This paper develops a model of international trade based on the division of labour under perfect competition. International trade, by eliminating the duplication of coordination costs, leads to a greater variety of intermediate goods, each produced at a larger scale than in autarky. The greater variety of intermediate inputs implies greater division of labour and hence gains from trade. Similarly to models of international trade under imperfect competition, the volume of trade depends on the relative sizes of the trading partners. Extending the model to two factors of production yields the additional result that if the two countries are sufficiently similar in their relative endowments, then both factors of production can experience gains from trade.
{"title":"International Trade and the Division of Labor","authors":"K. Soo","doi":"10.1111/roie.12333","DOIUrl":"https://doi.org/10.1111/roie.12333","url":null,"abstract":"This paper develops a model of international trade based on the division of labour under perfect competition. International trade, by eliminating the duplication of coordination costs, leads to a greater variety of intermediate goods, each produced at a larger scale than in autarky. The greater variety of intermediate inputs implies greater division of labour and hence gains from trade. Similarly to models of international trade under imperfect competition, the volume of trade depends on the relative sizes of the trading partners. Extending the model to two factors of production yields the additional result that if the two countries are sufficiently similar in their relative endowments, then both factors of production can experience gains from trade.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"102 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124721320","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
There has been controversy between (two‐country) theory and the empirics about whether hedging against real exchange rate fluctuations in the goods market influences foreign equity holdings. This study reconciles the theory with the empirics by introducing a multicountry framework with asymmetric trade costs. We find that the incentive to hold foreign equities to hedge real exchange rate risk is negligible because multiple trade partners act as a hedging channel for real exchange rate fluctuations. Further, our theory calls for a country's covariance–variance ratio to be constructed as the sum of the bilateral covariance–variance ratios of the multiple partners. The empirical analysis of 24 advanced countries confirms the theoretical prediction.
{"title":"(Asymmetric) Trade Costs, Real Exchange Rate Hedging, and Equity Home Bias in a Multicountry Model","authors":"J. Pyun","doi":"10.1111/roie.12335","DOIUrl":"https://doi.org/10.1111/roie.12335","url":null,"abstract":"There has been controversy between (two‐country) theory and the empirics about whether hedging against real exchange rate fluctuations in the goods market influences foreign equity holdings. This study reconciles the theory with the empirics by introducing a multicountry framework with asymmetric trade costs. We find that the incentive to hold foreign equities to hedge real exchange rate risk is negligible because multiple trade partners act as a hedging channel for real exchange rate fluctuations. Further, our theory calls for a country's covariance–variance ratio to be constructed as the sum of the bilateral covariance–variance ratios of the multiple partners. The empirical analysis of 24 advanced countries confirms the theoretical prediction.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"111 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2018-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125552395","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the robustness of behavioral equilibrium exchange rate (BEER) models. We highlight the importance of model uncertainty, and employ real exchange rates computed from price-level data to explore robustness to the inclusion of country fixed effects. The estimated coefficients—and therefore also the implied equilibrium values—are sensitive to the combination of variables included in the model, and to the inclusion of fixed effects. We identify several variables that exhibit a robust link with real exchange rates across specifications. Our findings can help policymakers in understanding the uncertainty associated with estimates of equilibrium exchange rates.
{"title":"Thousands of Beers: Take Your Pick","authors":"Konrad Adler, Christian Grisse","doi":"10.1111/roie.12296","DOIUrl":"https://doi.org/10.1111/roie.12296","url":null,"abstract":"This paper explores the robustness of behavioral equilibrium exchange rate (BEER) models. We highlight the importance of model uncertainty, and employ real exchange rates computed from price-level data to explore robustness to the inclusion of country fixed effects. The estimated coefficients—and therefore also the implied equilibrium values—are sensitive to the combination of variables included in the model, and to the inclusion of fixed effects. We identify several variables that exhibit a robust link with real exchange rates across specifications. Our findings can help policymakers in understanding the uncertainty associated with estimates of equilibrium exchange rates.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129995207","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
One channel of welfare‐improving globalization is through the increasing integration of trade. Although this is attributed to decreasing effects of distance across countries, the workhorse models of gravity fail to capture it, the so‐called “missing globalization” or “distance puzzle.” This paper shows that this puzzle may be due to the restricting assumption of constant elasticity of substitution (CES) preferences working behind the gravity models. We test the validity of this assumption for different trade intervals and show that it is violated as a result of the distance elasticity of trade decreasing with the amount of trade. Accordingly, we consider a type of non‐CES utility function, namely constant absolute risk version (CARA), and analytically show that the negative relation between trade and distance elasticity of trade is captured by CARA preferences. We estimate the gravity equation implied by CARA preferences, empirically confirm the endogenous relation between trade and distance elasticity of trade, and show that the distance puzzle is solved under CARA preferences. According to the data set used, CARA preferences are also econometrically selected over CES preferences based on their goodness of fit.
{"title":"A Solution to the Missing Globalization Puzzle by Non‐CES Preferences","authors":"H. Yilmazkuday","doi":"10.1111/roie.12278","DOIUrl":"https://doi.org/10.1111/roie.12278","url":null,"abstract":"One channel of welfare‐improving globalization is through the increasing integration of trade. Although this is attributed to decreasing effects of distance across countries, the workhorse models of gravity fail to capture it, the so‐called “missing globalization” or “distance puzzle.” This paper shows that this puzzle may be due to the restricting assumption of constant elasticity of substitution (CES) preferences working behind the gravity models. We test the validity of this assumption for different trade intervals and show that it is violated as a result of the distance elasticity of trade decreasing with the amount of trade. Accordingly, we consider a type of non‐CES utility function, namely constant absolute risk version (CARA), and analytically show that the negative relation between trade and distance elasticity of trade is captured by CARA preferences. We estimate the gravity equation implied by CARA preferences, empirically confirm the endogenous relation between trade and distance elasticity of trade, and show that the distance puzzle is solved under CARA preferences. According to the data set used, CARA preferences are also econometrically selected over CES preferences based on their goodness of fit.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"53 5","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2017-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"120983620","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Aid for trade increases a recipient's public services, which lower its import and export transport costs. Formulating a two-country endogenous growth model, we obtain two main results. First, a permanent increase in the donor's aid/GDP ratio raises the steady-state growth rate as well as both countries' long-run fractions and cost shares of imported varieties if and only if it lowers the product of transport costs. Second, under a plausible condition, there exists a unique interior growth-maximizing aid/GDP ratio. These results are robust to alternative specifications for congestion and stock-flow nature of public goods.
{"title":"Aid for Trade and Global Growth","authors":"Takumi Naito","doi":"10.1111/roie.12253","DOIUrl":"https://doi.org/10.1111/roie.12253","url":null,"abstract":"Aid for trade increases a recipient's public services, which lower its import and export transport costs. Formulating a two-country endogenous growth model, we obtain two main results. First, a permanent increase in the donor's aid/GDP ratio raises the steady-state growth rate as well as both countries' long-run fractions and cost shares of imported varieties if and only if it lowers the product of transport costs. Second, under a plausible condition, there exists a unique interior growth-maximizing aid/GDP ratio. These results are robust to alternative specifications for congestion and stock-flow nature of public goods.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"358 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"122041825","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper shows that the pricing behavior of exporting firms exhibits a “forward‐looking” nature with sticky prices. As a result, the expectations of future exchange rates affect current prices at both the product level and firm level. We find evidence by employing both highly disaggregated Harmonized System (HS) 10‐digit product‐level import data of the USA and firm–product level customs data on China's exports to the USA. These findings provide evidence for a previously unexplored micro‐level forward‐looking nature of trade price adjustment as response to future exchange rates, and suggest a potentially important factor in helping explain incomplete exchange rate pass‐through.
{"title":"Price Adjustment to Exchange Rates and Forward‐Looking Exporters: Evidence from USA–China Trade","authors":"Y. Li, Chen Zhao","doi":"10.1111/roie.12246","DOIUrl":"https://doi.org/10.1111/roie.12246","url":null,"abstract":"This paper shows that the pricing behavior of exporting firms exhibits a “forward‐looking” nature with sticky prices. As a result, the expectations of future exchange rates affect current prices at both the product level and firm level. We find evidence by employing both highly disaggregated Harmonized System (HS) 10‐digit product‐level import data of the USA and firm–product level customs data on China's exports to the USA. These findings provide evidence for a previously unexplored micro‐level forward‐looking nature of trade price adjustment as response to future exchange rates, and suggest a potentially important factor in helping explain incomplete exchange rate pass‐through.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"3 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133192850","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper reviews the different concepts of measuring activities of multinational corporations. It aims at working out the economic relationships that theoretically exist between these measures under general economic assumptions and then empirically investigates to which extent such relationships exist in the data. As a main conclusion, foreign direct investment (FDI) stock data is indeed a good proxy for measuring most real economic activities of multinational firms. Discrepancies between FDI stock and other data can to a large extent be given a reasonable economic meaning, but observed asset‐to‐employment patterns in multinational production also call for more thorough future research.
{"title":"(When) Should We Use Foreign Direct Investment Data to Measure the Activities of Multinational Corporations? Theory and Evidence","authors":"K. Wacker","doi":"10.1111/roie.12244","DOIUrl":"https://doi.org/10.1111/roie.12244","url":null,"abstract":"This paper reviews the different concepts of measuring activities of multinational corporations. It aims at working out the economic relationships that theoretically exist between these measures under general economic assumptions and then empirically investigates to which extent such relationships exist in the data. As a main conclusion, foreign direct investment (FDI) stock data is indeed a good proxy for measuring most real economic activities of multinational firms. Discrepancies between FDI stock and other data can to a large extent be given a reasonable economic meaning, but observed asset‐to‐employment patterns in multinational production also call for more thorough future research.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"51 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-11-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115725784","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Michael A. Anderson, M. Davies, Stephen L. S. Smith
We offer and test a model linking ethnic networks to global price dispersion which predicts lower price dispersion as shared ethnic populations between countries rise, effects that may reverse at higher levels as network discipline breaks down. Using Chinese, Indian and Japanese data, we find that country pairs linked by the Chinese network have significantly lower mean price dispersion. A one standard deviation increase in the size of the Chinese coethnic network lowers price dispersion by 6–33%, an effect that reverses as the network gets large. No such evidence exists for the Indian or Japanese networks.
{"title":"Ethnic Networks and Price Dispersion","authors":"Michael A. Anderson, M. Davies, Stephen L. S. Smith","doi":"10.1111/roie.12221","DOIUrl":"https://doi.org/10.1111/roie.12221","url":null,"abstract":"We offer and test a model linking ethnic networks to global price dispersion which predicts lower price dispersion as shared ethnic populations between countries rise, effects that may reverse at higher levels as network discipline breaks down. Using Chinese, Indian and Japanese data, we find that country pairs linked by the Chinese network have significantly lower mean price dispersion. A one standard deviation increase in the size of the Chinese coethnic network lowers price dispersion by 6–33%, an effect that reverses as the network gets large. No such evidence exists for the Indian or Japanese networks.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"90 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"117345711","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the present paper, I integrate frictional labor markets with on-the-job search into an otherwise standard heterogeneous firm model of intra-industry trade. Most importantly, I show that the returns to workers’ inter-firm mobility are higher in a trade equilibrium than in autarky. Intuitively, by favoring large and productive firms, international trade amplifies the disparities in profitability between small and large firms. Hence, the returns to labor reallocation across firms rise. In view of the empirically observed higher inter-firm mobility among high-skill workers, this suggests a skill-biased impact of trade liberalization.
{"title":"Globalization, Worker Mobility and Wage Inequality","authors":"Damir Stijepic","doi":"10.1111/roie.12258","DOIUrl":"https://doi.org/10.1111/roie.12258","url":null,"abstract":"In the present paper, I integrate frictional labor markets with on-the-job search into an otherwise standard heterogeneous firm model of intra-industry trade. Most importantly, I show that the returns to workers’ inter-firm mobility are higher in a trade equilibrium than in autarky. Intuitively, by favoring large and productive firms, international trade amplifies the disparities in profitability between small and large firms. Hence, the returns to labor reallocation across firms rise. In view of the empirically observed higher inter-firm mobility among high-skill workers, this suggests a skill-biased impact of trade liberalization.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"18 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-07-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121031742","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a time‐varying risk premium. This paper presents a mechanism in a simple two‐country two‐good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents’ strong resulting precautionary motives successfully generates a time‐varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.
{"title":"An Incomplete Markets Explanation of the Uncovered Interest Rate Parity Puzzle","authors":"K. Rabitsch","doi":"10.1111/roie.12220","DOIUrl":"https://doi.org/10.1111/roie.12220","url":null,"abstract":"A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a time‐varying risk premium. This paper presents a mechanism in a simple two‐country two‐good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents’ strong resulting precautionary motives successfully generates a time‐varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.","PeriodicalId":351939,"journal":{"name":"Wiley-Blackwell: Review of International Economics","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2016-05-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130615385","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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