|
David E. Weinstein |
Office: 916 Int'l Affairs Building |
Mailing
Address: |
|
|
||||
|
|
|
|
|
|
|
Research
Abstract: Almost 50 years after President
Lyndon Johnson’s famous 1964 State of the Union speech that introduced the
“War on Poverty,” two facts stand out in the current debate about poverty.
First, since David Caplovitz (1963) wrote his
path-breaking book, The Poor Pay More, numerous
researchers have confirmed that the poor indeed pay more than households of
higher income for the goods and services they purchase. Second, official
poverty rates as measured by the U.S. Census have remained essentially flat
since the late 1960s, raising questions about the success of the policies
implemented to reduce poverty. In this paper we revisit these two facts by
paying close attention to the price data underlying these findings. By
examining scanner data on thousands of household purchases we find that the poor pay less—not more—for
the goods they purchase. In addition, by extending the advances on price
measurement in the recent decade back to the 1970s, we find that current
poverty rates are less than half of
the official numbers. This finding underscores the importance of correctly
measuring the evolution of prices to determine the appropriate poverty
thresholds over time. Both findings are contrary to the conventional wisdom
established in the last few decades.
Abstract: This paper describes the extent and
cyclicality of product creation and destruction in a large sector of the U.S.
economy and quantifies its implications for the measurement of consumer prices.
We find four times more entry and exit in product markets than is typically
found in labor markets because most product turnover happens within the
boundaries of the firm. Net product creation is strongly pro-cyclical, but
contrary to the behavior of labor flows, it is primarily driven by creation
rather than destruction. High rates of innovation are also accompanied by
substantial price volatility of products. These facts suggest that the CPI
deviates from a true cost-of-living index in three important dimensions. The
quality bias that arises as new goods replace outdated ones causes the CPI to
overstate inflation by 0.8 percent per year; the cyclicality of the bias implies
that business cycles are more volatile than indicated by official statistics;
and finally, sampling error is sufficiently large that over the last 10 years
policymakers could not statistically distinguish whether quarterly inflation
was accelerating or decelerating 65 percent of the time.
Abstract: The empirical
literature in international finance has produced three key results about
international price deviations: borders give rise to flagrant violations of
the law of one price, distance matters enormously for understanding these
deviations, and most papers find that convergence rates back to purchasing
power parity are inconsistent with the evidence of micro studies on nominal
price stickiness. The data underlying these results are mostly comprised of
price indexes and price surveys of goods that may not be identical
internationally. In this paper, we revisit these three stylized facts using
massive amounts of US and Canadian data that share a common barcode
classification. We find that none of these three main stylized facts survive.
We use our barcode level data to replicate prior work and explain what
assumptions caused researchers to find different results from those we find
in this paper. Overall, our work is supportive of simple pricing models where
the degree of market segmentation across the border is similar to that within
borders. ·
Exporting
Deflation? Chinese Exports and Japanese Prices (with Christian Broda) NBER
Working Paper No. 13942, April 2008 Abstract:
Between 1992 and 2002, the Japanese Import Price Index
registered a decline of almost 9 percent and Japan entered a period of
deflation. We show that much of the correlation between import prices and
domestic prices was due to formula biases. Had the IPI been computed using a
pure Laspeyres index like the CPI, the IPI would have hardly moved at all. A
Laspeyres version of the IPI would have risen 1 percentage point per year
faster than the official index. Second we show that Chinese prices did not
behave differently from the prices of other importers. Although Chinese
prices are substantially lower than the prices of other exporters, they do
not exhibit a differential trend. However, we estimate that the typical price
per unit quality of a Chinese exporter fell by half between 1992 and 2005.
Thus the explosive growth in Chinese exports is attributable to growth in the
quality of Chinese exports and the increase in new products being exported by
China.
Abstract: Japanese
monetary and fiscal policy uses the consumer price index as a metric for
price stability. Despite a major effort to improve the index, the Japanese
methodology of calculating the CPI seems to have a large number of
deficiencies. Little attention is paid in Japan to substitution biases and
quality upgrading. This implies that important methodological differences
have emerged between the U.S. and Japan since the U.S. started to correct for
these biases in 1999. We estimate that using the new corrected U.S.
methodology, Japan's deflation averaged 1.2 percent per year since 1999. This
is more than twice the deflation suggested by Japanese national statistics.
Ignoring these methodological differences misleading suggests that American
real per capita consumption growth has been growing at a rate that is almost
2 percentage points higher than that of Japan between 1999 and 2006. When a
common methodology is used Japan's growth has been much closer to that of the
U.S. over this period. Moreover, we estimate that the bias of the Japanese
CPI relative to a true cost-of-living index is around 2 percent per year.
This overstatement in the Japanese CPI in combination with Japan's low
inflation rate is likely to cost the government over 69 trillion yen -- or 14
percent of GDP -- over the next 10 years in increased social security
expenses and debt service. For monetary policy, the overstatement of
inflation suggests that if the BOJ adopts a formal inflation target without
changing the current CPI methodology a lower band of less than 2 percent
would not achieve its goal of price stability.
Abstract: This paper
describes the extent and cyclicality of product creation and destruction in a
large sector of the U.S. economy and quantifies its implications for the
measurement of consumer prices. We find four times more entry and exit in
product markets than is typically found in labor markets because most product
turnover happens within the boundaries of the firm. Net product creation is
strongly pro-cyclical, but contrary to the behavior of labor flows, it is
primarily driven by creation rather than destruction. High rates of
innovation are also accompanied by substantial price volatility of products.
These facts suggest that the CPI deviates from a true cost-of-living index in
three important dimensions. The quality bias that arises as new goods replace
outdated ones causes the CPI to overstate inflation by 0.8 percent per year;
the cyclicality of the bias implies that business cycles are more volatile
than indicated by official statistics; and finally, sampling error is
sufficiently large that over the last 10 years policymakers could not
statistically distinguish whether quarterly inflation was accelerating or decelerating
65 percent of the time.
Abstract: Starting
with Romer [1987] and Rivera-Batiz-Romer [1991]
economists have been able to model how trade enhances growth through the
creation and import of new varieties. In this framework, international trade
increases economic output through two channels. First, trade raises
productivity levels because producers gain access to new imported varieties.
Second, increases in the number of varieties drives down the cost of
innovation and results in ever more variety creation. Using highly disaggregate
trade data, e.g. Gabon's imports of Gambian groundnuts, we structurally
estimate the impact that new imports have had in approximately 4000 markets
per country. We then move from groundnuts to globalization by building an
exact TFP index that aggregates these micro gains to obtain an estimate of
trade on productivity growth for each country. We find that in the typical
country in the world, new imported varieties account for 15 percent of its
productivity growth. These effects are larger in developing countries where
the median impact of new imported varieties equals a quarter of national
productivity growth.
Abstract: We analyze
fiscal policy and fiscal sustainability in Japan using a variant of the
methodology developed in Blanchard (1990). We find that Japan can achieve
fiscal sustainability over a 100-year horizon with relatively small changes
in the tax-to-GDP ratio. Our analysis differs from more pessimistic analyses
in several dimensions. First, since Japanese net debt is only half that of
gross debt, we demonstrate that the current debt burden is much lower than is
typically reported. This means that monetization of the debt will have little
impact on Japan's fiscal sustainability because Japan's problem is the level
of future liabilities not current ones. Second, we argue that one obtains very
different projections of social security burdens based on the standard
assumption that Japan's population is on a trend towards extinction rather
than transitioning to a new lower level. Third, we demonstrate that some
modest cost containment of the growth rate of real per capita benefits, such
as cutting expenditures for shrinking demographic categories, can
dramatically lower the necessary tax burden. In sum, no scenario involves
Japanese taxes rising above those in Europe today and many result in tax-to-GDP
ratios comparable to those in the United States.
Abstract: Since the
seminal work of Krugman (1979), product variety has played a central role in
models of trade and growth. In spite of the general use of love-of-variety
models, there has been no systematic study of how the import of new varieties
has contributed to national welfare gains in the United States. In this paper
we show that the unmeasured growth in product variety from US imports has
been an important source of gains from trade over the last three decades
(1972-2001). Using extremely disaggregated data, we show that the number of imported
product varieties has increased by a factor of four. We also estimate the
elasticities of substitution for each available category at the same level of
aggregation, and describe their behavior across time and SITC-5 industries.
Using these estimates we develop an exact price index and find that the
upward bias in the conventional import price index is approximately 1.2
percent per year. The magnitude of this bias suggests that the welfare gains
from variety growth in imports alone are 2.8 percent of GDP.
Abstract: Theories
featuring multiple equilibria are now widespread across many fields of
economics. Yet little empirical work has asked if such multiple equilibria
are salient features of real economies. We examine this in the context of the
Allied bombing of Japanese cities and industries in WWII. We develop a new
empirical test for multiple equilibria and apply it to data for 114 Japanese
cities in eight manufacturing industries. The data provide no support for the
existence of multiple equilibria. In the aftermath even of immense shocks, a
city typically recovers not only its population and its share of aggregate
manufacturing, but even the specific industries it had before.
Abstract: Two facts
motivate this study. (1) The United States is the world’s most productive
economy. (2) The US is the destination for a broad range of net factor
inflows: unskilled labor, skilled labor, and capital. Indeed, these two facts
may be strongly related: All factors seek to enter the US because of the US
technological superiority. The literature on international factor flows rarely
links these two phenomena, instead considering one-at-a-time analyses that
stress issues of relative factor abundance. This is unfortunate, since the
welfare calculations differ markedly. In a simple Ricardian framework, a
country that experiences immigration of factors motivated by technological
differences always loses from this migration relative to a free trade
baseline, while the other country gains. We provide simple calculations
suggesting that the magnitude of the losses for US natives may be quite
large– $72 billion dollars per year or 0.8 percent of GDP.
Abstract: We
consider the distribution of economic activity within a country in light of
three leading theories – increasing returns, random growth, and locational fundamentals. To do so, we examine the
distribution of regional population in Japan from the Stone Age to the modern
era. We also consider the Allied bombing of Japanese cities in WWII as a
shock to relative city sizes. Our results support a hybrid theory in which locational fundamentals establish the spatial pattern of
relative regional densities, but increasing returns may help to determine the
degree of spatial differentiation. One implication of our results is that
even large temporary shocks to urban areas have no long-run impact on city
size.
Abstract: The
increasing returns revolution in trade is incomplete in an important respect
- there exists no compelling empirical demonstration of the role of
increasing returns in determining production and trade structure. One reason
is that trade patterns of the canonical increasing returns models are a
consequence simply of specialization, which all theories permit. Krugman
(1980) shows that increasing returns models with costs of trade - economic
geography - do allow a simple test: home market effects of demand on
production. Davis and Weinstein (1996) reject the simple Krugman (1980) model
on OECD data. Here we pair the model with a richer geography structure and
find evidence of the importance of increasing returns, in combination with
comparative advantage, in affecting OECD manufacturing production structure.
The results underscore the importance of market access in implementing models
of economic geography.
Abstract: Examining
the relationship between factor endowments and production patterns using data
from Japanese prefectures and from OECD nations, we find evidence of
substantial production indeterminacy. Regressions of outputs on endowments
yield prediction errors six to 30 times larger for goods traded relatively
freely than for non-traded goods. We argue that a compelling explanation for
these results is the existence of more goods than factors in the presence of
trade costs. If so, regressions of trade or output on endowments have weak
theoretical foundations. Furthermore, since errors are largest in data sets
where trade costs are small, we explain why the common methodology of
imputing trade barriers from regression residuals has produced
counterintuitive results.
Abstract: A
half-century of empirical work attempting to predict the factor content of
trade in goods has failed to bring theory and data into congruence. Our study
shows how the Heckscher-Ohlin-Vanek theory, when modified to permit technical
differences, a breakdown in factor price equalization, the existence of
non-traded goods, and costs of trade, is consistent with data from ten OECD
countries and a rest-of-world aggregate.
Abstract: The
dominant paradigm of world trade patterns posits two principal features.
Trade between North and South arises due to traditional comparative
advantage, largely determined by differences in endowment patterns. Trade
within the North, much of it intra-industry trade, is based on economies of
scale and product differentiation. The paradigm specifically denies an
important role for endowment differences in determining North-North trade.
This paper provides the first sound empirical examination of this question.
We demonstrate that trade in factor services among countries of the North is
systematically related to endowment differences and large in economic
magnitude. Intra-industry trade, rather than being a puzzle for a factor
endowments theory, is instead the conduit for a great deal of this factor
service trade.
Abstract: One
account of spatial concentration focuses on productivity advantages arising
from market size. We investigate this for forty regions of Japan. Our results
identify important effects of a region's own size, as well as cost linkages
between producers and suppliers of inputs. Productivity links to a more
general form of “market potential” or Marshall-Arrow-Romer externalities do
not appear to be robust in our data. Landlocked status does not matter for
productivity of regions in Japan. The effects we identify are economically
quite important, accounting for a substantial portion of cross-regional
productivity differences. A simple counterfactual shows that if economic
activity were spread evenly over the forty regions of Japan, aggregate output
would fall by nearly twenty percent.
Abstract: The
concept of the 'Integrated Equilibrium' has played an important role in the
development of the theory of international trade. In spite of the fact that
all observers understand that it is not literally a description of the world
that we live in, approaches based on this concept have been very influential
in discussion of real world policies. In this paper, we discuss some of the
key empirical limitations of this concept and suggest directions that future
empirical and theoretical work needs to go once we recognize the limits of
integrated equilibrium thinking.
Abstract: There are
two principal theories of why countries or regions trade: comparative
advantage and increasing returns to scale. Yet there is virtually no
empirical work that assesses the relative importance of these two theories in
accounting for production structure and trade. We use a framework that nests
an increasing returns model of economic geography featuring "home market
effects" with that of Heckscher-Ohlin. We employ these trade models to
account for the structure of regional production in Japan. We find support
for the existence of economic geography effects in eight of nineteen
manufacturing sectors, including such important ones as transportation
equipment, iron and steel, electrical machinery, and chemicals. Moreover, we
find that these effects are economically very significant. The latter
contrasts with the results of Davis and Weinstein (1996), which found scant
economic significance of economic geography for the structure of OECD
production. We conclude that while economic geography may explain little
about the international structure of production, it is very important for
understanding the regional structure of production.
Abstract: The
Heckscher-Ohlin-Vanek (HOV) model of factor service trade is a mainstay of
international economics. Empirically, though, it is a flop.This
warrants a new approach. We test the HOV model with international and
Japanese regional data. The strict HOV model performs poorly because it
cannot explain the international location of production. Restricting the
sample to Japanese regions provides no help, inter
alia giving rise to what Trefler (1995) calls the "mystery of the
missing trade." However, when we relax the assumption of universal
factor price equalization, results improve dramatically. In sum the HOV model
performs remarkably well.
Abstract: This paper
focuses on two issues. First, a reexamination of the data on the level of
foreign direct investment (FDI) in Japan suggests that foreign firms sell
five to six times more in Japan than is commonly believed. Previous studies
severely underestimated the stock of FDI in Japan due to poor data. Second,
after finding that even after adjusting for various factors the level of FDI
in Japan is still low, the paper explores explanations for this phenomenon. A
second main conclusion is that government tax and financial policy continues
to inhibit foreign takeovers through the promotion of stable shareholding.
Abstract: Most
Japanese workers in large firms are members of firm-based enterprise unions
while workers in the United States, if organized at all, tend to be members
of trade or industrial unions. This paper analyzes how differences in union
structure and membership can affect firm behavior in a Pareto optimal
contracting framework. The findings are that oligopolistic firms with
enterprise unions will tend to hire excessive amounts of labor. Furthermore,
it is shown that by organizing as an enterprise union and firm, the firm and
its employees can be made better off relative to not being organized at all. |
|
|
|
|