Assessing Productivity Gains from International Trade in a Small Open Economy

Empirical evidence suggests that exporter firms tend to charge higher markups than non-exporters due to trade barriers. The exporters’ markup premium, however, may disappear in a special case, namely when the home country is small relative to its trade partners and trade barriers are low. This can be because competition is more intense in the large export destination than in the small home country, so that firms are able to set higher markups for locally sold products but not for exports. This paper provides empirical evidence on the validity of this special case by estimating markups for firms in Luxembourg who generally export to larger countries. The estimated negative markup premium for exporters has important implications for the productivity measurement. In a sufficiently small open economy, exporters’ productivity may be biased downward, when the firm-level markup variation is not controlled for in the productivity estimation. The bias in the productivity estimates further leads to the inaccurate conclusion that openness to international trade lowers allocative efficiency.     

Corporate Governance and CEO Innovation

A fundamental concern emerging from the corporate literature is the agency problem of innovation. While innovation is considered as a major driver of corporate growth and profitability, the Chief Executive Officer (CEO) has an intrinsic reluctance to pursue innovation projects. The thrust of this paper is to identify the mechanisms of corporate governance which help attenuate this problem, thereby encouraging the CEO to have the propensity to innovate. The empirical results suggest that firms with a widespread dispersion of shares among shareholders are less likely to encourage the CEO to innovate. The likelihood of innovation appears to increase, however, in the presence of a large shareholder. Contrary to prevailing beliefs, there appears to be no association between innovation and board independence. The same result holds for board size. Also, a diverse board appears to negate CEO predisposition to innovate. On the other hand, innovation increases when the CEO is not the Board Chair but has equity ownership, although the incentive effect is economically small. The paper uses a sample of domestically-owned, publicly-listed Australian firms over the period 1994–2003.     

Estimating Key Economic Variables: The Policy Implications

The current monetary policy debate has focused on current estimates and the future path of the natural rate of unemployment and the equilibrium interest rate. Estimates of the natural rate of unemployment should vary over time with changes in demographics and improvements in human capital. However, these changes should be gradual. This paper shows that the estimates of the natural rate of unemployment by Federal Reserve officials and private-sector economists seem to move pro-cyclically, potentially showing too much weight given to short-term fluctuations in economic variables. As with the natural rate, there are good reasons to expect the equilibrium interest rate to change over time. In fact, the level may actually be more responsive to current economic data, reflecting changes in aggregate savings and investment. Yet, we see that equilibrium interest rate estimates by both Federal Reserve officials and private-sector economists have declined quite dramatically over the past five years. A potential concern raised in this paper is that estimates of these critical economic variables for policy determination appear to be overly sensitive to high frequency economic data.     

Investing in Health: A Macroeconomic Exploration of Short-Run and Long-Run Trade-Offs

This paper aims to unravel the competing effects of health investment. It explores, both analytically and numerically, the equilibrium shift and transitional dynamics after a one-time policy of health investment. We find that such a policy improves health status in the long run, but harms economic growth in both the short- and long-term. The relative sizes of these competing effects depend on the specific health parameters. Within the plausible range for the value of health relative to consumption, households gain welfare in the long run as long as the effectiveness of labor in health production is large. The expanded health sector policy makes households worse off only if labor is rather unproductive in producing health and if households value health relatively little. Nevertheless, the findings challenge the policy recommendations of the World Bank (1993) and World Health Organization (2001) in that good health does not necessarily increase the productivity of workers and the economic growth rate. We hope that the relative simplicity of our model, compared to the existing theoretical literature, can help close the gap between formal academic work on this topic and actual debates among policy makers in both developed and developing countries.     

Migration,FDI, and Welfare

We investigate migration and foreign direct investment (FDI) for a small trading economy. Historically, immigration in small countries has been accompanied by FDI inflows (complementary capital movements). Based on the skill composition of migrants, empirical evidence finds that skilled immigration is accompanied by FDI inflows but unskilled immigration is accompanied by FDI outflows (substitutable capital movements). We prove that the Heckscher-Ohlin model cannot reconcile these apparently contradictory observations. We introduce a theoretical model in which capital and unskilled labor are sector specific, and demonstrate that this model can reconcile the historical and empirical observations on migration and FDI.     

Why Are Input-Output Tables Important?

The new input-output tables published by Rosstat for 2011–2015 are indeed an achievement worth celebrating. These tables form a comprehensive picture of the economy that show how its many parts are connected. They serve as a basis for national accounts and for envisioning possible futures for the economy.     

International capital mobility: regional versus global perspective

This paper examines the role of regional versus global savings in financing domestic investment to shed light on the role of financial globalization and regionalism in capital markets. Regression results based on six regions with 141 countries reveal that although the role of foreign (global or regional) saving has increased over time, there are regional differences: domestic saving is the major source of investment financing in North America with an increasing role of regional and global savings over time, while regional saving is the main source in Europe. Global saving has been the main source of investment financing in other regions where domestic and regional financial markets are not well developed. However, the role of regional saving has significantly increased in recent years in the Asia-Pacific and in Latin America. Regionalism such as financial and monetary cooperation is likely to have increased the role of regional saving.     

Can countries rely on foreign saving for investment and economic development?

Contrary to widespread presumption, a surprisingly large number of countries have been able to finance a significant fraction of their investment for extended periods using foreign finance. While many of these episodes are in countries where official finance is important, we also identify episodes where a substantial fraction of domestic investment is financed by private capital inflows. Although there is evidence of a positive growth effect of such inflows in the short run, that positive impact dissipates after 5 years and turns negative over longer horizons. Many such episodes end abruptly, with compression of the current account and sharp slowdowns in investment and growth. Summing over the inflow (current account deficit) episode and its aftermath, we find that growth is slower than when countries rely on domestic savings. The implication is that financing growth and investment out of foreign savings, while not impossible, is risky and too often counterproductive.