A very influential model in the determination of capital requirements for credit exposures is Vacisek’s model. This model underpins the Basel framework for credit exposures of financial institutions. Vacisek’s model uses information on asset correlation and the unconditional mean of the probability of default to derive the conditional probability of default under stress. However, the concept of asset values applies best to corporations rather than to sovereign exposures. We adapt Vacisek’s model to capture the event of a sovereign default that results from a country hitting certain thresholds of economic distress. A reasonable assumption is that a significant drop in foreign reserve assets triggers the default event in a developing country as observed during the 1980s debt crisis, in which highly indebted Latin American countries and other developing regions were unable to repay the debt.
{"title":"A Simple Sovereign Default Model","authors":"C. Sarmiento","doi":"10.2139/ssrn.3456077","DOIUrl":"https://doi.org/10.2139/ssrn.3456077","url":null,"abstract":"A very influential model in the determination of capital requirements for credit exposures is Vacisek’s model. This model underpins the Basel framework for credit exposures of financial institutions. Vacisek’s model uses information on asset correlation and the unconditional mean of the probability of default to derive the conditional probability of default under stress. However, the concept of asset values applies best to corporations rather than to sovereign exposures. We adapt Vacisek’s model to capture the event of a sovereign default that results from a country hitting certain thresholds of economic distress. A reasonable assumption is that a significant drop in foreign reserve assets triggers the default event in a developing country as observed during the 1980s debt crisis, in which highly indebted Latin American countries and other developing regions were unable to repay the debt.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"68 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115683837","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 studies the impact of income inequality on sovereign spreads under elastic labor and endogenous taxation. We first document that high pre-tax income inequality is associated with high spreads both across countries and across U.S. states. We then develop a sovereign default model with endogenous progressive taxation and heterogeneous labor in productivity and migration cost. The government chooses the optimal combination of tax and debt, considering their interaction. Progressive taxes redistribute income but discourage labor supply and induce emigration, eroding the tax base and the government's ability to repay debt. Default risk increases sovereign spreads and borrowing costs. Thus, the government faces a trade-off between redistribution and spreads. In more unequal economies, the government opts for more redistribution and higher spreads. With the model parameterized to state-level data, we find that income inequality is an important determinant of spreads, generating more than 20% higher spreads compared with a model without income inequality. In a recession, more unequal economies suffer a larger increase in spreads.
{"title":"Inequality, Taxation, and Sovereign Default Risk","authors":"Min Deng","doi":"10.2139/ssrn.3545501","DOIUrl":"https://doi.org/10.2139/ssrn.3545501","url":null,"abstract":"This paper studies the impact of income inequality on sovereign spreads under elastic labor and endogenous taxation. We first document that high pre-tax income inequality is associated with high spreads both across countries and across U.S. states. We then develop a sovereign default model with endogenous progressive taxation and heterogeneous labor in productivity and migration cost. The government chooses the optimal combination of tax and debt, considering their interaction. Progressive taxes redistribute income but discourage labor supply and induce emigration, eroding the tax base and the government's ability to repay debt. Default risk increases sovereign spreads and borrowing costs. Thus, the government faces a trade-off between redistribution and spreads. In more unequal economies, the government opts for more redistribution and higher spreads. With the model parameterized to state-level data, we find that income inequality is an important determinant of spreads, generating more than 20% higher spreads compared with a model without income inequality. In a recession, more unequal economies suffer a larger increase in spreads.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"11 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"134416489","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}
The importance of aid for trade as a tool for facilitating trade, economic growth and social development has received attention since the concept was introduced in 2005. While one of the main targets of aid for trade is export diversification, reflecting the fact that the exports of many developing countries are concentrated in a small range of items, there have not been many efforts to measure the effect of aid for trade on export structure. This study, therefore, attempts to trace the relationship between aid for trade and 133 aid recipients' export structure between 1996 and 2013. Using the Herfindahl–Hirschman Index to measure the degree of export concentration, the findings suggest that total aid for trade has reduced the concentration level in the short run. In the long run, on the other hand, aid for trade has had no significant effect on export structure of recipient countries. Only aid for building productive capacity, which is one of the three categories of aid for trade, contributes to lower concentration. Yet, this change is not caused by an increase in export diversity but by the redistribution of shares of existing products of a similar sophistication level.
{"title":"Does Aid for Trade Diversify the Export Structure of Recipient Countries?","authors":"Yu Ri Kim","doi":"10.1111/twec.12845","DOIUrl":"https://doi.org/10.1111/twec.12845","url":null,"abstract":"The importance of aid for trade as a tool for facilitating trade, economic growth and social development has received attention since the concept was introduced in 2005. While one of the main targets of aid for trade is export diversification, reflecting the fact that the exports of many developing countries are concentrated in a small range of items, there have not been many efforts to measure the effect of aid for trade on export structure. This study, therefore, attempts to trace the relationship between aid for trade and 133 aid recipients' export structure between 1996 and 2013. Using the Herfindahl–Hirschman Index to measure the degree of export concentration, the findings suggest that total aid for trade has reduced the concentration level in the short run. In the long run, on the other hand, aid for trade has had no significant effect on export structure of recipient countries. Only aid for building productive capacity, which is one of the three categories of aid for trade, contributes to lower concentration. Yet, this change is not caused by an increase in export diversity but by the redistribution of shares of existing products of a similar sophistication level.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"2 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-09-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"132826768","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}
Macroeconomic policies that aim to achieve clear and beneficial trade relationships are of utmost importance to a developing country due to complex global economic integration. This is particularly the case for Nigeria’s bilateral trade relationships and is a determinant of the size and direction of capital movements and the volume of trade flows. Thus, to analyse Nigeria’s bilateral trade flows and provide a connection between Nigeria’s economic size and distance with trading partners amongst other variables, this paper adopts the augmented gravity model. Considering both trade and non-trade variables, the gravity model has been widely applied to research on international trade. We adopt a panel data of 16 trading partners of Nigeria for the period 2000 to 2016 to estimate an augmented version of the gravity model with the aid of the panel fixed effects estimation technique. Amongst several determinants, the empirical results reveal that domestic and partner’s GDPs and distance are consistent with the predictions of the gravity model.
{"title":"Determinants of Bilateral Trade Flows of Nigeria: An Application of the Augmented Gravity Model","authors":"O. Oladipupo, F. Adedoyin","doi":"10.2139/ssrn.3439986","DOIUrl":"https://doi.org/10.2139/ssrn.3439986","url":null,"abstract":"Macroeconomic policies that aim to achieve clear and beneficial trade relationships are of utmost importance to a developing country due to complex global economic integration. This is particularly the case for Nigeria’s bilateral trade relationships and is a determinant of the size and direction of capital movements and the volume of trade flows. Thus, to analyse Nigeria’s bilateral trade flows and provide a connection between Nigeria’s economic size and distance with trading partners amongst other variables, this paper adopts the augmented gravity model. Considering both trade and non-trade variables, the gravity model has been widely applied to research on international trade. We adopt a panel data of 16 trading partners of Nigeria for the period 2000 to 2016 to estimate an augmented version of the gravity model with the aid of the panel fixed effects estimation technique. Amongst several determinants, the empirical results reveal that domestic and partner’s GDPs and distance are consistent with the predictions of the gravity model.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"8 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"124079938","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 examines the effect of the U.S-China trade war on Chinese firms. I use quarterly data on more than two thousand listed firms to document that firms in industries with a higher share of output exported to the U.S. have had lower revenue and profits since the start of the trade war. This has been especially the case for businesses producing consumer and industrial durables. U.S. tariffs have had heterogeneous impacts on Chinese firms, hurting mostly larger firms. To a smaller extent, Chinese tariffs have benefited firms of all sizes equally.
{"title":"The Negative Impact of the U.S. - China Trade War on Chinese Firms","authors":"Felipe Benguria","doi":"10.2139/ssrn.3440292","DOIUrl":"https://doi.org/10.2139/ssrn.3440292","url":null,"abstract":"This paper examines the effect of the U.S-China trade war on Chinese firms. I use quarterly data on more than two thousand listed firms to document that firms in industries with a higher share of output exported to the U.S. have had lower revenue and profits since the start of the trade war. This has been especially the case for businesses producing consumer and industrial durables. U.S. tariffs have had heterogeneous impacts on Chinese firms, hurting mostly larger firms. To a smaller extent, Chinese tariffs have benefited firms of all sizes equally.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"128499627","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 study examines the impact of the African Growth and Opportunity Act using the synthetic control method, a quasi-experimental approach. The novelty in the approach is that it addresses problems of estimation that are prevalent in nonexperimental methods used to analyze the impact of preferential trade agreements. The findings show that most of the eligible countries registered gains in exports due to the African Growth and Opportunity Act. However, the results are varied, and the gains were largely unsteady. Much of the gains are due to exports of petroleum and other minerals, while there are few countries that were able to expand into manufacturing and other industrial goods. The positive trade impacts were largely associated with improvements in information and communications technology infrastructure, integrity in the institutions of legal and property rights, ease of labor market regulations, and sound macroeconomic environment, including stable exchange rates and low inflation. Undue exposure to a single market, like the United States, or few commodities may have also restricted the gains from trade.
{"title":"Revisiting the Trade Impact of the African Growth and Opportunity Act: A Synthetic Control Approach","authors":"Woubet Kassa, S. Coulibaly","doi":"10.1596/1813-9450-8993","DOIUrl":"https://doi.org/10.1596/1813-9450-8993","url":null,"abstract":"This study examines the impact of the African Growth and Opportunity Act using the synthetic control method, a quasi-experimental approach. The novelty in the approach is that it addresses problems of estimation that are prevalent in nonexperimental methods used to analyze the impact of preferential trade agreements. The findings show that most of the eligible countries registered gains in exports due to the African Growth and Opportunity Act. However, the results are varied, and the gains were largely unsteady. Much of the gains are due to exports of petroleum and other minerals, while there are few countries that were able to expand into manufacturing and other industrial goods. The positive trade impacts were largely associated with improvements in information and communications technology infrastructure, integrity in the institutions of legal and property rights, ease of labor market regulations, and sound macroeconomic environment, including stable exchange rates and low inflation. Undue exposure to a single market, like the United States, or few commodities may have also restricted the gains from trade.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"4 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-20","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"130509045","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}
We study the impact of international financial integration on firm‐level equity cost of capital in the presence of regulatory differences. International financial integration reduces the domestic cost of capital in the presence of well‐defined regulations that make it easier for foreign firms to overcome information asymmetry. We study this relationship for 55 countries for the period 2002 to 2014. Using multilevel mixed estimations, we find a negative relationship between cost of capital and both financial openness and regulatory quality. However, economies with better regulatory quality have a positive relationship between financial openness and cost of capital. Our results inform policy on the cost of higher level of regulations on firms’ equity cost of capital, especially when an economy has a high level of financial openness.
{"title":"Regulatory Quality, Financial Integration and Equity Cost of Capital","authors":"P. Nagaraj, Chuanqian Zhang","doi":"10.1111/roie.12403","DOIUrl":"https://doi.org/10.1111/roie.12403","url":null,"abstract":"We study the impact of international financial integration on firm‐level equity cost of capital in the presence of regulatory differences. International financial integration reduces the domestic cost of capital in the presence of well‐defined regulations that make it easier for foreign firms to overcome information asymmetry. We study this relationship for 55 countries for the period 2002 to 2014. Using multilevel mixed estimations, we find a negative relationship between cost of capital and both financial openness and regulatory quality. However, economies with better regulatory quality have a positive relationship between financial openness and cost of capital. Our results inform policy on the cost of higher level of regulations on firms’ equity cost of capital, especially when an economy has a high level of financial openness.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"52 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"127367036","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}
Whether the non‐market economy (NME) treatment on China can be maintained even after the expiry date under Section 15 of China's World Trade Organization (WTO) Accession Protocol is one of the most controversial issues in the WTO. In fact, the key issue of the NME status in the anti‐dumping (AD) proceedings turns out to be how surrogate countries are selected in relation to dumping margin calculation. This paper reviews the US practices concerning the application of the surrogate country method. Despite the general perception of capricious and random selection of surrogate countries, the Department of Commerce has maintained a consistent pattern for applying the criteria. This seemingly consistent practice, however, raised systematic problems—but not at a significant scale—in dumping margin calculation concerning Chinese products. This result sheds an interesting light on the current WTO disputes concerning the China's NME status. At least in terms of the US AD practices, the result of the WTO dispute settlement process may not have a significant impact on the China's exportation.
{"title":"Empirical Evidence on Surrogate Country Method for Non‐Market Economy: US Anti‐Dumping Policy Towards China","authors":"Hyerim Kim, D. Ahn","doi":"10.1111/twec.12804","DOIUrl":"https://doi.org/10.1111/twec.12804","url":null,"abstract":"Whether the non‐market economy (NME) treatment on China can be maintained even after the expiry date under Section 15 of China's World Trade Organization (WTO) Accession Protocol is one of the most controversial issues in the WTO. In fact, the key issue of the NME status in the anti‐dumping (AD) proceedings turns out to be how surrogate countries are selected in relation to dumping margin calculation. This paper reviews the US practices concerning the application of the surrogate country method. Despite the general perception of capricious and random selection of surrogate countries, the Department of Commerce has maintained a consistent pattern for applying the criteria. This seemingly consistent practice, however, raised systematic problems—but not at a significant scale—in dumping margin calculation concerning Chinese products. This result sheds an interesting light on the current WTO disputes concerning the China's NME status. At least in terms of the US AD practices, the result of the WTO dispute settlement process may not have a significant impact on the China's exportation.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"21 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-08-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"114604890","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}
Using a panel dataset of 105 developing countries for the period 2003–15, this paper assesses the effects of Aid for Trade (AfT) on greenfield FDI flows to the aid‐recipient countries. Particularly, this paper classifies the total dollar value of greenfield FDI flows to each recipient country in terms of four different layers: the extensive and intensive margins of projects as well as the extensive and intensive margins of source countries. Applying the system GMM estimator, this paper finds that AfT not only increases the dollar value of FDI flows to the recipient countries but also helps diversify the greenfield projects and source countries. In addition, this paper finds that AfT has a greater effect for greenfield FDI from donor (developed) countries than from non‐donor (developing) countries. Among the three components of AfT, aid for trade‐related infrastructure and aid for trade policy regulations are found to have positive links with greenfield FDI, irrespective of source‐country groups, yet their effects are larger for developed source countries. In contrast, aid for building productive capacity hinders greenfield FDI flows from non‐donor countries, while it promotes greenfield FDI from donor countries. We offer some explanations for this finding.
{"title":"Effects of Aid for Trade on Extensive and Intensive Margins of Greenfield FDI","authors":"Dung Ly‐My, Hyun‐Hoon Lee","doi":"10.1111/twec.12787","DOIUrl":"https://doi.org/10.1111/twec.12787","url":null,"abstract":"Using a panel dataset of 105 developing countries for the period 2003–15, this paper assesses the effects of Aid for Trade (AfT) on greenfield FDI flows to the aid‐recipient countries. Particularly, this paper classifies the total dollar value of greenfield FDI flows to each recipient country in terms of four different layers: the extensive and intensive margins of projects as well as the extensive and intensive margins of source countries. Applying the system GMM estimator, this paper finds that AfT not only increases the dollar value of FDI flows to the recipient countries but also helps diversify the greenfield projects and source countries. In addition, this paper finds that AfT has a greater effect for greenfield FDI from donor (developed) countries than from non‐donor (developing) countries. Among the three components of AfT, aid for trade‐related infrastructure and aid for trade policy regulations are found to have positive links with greenfield FDI, irrespective of source‐country groups, yet their effects are larger for developed source countries. In contrast, aid for building productive capacity hinders greenfield FDI flows from non‐donor countries, while it promotes greenfield FDI from donor countries. We offer some explanations for this finding.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"64 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129768662","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}
We study a non-parametric class of neoclassical trade models with global production networks. We characterize their properties in terms of sufficient statistics useful for growth and welfare accounting as well as for counterfactuals. We establish a formal duality between open and closed economies and use it to analytically quantify the gains from trade. Accounting for nonlinear (non-Cobb-Douglas) production networks with realistic complementarities in production significantly raises the gains from trade relative to estimates in the literature. We use our general comparative statics results to show how models that abstract away from intermediates, no matter how well calibrated, are incapable of simultaneously predicting the costs of tariff and non-tariff barriers to trade. Given trade volumes and elasticities, accounting for intermediates doubles the losses from tariffs. Better quantitative accuracy demands the use of more complicated, oftentimes computational, models. This paper seeks to help bridge the gap between computation and theory.
{"title":"Networks, Barriers, and Trade","authors":"D. Baqaee, E. Farhi","doi":"10.3386/W26108","DOIUrl":"https://doi.org/10.3386/W26108","url":null,"abstract":"We study a non-parametric class of neoclassical trade models with global production networks. We characterize their properties in terms of sufficient statistics useful for growth and welfare accounting as well as for counterfactuals. We establish a formal duality between open and closed economies and use it to analytically quantify the gains from trade. Accounting for nonlinear (non-Cobb-Douglas) production networks with realistic complementarities in production significantly raises the gains from trade relative to estimates in the literature. We use our general comparative statics results to show how models that abstract away from intermediates, no matter how well calibrated, are incapable of simultaneously predicting the costs of tariff and non-tariff barriers to trade. Given trade volumes and elasticities, accounting for intermediates doubles the losses from tariffs. Better quantitative accuracy demands the use of more complicated, oftentimes computational, models. This paper seeks to help bridge the gap between computation and theory.","PeriodicalId":391101,"journal":{"name":"Econometric Modeling: International Economics eJournal","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2019-07-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115038928","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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