Knowledge that Transforms

The Canada-U.S. Free Trade Agreement provides a unique window onto the effects of a reciprocal trade agreement on an industrialized economy (Canada). For industries that experienced the deepest Canadian tariff cuts, the contraction of low-productivity plants reduced employment by 12 percent while raising industry-level labor productivity by 15 percent. For industries that experienced the largest U.S. tariff cuts, plant-level labor productivity soared by 14 percent. These results highlight the conflict between those who bore the short-run adjustment costs (displaced workers and struggling plants) and those who are garnering the long-run gains (consumers and efficient plants).

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

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.

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.

Efficiency in the Use of Technology in Economic Education: Some Preliminary Results by Kim Sosin, Betty J. Lecha, Rajshree Agarwal, Robin L. Bartlett and Joseph I. Daniel. Published in volume 94, issue 2, pages 253-258 of American Economic Review, May 2004