In this paper we demonstrate the importance of distinguishing capital goods tariffs from other tariffs. Using exposure to a quasi-natural experiment induced by a trade reform in Colombia, we find that firms that have been more exposed to a reduction in intermediate and consumption input or output tariffs do not significantly increase their investment rates. However, firms’ investment rate increase strongly in response to a reduction in capital goods input tariffs. Firms do not substitute capital with labor, but instead also increase employment, especially for production workers. Reduction in other tariff rates do not increase investment and employment. Our results suggest that a reduction in the relative price of capital goods can significantly boost investment and employment and does not seem to lead to a decline in the labor share.
This paper identifies a new mechanism leading to inefficiency in capital reallocation at the
extensive margin when an economy experiences a sectoral boom. I argue that imperfections
in the financial market and capital barriers to entry in the booming sector create a
misallocation of managerial talent. Using comprehensive firm-level data from China, I first
provide evidence that more productive firms reallocate capital to the booming real estate
sector, and demonstrate that the pattern is likely driven by fewer financial constraints on
these firms. I then use a structural estimation to verify the talent misallocation. Finally, I
calibrate a dynamic model and find that the without the misallocation, the TFP growth in the
manufacturing sector would have improved by 0.5% per year.
Why did the Great Recession lead to such a slow recovery? I build a model where
heterogeneous firms invest in physical and intangible capital, and can default on their debt. In
case of default, intangible assets are harder to seize by creditors. Hence, intangible capital
faces higher financing costs. This differential is exacerbated in a financial crisis, when
default is more likely and aggregate risk bears a higher premium. The resulting fall in
intangible investment amplifies the crisis, and gradual intangible spillovers to other firms
contribute to its persistence. Using panel data on Spanish manufacturing firms, I estimate the
model matching firm-level moments regarding intangibles and financing. The model captures
the extent and components of the Great Recession in Spanish manufacturing, whereas a
standard model without endogenous intangible investment would miss more than half of the
GDP fall. A policy of transfers conditional on firm age could speed up the recovery, as young
firms tend to be more financially constrained, particularly regarding intangible investment.
Conditioning transfers on firm size or subsidizing credit (as in current E.U. policy) appears to
be less effective.
We trace Japanese corporate investment across different types of firms over the past decades and estimate the main determinants of investment. We find that there are differences in investment behavior between firms expanding abroad and those operating mainly in domestic markets. On the back of a trend increase in production offshoring, investment by large companies, especially those in the transportation sector, is more positively associated with cash flow while responding less to Q ratio. These findings are consistent with the subdued recovery of private investment in recent years despite booming stock markets and the large build up of cash holdings by Japanese corporates.
Oya Celasun, Gabriel Di Bella, Tim Mahedy, and Mr. Chris Papageorgiou
The notable rebound of U.S. manufacturing activity following the Great Recession has raised the question of whether the sector might be experiencing a renaissance. Using panel regressions, we find that a depreciating real exchange rate, an increasing spread in natural gas prices between the United States and other G-7 countries, and in particular decreasing unit labor costs have had a positive impact on U.S. manufacturing production. While we find it unlikely for manufacturing to become a main engine of growth in the United States, we find that U.S. manufacturing exports could provide nonnegligible growth opportunities going forward.
Technology is generating a global convergence. A "big bang" of information—and education as well—is improving human lives. And with global interconnectivity growing by leaps and bounds, we are all witness to a rapid spread of information and ideas. But, as we have seen from the prolonged global financial crisis, our interconnectedness carries grave risks as well as benefits. This issue of F&D looks at different aspects of interconnectedness, globally and in Asia. • Brookings VP Kemal Devis presents the three fundamental trends in the global economy affecting the balance between east and west in "World Economy: Convergence, Interdependence, and Divergence." • In "Financial Regionalism," Akihiro Kawai and Domenico Lombardi tell us how regional arrangements are helping global financial stability. • In "Migration Meets Slow Growth," Migration Policy Institute president Demetrios Papademetriou examines how the global movement of workers will change as the economic crisis continues in advanced economies. • "Caught in the Web" explains new ways of looking at financial interconnections in a globalized world. • IMF Managing Director Christine Lagarde provides her take on the benefits of integration and the risks of fragmentation in "Straight Talk." Also in this issue, we take a closer look at interconnectedness across Asia as we explore how trade across the region is affected by China's falling trade surplus, how India and China might learn from each others' success, and what Myanmar's reintegration into the global economy means for its people. F&D's People in Economics series profiles Justin Yifu Lin, first developing country World Bank economist, and the Back to Basics series explains the origins and evolution of money.
The statistical appendices present the following details for Brunei Darussalam: Nominal GDP and quarterly nominal GDP by economic activity, nominal GDP and quarterly nominal GDP by expenditure, quarterly composition of nominal GDP and composition of nominal GDP by activity, real GDP and quarterly real GDP by economic activity and expenditure, oil and gas production and sales, consumer price index, imports and exports by commodities, country destination exchange rates, energy sector, financial soundness indicators, balance of payments, depository corporations survey, Brunei currency, and the monetary board survey.