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