Knowledge that Transforms

The neoclassical model of trade predicts that international specialization will be jointly determined by cross-country differences in relative factor endowments and technology levels. This paper specifies an empirical model of specialization consistent with the neoclassical explanation. In the model, a sector's share of GDP depends on relative factor supplies and relative technology differences, and the estimated parameters of the model have a clear connection to theoretical parameters. The model is estimated with panel data on manufacturing sectors in industrialized countries. Relative technology levels and factor supplies are both found to be important determinants of specialization.

When optimal monetary policy is subject to a credibility problem, it is often argued that the government should appoint a central banker whose incentives differ from the government's. I argue, however, that such delegation does not overcome credibility problems given that delegation is discretionary and without costs. "Reappointment costs" of delegation are shown to improve suboptimal outcomes, but credibility of optimal monetary policy turns out to be worsened. At best, delegation therefore has no effects on credibility, but only if reappointment has no costs.