking account of these problems, the bias‐corrected half‐life for all goods is as low as 3.00 years, close to the bottom of the consensus view of 3 to 5 years. Moreover, the bias‐corrected half‐life of mean reversion is 2.40 years for traded goods, and only approximately half that for non‐traded goods. Finally, our findings also support the view that small‐sample bias correction is critical for half‐life estimations.     

A model of wage and employment effects of service offshoring

This paper develops a two‐sector model of trade in goods and intermediate tasks that differ in tradability and skill intensity. A skill‐abundant country with high productivity is shown to offshore more unskilled tasks than skilled tasks, without relying on a particular correlation structure between tradability and skill intensity. With putty‐clay technology that allows retraining in the long run, transition from the non‐offshoring to the offshoring equilibrium generates wage and employment effects that switch from negative to positive as tradability declines, with the switches occurring at a higher degree of tradability for skilled tasks. This is consistent with the empirical literature.     

HORIZONTAL MERGERS IN A DIFFERENTIATED COURNOT OLIGOPOLY

Using a standard differentiated goods quantity competition setting, we show three facts about horizontal two‐firm mergers that are not true for a homogeneous goods Cournot market. First, merger of two firms is profitable for the merging firms provided that goods are sufficiently distant substitutes. Second, merging of two firms can lead to more two‐firm mergers. Third, an initially non‐profitable two‐firm merger can occur in anticipation of subsequent mergers. These facts imply that mergers are more likely to occur in differentiated goods markets than in homogeneous goods markets.     

North–South Outsourcing,Immigration, and Skilled Wages: Through the Lens of Incomplete Contracts

The forces of immigration and offshore outsourcing are subject to factors that leave sufficient room for incompleteness in a contract. The authors present a model that allows one to compare the effects of immigration and offshore outsourcing, on skilled wage, when both are subject to contractual incompleteness. They capture the sensitivity of the effect on the skilled wage, of immigration and offshore outsourcing to complementarities between firm‐specific human capital and human capital that is transferable across firms manufacturing intermediate goods. In particular, the authors show that the North–South gap in skilled wages is likely to (i) increase through the forces of immigration when the intermediate goods' technology is super‐modular in the North but sub‐modular in the South and (ii) decrease through the forces of outsourcing when the intermediate goods' technology is sub‐modular in the North but super‐modular in the South.     

A North–South model of outsourcing and growth

In this paper, I formulate a simple North–South R&D‐based growth model where final goods firms in the North endogenously determine the range of international outsourcing of intermediate goods to the South. I show that a fall in the trade cost (through trade liberalization) of intermediate goods in the North: (i) reduces the wage of the North relative to that of the South; (ii) increases the outsourced variety of intermediate goods in the North; and (iii) stimulates Northern R&D activity and economic growth in both countries. By conducting welfare analysis, I also show that a decline in the trade cost of intermediate goods in the North improves welfare in the South more than in the North.     

Aid,non‐traded goods,and growth

Abstract We examine the effects of foreign aid in a small recipient country with two traded goods, one non‐traded good, and two factors. Learning by doing and intersectoral knowledge spillovers contribute to endogenous growth. We obtain two main results. First, a permanent increase in untied aid raises (or lowers) the growth rate if and only if the non‐traded good is more capital intensive (or effective labour intensive) than the operating traded good. Second, a permanent increase in untied aid raises welfare if the non‐traded good is more capital intensive than the operating traded good; otherwise, it may raise or lower welfare.     

Does Outsourcing Always Benefit Skilled Labor?

This paper builds a dynamic product cycle model with three kinds of labor inputs—scientists, white‐collar workers, and blue‐collar workers—and producer heterogeneity to find an explanation for why outsourcing did not cause wage inequality in the 1970s. According to the theoretical model, outsourcing decreases the wages of white‐collar workers and the relative wages of white‐collar workers to blue‐collar workers in the outsourcing home country if outsourcing industries are blue‐collar worker intensive compared with non‐outsourcing industries. Scientists who conduct research and development always benefit from outsourcing.     

The Division and Size of Gains from Liberalization in Service Networks*

If two disjoint country service networks involving a small and large country are connected as part of international liberalization in the presence of network externalities, the per capita gain for the small country from access to a large network will be large, and the per capita gain for the large country will be small. In contrast to goods, the benefits of liberalization in network‐related services are more likely to be approximately equally divided between large and small countries than is true of trade in goods, where benefits accrue disproportionately to the small country. We also argue that non‐cooperation in network‐related services trade may involve more extreme retaliation than suggested for trade in goods by the optimal tariff literature, so that relative to a non‐cooperative outcome, gains from liberalization in network‐related services become larger than from liberalization in goods. We develop simple models which we use for numerical examples showing these points, along with an empirical implementation for global telecoms liberalization for the US, Europe, Canada, and the rest of the world using the framework developed in the paper. This shows similar proportional gains to regions, consistent with the theme of the paper that goods and services liberalization differ.     

Offshoring and Trade Balance in Developed and Emerging Economies

This paper analyzes the effects of off‐shore outsourcing for international trade, especially for the emerging and poor economies, in a two‐sector specific factor model, with a nontraded good being one of the sectors. The phenomenon of offshoring is modeled by incorporating the reduced use of domestic labor in the production function. This is regarded as a characteristic feature of offshoring in the literature. We find that increased offshoring leads to an increase in the relative price of the nontraded good. Given that this relative price can be interpreted as the real exchange rate, increased offshoring leads to exchange rate appreciation. This suggests that offshoring actually makes the goods and services from the emerging economies more competitive in the world market, and thus can be a contributory factor in the positive trade balance experienced by many emerging economies since early 2000s.     

How and where to offshore: a productivity comparison at the firm level

Using recent survey data on South Korean firms’ strategies for sourcing intermediate goods from abroad, we investigate whether there exists a productivity premium of offshoring by considering organizational forms (insourcing versus outsourcing) and the income level of offshored countries (North versus South) altogether. Thus, we consider the following four offshoring types: outsourcing from South, insourcing from South, outsourcing from North and insourcing from North. Unlike previous studies, we give particular attention to the comparison between outsourcing from North and insourcing from South and find that firms outsourcing from North are more productive than firms sourcing from their own affiliates in South. We offer three critical conditions to incorporate our empirical findings into the standard firm heterogeneity model: the fixed cost is higher for insourcing than for outsourcing and is higher in North than in South, the headquarters receive a larger share of the final revenue through insourcing than through outsourcing, and sourcing from North guarantees better profitability (or a bigger share) in the market for the headquarters than sourcing from South. Thus, this article contributes to the literature by identifying a new productivity order.     

SUBSIDIES AS OPTIMAL FISCAL STIMULI

Theoretical macroeconomic models typically take fiscal policy to mean tax‐and‐spend by a ‘benevolent government’ that exploits potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd‐out private consumption and typically reduce welfare. On account of their widespread use to stimulate economic activity, we consider the use of ‘tax‐and‐subsidize’ instead of ‘tax‐and‐spend’ policies. Within a static general equilibrium macro‐model with imperfectly competitive goods markets, we examine the effects of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximize welfare, rendering no intervention suboptimal. We also show that, within a two‐country setting, a Nash non‐cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between governments in setting these rates is more expansionary and leads to an improvement upon the non‐cooperative solution.     

PRICE DYNAMICS,FOREIGN EXCHANGE AND ANTICIPATED SHOCKS IN A TOURISM ECONOMY

Using a dynamic model of an open monetary economy, this paper examines the effects of tourism‐related anticipated shocks on goods prices and foreign exchange reserves. Foreign tourists consume mainly non‐traded goods in holiday destinations, converting them into exportable goods. This gives rise to a tourism terms‐of‐trade effect that affects the accumulation of foreign exchange. Announcements of anticipated events bring tourist visits forward, resulting in an initial under‐adjustment or an over‐adjustment in the prices of the non‐traded goods when the tourism terms‐of‐trade effect is positive or negative. This leads to an increase or a decrease in foreign reserves in the long run.     

THE TIMING OF UPGRADES*

By using a durable‐goods monopolist model, this paper investigates the timing of upgrades. I consider a three‐period model where the monopolist can upgrade the product in the second and third periods by investing in R&D. I analyse the non‐commitment and commitment cases. In the latter case, the decision on the timing of upgrades is made in the first period in advance. It is shown that the time‐inconsistency problem causes the monopolist in the non‐commitment case to release a new version more rapidly than in the commitment case. Moreover, even in the non‐commitment case, the release of a new version can still be later than the optimum from the social viewpoint.     

Equilibrium Effects of Superstition in the Housing Market

We investigate the interaction of product quality differentiation and consumer preference heterogeneity in durable goods markets, focusing on the effects of secondary market liquidity and consumer heterogeneity on equilibrium prices. We build an infinite‐horizon dynamic model of the apartments housing market that captures the above features. Some apartments are considered lucky, and some consumers are superstitious. Lucky apartments are valued more highly than non‐lucky ones only by superstitious consumers. Results show that the difference between the lucky apartment price and the non‐lucky apartment price becomes smaller when the secondary market becomes less liquid and when consumers’ preference heterogeneity becomes more persistent as opposed to time‐varying.     

Optimal Monetary Policy and Sectoral Shocks: Is International Monetary Cooperation Beneficial?

A stochastic general‐equilibrium model is used to explore the welfare effects of optimal monetary policy and the potential benefits of policy coordination. Cross‐country perfectly symmetric shocks in the traded goods sectors and imperfectly correlated shocks in the non‐traded goods sectors are considered. In this set‐up, monetary policy may not be able to achieve efficient sectoral resource allocations within countries and avoid inefficient relative price changes across countries. Welfare gains from coordination are sizable if the shocks to the traded and non‐traded goods sectors are negatively correlated and both sectors are of roughly equal size.     

Why does the velocity of money move pro‐cyclically?

The velocity of money usually rises in expansions and falls in recessions This paper explains this pro‐cyclical movement of velocity using two ideas: (i) during business cycles the movement of investment and consumption of durable goods has a larger amplitude than consumption of non‐durable goods and services; (ii) the velocity associated with expenditure on investment and durable goods is much higher than the velocity associated with consumption of non‐durable goods and services, because the former expenditures are synchronized with the attainment of money by economic agents whereas the latter are not. In this setting, the rise in the weight of expenditure in durable goods relative to the weight of non‐durable goods and services, which occurs during expansions, generates an increase in the average velocity of circulation. The opposite happens during recessions and thus velocity moves pro‐cyclically.     

Market entry and trade weighted import costs

Trade weighting is a common method of aggregating trade frictions. It will understate changes in these costs when there are non‐ad valorem trade costs and quality differences. Newly traded goods enter at higher trade costs than previously traded ones. Lower import costs shift trade to low‐quality goods with higher measured trade costs. These effects are quantitatively important. U.S. import costs fall more than twice as fast as trade weighted measures from 1974 to 2004 after the impact of shifting quality and newly traded goods is accounted for. Empirical estimates that use trade weighting will underestimate the welfare impact of trade costs.     

Trade and Endogenous Formation of Regions in a Developing Country

The authors present a model of regional catching‐up and development without scale effects. Regional growth is driven by technological imitation which is determined by positive externalities from international trade, the regions’ geography, and regional institutions. For the two regions considered, factor endowments are immobile land and human capital which is perfectly mobile between the two regions. Endogenous formation of regions is analyzed by introducing a non‐symmetric decrease in international transaction costs, reflecting the different geography and institutions in the two regions. Using panel data from 354 South African magisterial districts over the period 1996 to 2000, we find that geography is important in explaining trade patterns. As predicted, regions that are larger in terms of economic size, with good foreign market access and know‐how of foreign markets, competitive transport costs and a good local institutional support framework will be more successful in exporting manufactured goods than other regions.     

Outsourcing,Importing and Innovation: Evidence from Firm‐level Data for Emerging Economies

This paper investigates two sourcing strategies of firms, outsourcing and importing, and links these to innovation activities. The authors examine this empirically using firm‐level data for 28 emerging market economies and find robust evidence that outsourcing increases the likelihood to spend on R&D and via this channel raises innovation output, whereas importing increases innovation output, but not R&D. The results hold when implementing an instrumental variables approach. It is found that results crucially depend on the institutional environment in the economy, e.g. property rights and intellectual property rights protection. The results suggest that better institutions magnify the gains from importing, but not from outsourcing. EU countries also reap additional positive innovation effects from importing compared with non‐EU countries.     

Does Preferential Trade Benefit Poor Countries? A General Equilibrium Assessment with Nonhomothetic Preferences

We develop a Ricardian model of trade with nonhomothetic preferences to analyze preferential trade agreements (PTAs) among countries of different stages of economic development. The richer a country is, the more likely will PTAs improve its terms of trade, also when it is a non‐member. Rich non‐member countries are also less likely to incur welfare losses from PTAs. PTA membership only guarantees welfare gains for countries that are too poor to import the goods rich countries produce. For all other countries, the welfare effects of joining PTAs depend on the world income distribution and on the strength of comparative advantages.