Knowledge that Transforms

Accounting for Exchange-Rate Variability in Present-Value Models When the Discount Factor Is Near 1 by Charles Engel and Kenneth D. West. Published in volume 94, issue 2, pages 119-125 of American Economic Review, May 2004

We test for home-market effects using a difference-in-difference gravity specification. The home-market effect is the tendency for large countries to be net exporters of goods with high transport costs and strong scale economies. It is predicted by models of trade based on increasing returns to scale but not by models of trade based on comparative advantage. In our estimation approach, we select pairs of exporting countries that belong to a common preferential trade area and examine their exports of goods with high transport costs and strong scale economies relative to their exports of goods with low transport costs and weak scale economies. We find that home-market effects exist and that the nature of these effects depends on industry transport costs. For industries with very high transport costs, it is national market size that determines national exports. For industries with moderately high transport costs, it is neighborhood market size that matters. In this case, national market size plus market size in nearby countries determine national exports.

Credit market imperfections influence the labor market and aggregate economic activity. In turn, macroeconomic factors have an impact on the credit sector. To assess these effects in a tractable general-equilibrium framework, we introduce endogenous search frictions, in the spirit of Peter Diamond (1990), in both credit and labor markets. We demonstrate that credit frictions amplify macroeconomic volatility through a financial accelerator. The magnitude of this general-equilibrium accelerator is proportional to the credit gap, defined as the deviation of actual output from its perfect credit market level. We explore various extensions, notably endogenous wages.

This paper estimates the effect on international trade of multilateral trade agreements—the World Trade Organization (WTO), its predecessor the General Agreement on Tariffs and Trade (GATT), and the Generalized System of Preferences (GSP) extended from rich countries to developing countries. I use a standard “gravity” model of bilateral merchandise trade and a large panel data set covering over 50 years and 175 countries. An extensive search reveals little evidence that countries joining or belonging to the GATT/WTO have different trade patterns from outsiders, though the GSP seems to have a strong effect.

A period of malaise in the mid-1990s led to a contraction in enrollment at many economics Ph.D. programs. The resulting reduction in the supply of new Ph.D. economists, combined with a smaller contraction in demand for new Ph.D. economists, generated, as the Wall Street Journal reported, a "hot pursuit " for some economics Ph.D.s, with "even low-level candidates [being] treated like big shots " (Jon E. Hilsenrath, 2001, p. B1). As might be expected, the scarcity of new economics Ph.D.s that materialized at the end of the decade appears to have induced more enrollments in economics Ph.D. programs, with annual matriculations rising by about 25 percent between Fall 1998 and Fall 2002 (Charles E. Scott and John J. Siegfried, 1999-2003). Predictions for the current job market are mixed. On the one hand, demand may expand as some academic departments whose hiring had been constrained by financial exigency return to active recruiting (Jennifer Jacobson, 2003). On the other hand, the aftermath of the recession continues to limit some public university budgets at the same time that the supply of new economics Ph.D.s may start to expand, resulting in a job market for American Ph.D.s that The Economist describes as “bleak ” (“Unemployment Forecast, ” 2003, p. 60). Five years ago we reported the results of a comprehensive survey of the labor market for economics Ph.D.s graduating in 1996-97 (Siegfried and Wendy A. Stock, 1999). In contrast to other social science and science disciplines, most economists who graduated with a doctorate in 1996-97 found full-time career-tracking jobs that paid well (those in permanent full-time jobs in the U.S. earned an average starting salary of $61,000). Many of those employed in business and industry, however, were not satisfied with their jobs despite receiving a significant salary premium relative to academics. 1 Here we report results from a new survey of the class of economics Ph.D.s graduating in 2001-02. This information should be of interest to current and prospective Ph.D. students, of use to advisors of undergraduates considering graduate study in economics, and of assistance to faculty concerned with the employment prospects of applicants they admit to their doctoral programs. For methodological details consult our earlier report (Siegfried and Stock, 1999).

Understanding Trend and Cycle in Asset Values: Reevaluating the Wealth Effect on Consumption by Martin Lettau and Sydney C. Ludvigson. Published in volume 94, issue 1, pages 276-299 of American Economic Review, March 2004

The views expressed herein are those of the author(s) and not necessarily those of the National Bureau of Economic Research. ©2004 by Dennis W. Carlton. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

This paper outlines possible channels linking commercial and financial openness. This inquiry is motivated by a salient feature of the global economy in recent decades: the embrace, by developing countries, of financial reforms. The adjustment process to the growing financial integration has been rocky, frequently associated with financial crises. These developments have led to a spirited debate concerning the wisdom of unrestricted capital mobility between OECD and emerging-market countries. Various studies have identified circumstances in which unlimited capital mobility may be suboptimal. This paper argues that, notwithstanding the above debate, the strongest argument for financial opening may be the pragmatic one. Like it or not, greater trade integration erodes the effectiveness of restrictions on capital mobility. Hence, for successful emerging markets that engage in trade integration, financial opening is not a question of if, but of when and how. Some insight into the possible linkages between financial and trade opening is obtained by looking at the patterns of changes in openness in the last 30 years. In order to evaluate the statistical significance of the association between financial and trade openness, I apply a panelregression methodology. The units of observations are nonoverlapping five-year changes in the openness measures, throughout 1969–1998, for all countries (subject to data availability). Table 1 presents the regressions, where the dependent variable is the change in financial openness. The explanatory variables are changes in trade openness and changes in the level of GDP per capita, allowing for country fixed effects. Regression (i) reports all developing countries (subject to data availability), regression (ii) excludes from the sample developing-economies countries that are characterized by financial openness that exceeds 100 percent, or by trade openness that exceeds 60 percent, and small island economies. Finally, regression (iii) deals only with the OECD countries. The first two regressions indicate a highly significant positive association between changes in financial and commercial openness in developing countries. This effect in the OECD countries is positive, but at a substantially lower significance level. In Aizenman and Ilan Noy (2003), annual data are used to investigate the impact of political economy and other structural variables on the links between trade and financial openness. An extended version of our model, where political-economy considerations determine the efficiency of the tax system, suggests that democracies are associated with lower financial openness. Our empirical investigation, * 317 Social Sciences 1, Department of Economics, University of California–Santa Cruz, 1156 High St., Santa Cruz, CA 95064, and NBER (e-mail: [email protected]). I thank Shang-Jin Wei for sharing the data on financial openness, and Ilan Noy and Bill Koch for excellent research assistance. Useful comments by Mike Dooley, Michael Hutchison, Phil McCalman, Graciela Kaminsky, and Ken Kletzer are gratefully acknowledged. 1 A useful survey of financial liberalization is John Williamson and Molly Mahar (1998). See Carlos Diaz-Alejandro (1985), Dani Rodrik (1999), and Thomas Hellmann et al. (2000) for skeptical assessments of the gains from financial liberalization. For studies dealing with the financial instability associated with capital-account opening, see the papers in Sebastian Edwards and Jeffrey Frankel (2002). On the association between financial integration and financial crises see Asli Demirguc-Kunt and Enrica Detragiache (1998), Guillermo Calvo (1998), and Graciela Kaminsky and Carmen Reinhart (1999). 2 Financial openness measures (gross private capital inflows gross private outflows) 100/GDP, using the data documented and applied by Shang-Jin Wei and Yi Wu (2002), and Eswar Prasad et al. (2003). Trade openness measures (exports imports) 100/GDP, using the World Development Indicators (WDI) data. 3 The inclusion of GDP per capita as an explanatory variable is suggested by the linkages between GDP per capital level and financial depth. 4 Following the approach of Alex Cukierman et al. (1992), one expects less-polarized societies and better-functioning democracies to be characterized by more efficient taxcollection systems. Applying this conjecture, a more efficient tax system would be associated also with lower tax

How do firm boundaries influence employees' acquisition of information? Using detailed project-level data and qualitative evidence, I document that pharmaceutical firms are more likely to outsource the coordination of data-intensive clinical trials, while they are more likely to assign knowledge-intensive trials to internal teams. Managers do not choose between market and hierarchy, but between the hierarchy of the firm—in which subjective performance evaluations are combined with flat explicit incentives—and the hierarchy of its subcontractor—whose virtue stems precisely from the ability to provide high-powered incentives on a narrow set of monitorable tasks.