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David E. Weinstein |
Office:
916 Int'l Affairs Building |
Mailing Address: |
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Research
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. |
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