Old Wine in a New Bottle: Growth Convergence Dynamics in the EU

In this paper, we explore convergence of real per capita output across the European Union (EU) countries, as well as the transitional behavior of possible underlying factors that are responsible for any convergence or divergence pattern. The new panel convergence methodology developed by Phillips and Sul (2007) is employed in a production function growth accounting approach and data from the Total Economy Database and the Total Economy Growth Accounting Database. The empirical findings suggest that the EU countries form two distinct convergent clubs, exhibiting considerable heterogeneity in the underlying growth factors. These findings should help policy makers in designing appropriate growth-oriented programs as well as in setting priorities in their implementation.     

How to Measure Globalization? A New Globalization Index (NGI)

This paper presents the New Globalization Index (NGI). It is a composite index constructed to measure the relative globalization level of a group of countries. With its 21 variables, it accounts for the multidimensionality of this phenomenon instead of relying purely on economic indicators. As compared to other existing globalization indices, three major innovations are introduced in the NGI. Firstly, five variables that have until now not been used in globalization indices enter the calculations, introducing some new and important aspects to the measure, such as international student mobility and environmental issues. Secondly, the NGI forms a weighted sum of bilateral trade flows using the geographical distances between trading partners as weights. This modifies the usual trade openness measure by placing more weight on distant trading partners. In effect, intra-regional trade is given a lower weight in the NGI. One of the effects of this procedure is a significant downward movement in the ranking of some EU countries, whose international openness comes primarily from trade within their region and reflects regional integration more than globalization. A final innovation in the NGI is the use of a statistical method (principal component analysis) to form subcomponents of globalization according to the statistical features of the variable structure. The goal of this step is the analysis of the multidimensionality of globalization. Three dimensions emerge by the use of this technique: finance, trade and politics, and social globalization. Principal component analysis is also employed for producing weights for individual indicators within the overall index. Additionally, a control for country size is employed for some of the variables, as has been done in some other globalization indices before. The final index contains 70 countries and covers a period between 1995 and 2005.     

The Effect of Health and Poverty on Early Childhood Cognitive Development

Although evidence of a link between socioeconomic status and child health has been researched extensively, much less attention has been devoted to studying the link between child health and cognitive development. This paper seeks to determine whether early childhood illnesses and poverty significantly impede cognitive development. The empirical model attempts to control for observed and unobserved heterogeneity through the use of panel data models. Results indicate that a child’s cognitive development is not directly related to health problems acquired after birth or socioeconomic standing. Rather, cognitive development is primarily influenced by unobserved child- and family-specific factors that happen to be correlated with health and socioeconomic status. On the other hand, birth weight appears to affect cognitive performance later in childhood, even after taking unobserved heterogeneity into account.     

Government Purchases and the Real Exchange Rate

Recent empirical research documents that an exogenous rise in government purchases in a given country triggers a persistent depreciation of its real exchange rate—which raises an important puzzle, as standard macro models predict an appreciation of the real exchange rate. This paper presents a simple model with limited international risk sharing that can account for the empirical real exchange rate response. When faced with a country-specific rise in government purchases, local households experience a negative wealth effect; they thus work harder, and domestic output increases. Under balanced trade (financial autarky) this supply-side effect is so strong that the terms of trade worsen, and the real exchange rate depreciates. In a bonds-only economy, an increase in government purchases triggers a real exchange rate depreciation, if the rise in government purchases is sufficiently persistent and/or labor supply is highly elastic.     

Do Institutions Matter for Foreign Direct Investment?

Using a panel of 69 countries during 1981 and 2005, we investigate the role of institutions in determining foreign direct investment (FDI). We find that institutions are a robust predictor of FDI and that the most significant institutional aspects are linked to propriety rights. Using a novel data set, we also study the impact of institutions on FDI at the sectoral level. We find that institutions do not have a significant impact on FDI in the primary sector but that institutional quality matters for FDI in manufacturing, and particularly in services.