David E. Weinstein |
Office: 1130A Int'l Affairs Building |
Mailing
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Research
Abstract: The measurement of
price changes, economic welfare, and demand parameters is currently based on
three disjoint approaches: macroeconomic models derived from time-invariant
utility functions, microeconomic estimation based on time-varying utility
(demand) systems, and actual price and real output data constructed using
formulas that differ from either approach. The inconsistencies are so deep
that the same assumptions that form the foundation of demand-system
estimation can be used to prove that standard price indexes are incorrect,
and the assumptions underlying standard exact and superlative price indexes
invalidate demand-system estimation. In other words, we show that extant
micro and macro welfare estimates are biased and inconsistent with each other
as well as the data. We develop a unified approach to demand and price
measurement that exactly rationalizes observed micro data on prices and
expenditure shares while permitting exact aggregation and meaningful macro
comparisons of welfare over time. We show that all standard price indexes are
special cases of our approach for particular values of the elasticity of
substitution, constant demand for each good, and a constant set of goods. In
contrast to these standard index numbers, our approach allows us to compute
changes in the cost of living that take into account both changes in the
demand for individual goods and the entry and exit of goods over time. Using
barcode data for the U.S. consumer goods industry, we show that allowing for
the entry and exit of products, changing demand for individual goods, and a
value for the elasticity of substitution estimated from the data yields
substantially different conclusions for changes in the cost of living from
standard index numbers.
Abstract: We develop and
structurally estimate a model of heterogeneous multiproduct firms that can be
used to decompose the firm-size distribution into the contributions of costs,
“appeal” (quality or taste), markups, and product scope. Using Nielsen
bar-code data on prices and sales, we find that variation in firm appeal and
product scope explains at least four fifths of the variation in firm sales.
We show that the imperfect substitutability of products within firms, and the
fact that larger firms supply more products than smaller firms, implies that
standard productivity measures are highly dependent on implicit demand system
assumptions and probably dramatically understate the relative productivity of
the largest firms. Although most firms are well approximated by the
monopolistic competition benchmark of constant markups, we find that the
largest firms that account for most of aggregate sales depart substantially
from this benchmark, and exhibit both variable markups and substantial
cannibalization effects.
Abstract: This paper is the first
attempt to structurally estimate the impact of globalization on markups and
welfare in a monopolistic competition model. To achieve this, we work with a
class of preferences that allow for endogenous markups and firm entry and
exit that are especially convenient for empirical work ?the
translog preferences, with symmetry in substitution
imposed across products. Between 1992 and 2005 we find the U.S. market
experienced a series of changes that confirm the predictions of Melitz and Ottaviano (2008):
import shares rose and U.S. firms exited, leading to a fall in markups, while
product variety and welfare went up. We estimate the impacts of these effects
on a national level, and find a cumulative drop of 5.4 percent in merchandise
prices and of 1.0 percent in overall consumer prices between 1992 and 2005.
Although the magnitude of the welfare gains in our translog
setup is similar to that obtained by assuming CES preferences, the sources of
these gains are quite different. Variety gains under translog
are at least one-third smaller than in the CES case, but there is a
substantial reduction in U.S. markups, resulting in a comparable welfare gain
overall.
Abstract: Official price
indexes, such as the CPI, are imperfect indicators of inflation calculated
using ad hoc price formulae different from the theoretically well-founded
inflation indexes favored by economists. This paper provides the first
estimate of how accurately the CPI informs us about ¡§true¡¨ inflation. We
use the largest price and quantity dataset ever employed in economics to
build a Tornqvist inflation index for Japan between 1989 and 2010. Our
comparison of this true inflation index with the CPI indicates that the CPI
bias is not constant but depends on the level of inflation. We show the
informativeness of the CPI rises with inflation. When measured inflation is
low (less than 2.4% per year) the CPI is a poor predictor of true inflation
even over 12-month periods. Outside this range, the CPI is a much better
measure of inflation. We find that the U.S. PCE Deflator methodology is
superior to the Japanese CPI methodology but still exhibits substantial
measurement error and biases rendering it a problematic predictor of
inflation in low inflation regimes as well.
Abstract: We show that
supply-side financial shocks have a large impact on firms
investment. We do this by developing a new methodology to separate firm
credit shocks from loan supply shocks using a vast sample of matched bank-firm
lending data. We decompose loan movements in Japan for the period 1990 to
2010 into bank, firm, industry, and common shocks. The high degree of financial
institution concentration means that individual banks are large relative to
the size of the economy, which creates a role for granular shocks as in Gabaix (2011). As a result, idiosyncratic bank
shocks—i.e., movements in bank loan supply net of borrower
characteristics and general credit conditions—can have large impacts on
aggregate loan supply and investment. We show that these idiosyncratic bank
shocks explain 40 percent of aggregate loan and investment fluctuations.
Abstract: This paper
compares the 1995 Kobe earthquake with the more recent one in Tohoku. The
impact of the recent earthquake on industrial production was much larger and long-lasting than that of the 1995 earthquake. We find
that very little of this can be explained by differences in government
expenditures or private consumption. However, we find very substantial
differences in energy production in the wake of the two earthquakes. The
substantial and persistent drop in energy output is likely to have
exacerbated supply disruptions and may continue to slow the pace of recovery.
Moreover, we provide some evidence that Japan’s increasing reliance on fossil
fuel sources of energy is likely to result in a large number of deaths and
increases in morbidity due to increased air pollution. These results
highlight the difficulties that Japan is likely to face in its move away from
nuclear power.
Program
Files and Data Sources Abstract: A striking
feature of many financial crises is the collapse of exports relative to
output. In the 2008 financial crisis, real world exports plunged 17 percent
while GDP fell 5 percent. This paper examines whether the drying up of trade
finance can help explain the large drops in exports relative to output. This
paper is the first to establish a causal link between the health of banks
providing trade finance and growth in a firm’s exports relative to its
domestic sales. We overcome measurement and endogeneity
issues by using a unique data set, covering the Japanese financial crises of
the 1990s, which enables us to match exporters with the main bank that
provides them with trade finance. Our point estimates are economically and
statistically significant, suggesting that trade finance accounts for about
one-third of the decline in Japanese exports in the financial crises of the
1990s.
Abstract: While there is no
question that demand played a major part in the decline in world trade, there
is increasing evidence that the liquidity contractions that rocked the
financial world also played a part. Firm level evidence indicates that
exporters whose financial institutions became unhealthy cut back on exports
more than other firms, and imports declined more in sectors that had greater
external financial dependence. This paper shows that some of these shocks may
also have appeared in price movements. Export prices rose relative to domestic
manufacturing prices during the crisis, and the prices of seaborne imports
and exports—which are more sensitive to financial shocks—rose
relative to goods sent by land or air.
Abstract: The agglomeration
force behind the New Economic Geography literature initiated by Krugman is based on the notion that larger markets should
have a lower variety adjusted price index. Despite his Nobel Prize, there
have been no tests of this idea. This paper represents the first such test.
Using a rich dataset covering 10-20 million purchases of grocery items, we
find that after controlling for store and shopping effects: 1) Aggregate
grocery prices are lower in larger cities; 2) Residents of larger cities have
access to substantially more varieties than residents of smaller cities; and
3) These forces combine to substantially lower variety adjusted prices in
large cities. In short, Krugman was right.
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: 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: 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.
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: We find that
prior to World Trade Organization membership, countries set import tariffs 9
percentage points higher on inelastically supplied
imports relative to those supplied elastically. The magnitude of this effect
is similar to the size of average tariffs in these countries, and market
power explains more of the tariff variation than a commonly used political
economy variable. Moreover, US trade restrictions not
covered by the WTO are significantly higher on goods where the United
States has more market power. We find strong evidence that these importers
have market power and use it in setting noncooperative
trade policy.
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: 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: 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: 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: 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: Study of
the factor content of trade has become a laboratory to test our ideas about
how the key elements of endowments, production, absorption and trade fit
together within a general equilibrium framework. Already a great deal of
progress has been made in fitting these pieces together. Nevertheless, the
existing research raises a great many questions that should help to focus
empirical research in the coming years. Among the more pressing issues is a
deeper consideration of the role of intermediates, the role of aggregation
biases, and of differences in patterns of absorption. This work should
provide a more substantial foundation for future policy work developed within
a factor content framework.
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: 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: 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: 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: 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: It is
commonly argued that Japanese trade protection has enabled the nurturing and
development internationally competitive firms. The results in our paper
suggest that when it comes to TFP growth, this view of Japan is seriously erroneous.
We find that lower tariffs and higher import volumes would have been
particularly beneficial for Japan during the period 1964 to 1973. Our results
also lead us to question whether Japanese exports were a particularly
important source of productivity growth. Our findings on Japan suggest that
the salutary impact of imports stems more from their contribution to
competition than to intermediate inputs. Furthermore our results indicate a
reason for why imports are important. Greater imports of competing products
spur innovation. Our results suggest that competitive pressures and
potentially learning from foreign rivals are important conduits for growth.
These channels are even more important as industries converge with the market
leader. This suggests that further liberalization by Japan and other East
Asian countries may result in future dynamic gains. Our results thus call the
views of both the World Bank and the revisionists into question and provide
support for those who advocate more liberal trade policies.
Abstract: This paper
uses cross-sectional and pooled time series data to examine the impact of
administrative guidance and cartels in Japan. In general, government-organized
cartels appear to have caused only small changes in prices and had no impact
on sectoral margins. The lack of a stronger
relationship between cartels and margins probably reflects either the
difficulty of organizing cartels or the tendency of cartelized firms to
compete away rents through competition through quality. It is also possible
that Japanese cartels had little impact on prices because efforts to reduce
costs offset incentives to raise prices.
historical 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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