Trading Fire
Unequal gains, prolonged pain: A model of protectionist overshooting and escalation
Emily Blanchard & Gerald Willmann
Journal of International Economics, forthcoming
Abstract:
We develop a model of democratic responses to macroeconomic shocks, and show that when economic adjustment is slower than potential political change, economic shocks can trigger populist surges. Applied to trade policy, we show that unexpected changes in world prices or skill biased technological change can induce a surge in economic nationalism and trade protection. Over time, the initial protectionist surge will gradually diminish if and only if educational gains enable less-skilled workers to catch up with the overall economy. The more unequal the initial distribution of the returns to human capital, the greater and longer-lasting the protectionist backlash will be: unequal gains, prolonged pain. Key data markers suggested by the model exhibit patterns consistent with recent surges in protectionism in the US and UK.
The Political Economy of Anti-Bribery Enforcement
Lauren Cohen & Bo Li
NBER Working Paper, December 2021
Abstract:
This paper documents novel evidence on the influence of political incentives in the regulatory enforcement of foreign bribery. Using exogenous variation in the timing and geographic location of U.S. Congressional elections, we find that the probability of a Foreign Corrupt Practices Act (FCPA) enforcement action against foreign firms located in the Senator's jurisdiction increases significantly pre-election, spiking 23%, with zero equivalent move for equivalently global (but domestic-headquartered) firms in the Senator's jurisdiction. Using hand-collected case-level data from the U.S. SEC and DOJ, we also observe larger discretion in regions where foreign firms are larger global competitors of in-state firms, operate in locally important industries, and when Senators serve as the Chairman of the Senate Judiciary Committee (which oversees the DOJ). Anti-bribery enforcement has electoral implications, leading to spikes in media coverage of the FCPA enforcement coupled with greater vote shares for the Senator. Moreover, the cases pushed through against these foreign firms just prior to elections appear to be weaker cases. The enforcements result in real effects, as in response to strategic timing in enforcement, firms reallocate business segments and sales.
Who Pays for Protectionism? The Welfare and Substitution Effects of Tariffs
Torsten Jaccard
University of Toronto Working Paper, January 2022
Abstract:
This paper studies the distributional costs to US consumers of country-specific tariffs. By linking detailed household purchase records with a barcode-specific country-of-origin, I estimate a demand model with both detailed consumer heterogeneity and rich import substitution patterns in the face of country-specific tariff changes. Simulations using this model show that tariffs on low-income countries are regressive and anti-rural, whereas tariffs on high-income countries are progressive and anti-urban. I provide novel evidence that the urban/rural disparity in exposure to trade policy is driven by the extent to which retail market characteristics differ across urban and rural counties in the US. When modeling import substitution, I combine descriptive text on the packaging of each barcode with unsupervised clustering algorithms to place barcodes into market segments of observable similarity. In general, I estimate lower tariff costs compared to a model in which varieties are segmented based on their production location, as is common in the trade literature. These findings caution against the practice of estimating consumption gains from trade in the absence of (1) detailed variety attribute data and (2) information regarding the domestic alternatives available to consumers.
Currency Wars, Trade Wars, and Global Demand
Olivier Jeanne
NBER Working Paper, December 2021
Abstract:
This paper presents a tractable model of a global economy in which countries can use a broad range of policy instruments -- the nominal interest rate, taxes on imports and exports, taxes on capital flows or foreign exchange interventions. Low demand may lead to unemployment because of downward nominal wage stickiness. Markov perfect equilibria with and without international cooperation are characterized in closed form. The welfare costs of trade and currency wars crucially depend on the state of global demand and on the policy instruments that are used by national policymakers. Countries have more incentives to deviate from free trade when global demand is low. Trade wars lower employment if they involve tariffs on imports but raise employment if they involve export subsidies. Tariff wars can lead to self-fulfilling global liquidity traps.
Technology, market structure and the gains from trade
Giammario Impullitti, Omar Licandro & Pontus Rendahl
Journal of International Economics, forthcoming
Abstract:
We study the gains from trade in a model with oligopolistic competition, heterogeneous firms and innovation. Our key finding is that a trade-induced increase in market concentration can be an important source of the gains from trade. Foreign competition puts downward pressure on profitability which reduces the equilibrium number of firms, but increases their size. This rise in concentration increases welfare via two channels: increasing returns in production, and a scale effect on innovation. In a calibrated version of the model we show that concentration is a main driver of the gains from trade, mostly via its stimulating effect on innovation - the contribution of increasing returns is small. Moreover, lowering trade costs reduce the inefficiency produced by "reciprocal dumping", leading to substantial gains. In contrast, the associated reduction in markup dispersion has only a negligible effect.
The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States
Andrew Atkeson, Jonathan Heathcote & Fabrizio Perri
NBER Working Paper, February 2022
Abstract:
The US net foreign asset position has deteriorated sharply in the years following the Global Financial Crisis and is currently negative 65 percent of US GDP. This deterioration primarily reflects changes in the relative values of large gross international equity positions, as opposed to net new borrowing. In particular, a sharp increase in equity prices that has been US specific has inflated the value of US foreign liabilities. We develop an international macro finance model to interpret these trends, and argue that the rise in equity prices in the United States likely reflects rising profitability of domestic firms rather than a substantial accumulation of unmeasured capital by those firms. Under that interpretation, the revaluation effects that have driven down the US net foreign asset position are associated with large unanticipated transfers of US output to foreign investors.
Trade-Offs? The Impact of WTO Accession on Intimate Partner Violence in Cambodia
Bilge Erten & Pinar Keskin
Review of Economics and Statistics, forthcoming
Abstract:
We study the impact of trade-induced changes in labor market conditions on violence within the household. We exploit the local labor demand shocks generated by Cambodia's WTO accession to assess how changes in the employment of women relative to men affected the risk of intimate partner violence. We document that men in districts facing larger tariff reductions experienced a significant decline in paid employment, whereas women in harder-hit districts increased their entry into the labor force. These changes in employment patterns triggered backlash effects by increasing intimate partner violence, without changes in marriage, fertility, psychological distress, or household consumption.
Are IMF Rescue Packages Effective? A Synthetic Control Analysis of Macroeconomic Crises
Kevin Kuruc
Journal of Monetary Economics, forthcoming
Abstract:
Whether, and to what degree, IMF lending succeeds in stabilizing economies remains an open question. Here, a synthetic control analysis of macroeconomic crises with IMF intervention is performed - leveraging the existence of similar crises without intervention - that finds positive recovery effects. In the first five years following a crisis, output differences are, on average, nearly two percent of GDP per year. Consistent with a liquidity channel, effects are hump-shaped and fade in the medium run. An analysis of historical IMF forecasts provides evidence against selection as a spurious driver of this result, suggesting that these positive estimates are indeed causal.
Who Is Credible? Government Popularity and the Catalytic Effect of IMF Lending
Sujeong Shim
Comparative Political Studies, forthcoming
Abstract:
In this paper, I explain variations in international investors' reactions to International Monetary Fund (IMF) programs. Investors react favorably if a borrowing government is credibly committed to implementing essential IMF conditionality. Instead of engaging complex information processing about economic reform, however, investors rely on a heuristic device to assess the borrower's domestic political conditions. I argue that a borrowing government's popularity is an important cue for investors to assess the prospect of an IMF program. Investors associate higher government popularity with better implementation of the program and react more favorably to more popular borrowers. Using annual data from up to 52 emerging market economies from 1998 to 2017, I find robust statistical evidence supporting these claims: an IMF program alone does not restore investor confidence. Rather, an IMF program carried out by a strong government does. My findings have important implications for the study of global financial governance and credible commitment.
Sovereign Bonds Since Waterloo
Josefin Meyer, Carmen Reinhart & Christoph Trebesch
Quarterly Journal of Economics, forthcoming
Abstract:
This paper studies external sovereign bonds as an asset class. We compile a new database of 266,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering up to 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex post returns average more than 6% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of 3-4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. Central to this finding are the high average coupons offered on external sovereign bonds. The observed returns are hard to reconcile with canonical theoretical models and the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median creditor loss (haircut) is below 50%.
How production networks amplify economic growth
James McNerney et al.
Proceedings of the National Academy of Sciences, 4 January 2022
Abstract:
Technological improvement is the most important cause of long-term economic growth. In standard growth models, technology is treated in the aggregate, but an economy can also be viewed as a network in which producers buy goods, convert them to new goods, and sell the production to households or other producers. We develop predictions for how this network amplifies the effects of technological improvements as they propagate along chains of production, showing that longer production chains for an industry bias it toward faster price reduction and that longer production chains for a country bias it toward faster growth. These predictions are in good agreement with data from the World Input Output Database and improve with the passage of time. The results show that production chains play a major role in shaping the long-term evolution of prices, output growth, and structural change.