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John Spray
I develop a model of firm-to-firm search and matching to show that the impact of falling trade costs on firm sourcing decisions and consumer welfare depends on the relative size of search externalities in domestic and international markets. These externalities can be positive if firms share information about potential matches, or negative if the market is congested. Using unique firm-to-firm transaction-level data from Uganda, I document empirical evidence consistent with positive externalities in international markets and negative externalities in domestic markets. I then build a dynamic quantitative version of the model and show that, in Uganda, a 25% reduction in trade costs led to a 3.7% increase in consumer welfare, 12% of which was due to search externalities.
Mr. Philip Barrett
I use a monthly panel of provincially-collected central government revenues and conflict fatalities to estimate government revenues lost due to conflict in Afghanistan since 2005. I identify causal effects by instrumenting for conflict using pre-sample ethno-linguistic share. Headline estimates are very large, implying total revenue losses since 2005 of $3bn, and future revenue gains from peace of about 6 percent of GDP per year. Reduced collection efficiency, rather than lower economic activity, appears to be the key channel. OLS estimates understate the causal effect by a factor of four. Comparing to estimates from Powell’s (2017) generalized synthetic control method suggests that this bias results from omitted variables and measurement error in equal share. The findings underscore the considerable economic loss due to conflict, and the importance of careful identification in measuring this loss.
Vitor Gaspar, Laura Jaramillo, and Mr. Philippe Wingender
Is there a minimum tax to GDP ratio associated with a significant acceleration in the process of growth and development? We give an empirical answer to this question by investigating the existence of a tipping point in tax-to-GDP levels. We use two separate databases: a novel contemporary database covering 139 countries from 1965 to 2011 and a historical database for 30 advanced economies from 1800 to 1980. We find that the answer to the question is yes. Estimated tipping points are similar at about 12¾ percent of GDP. For the contemporary dataset we find that a country just above the threshold will have GDP per capita 7.5 percent larger, after 10 years. The effect is tightly estimated and economically large.
Mr. Kamiar Mohaddes and Mr. Mehdi Raissi
This paper investigates the global macroeconomic consequences of falling oil prices due to the oil revolution in the United States, using a Global VAR model estimated for 38 countries/regions over the period 1979Q2 to 2011Q2. Set-identification of the U.S. oil supply shock is achieved through imposing dynamic sign restrictions on the impulse responses of the model. The results show that there are considerable heterogeneities in the responses of different countries to a U.S. supply-driven oil price shock, with real GDP increasing in both advanced and emerging market oil-importing economies, output declining in commodity exporters, inflation falling in most countries, and equity prices rising worldwide. Overall, our results suggest that following the U.S. oil revolution, with oil prices falling by 51 percent in the first year, global growth increases by 0.16 to 0.37 percentage points. This is mainly due to an increase in spending by oil importing countries, which exceeds the decline in expenditure by oil exporters.
Todd B. Walker, Eric M. Leeper, and Ms. Susan S. Yang
News - or foresight - about future economic fundamentals can create rational expectations equilibria with non-fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react. Using tax policies as a leading example of foresight, simple theory makes transparent the economic behavior and information structures that generate non-fundamental equilibria. Econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes; biases are quantitatively important when two canonical theoretical models are taken as data generating processes. Both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows. Different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non-uniqueness problem endemic to moving average representations.
Ms. Katrin Elborgh-Woytek and Mr. Julian Berengaut
The paper analyzes the initial output decline in transition economies by estimating a crosssection model stressing two major factors-conflicts and the legacies of the Soviet period. We link the Soviet legacies in place at the outset of the transition to the subsequent path for the development of market-related institutions. Institutional development (as proxied by measures of corruption) is used as an intermediate variable. An instrumental variable approach is followed to derive estimates that are not biased by the possible endogeneity of corruption with respect to output developments. Assuming that the extent of Soviet legacies was positively correlated with the length of the communist rule allows us to use the years under the Soviet regime as an instrument.
Mr. Francisco d Nadal De Simone
This paper uses the classical (level) definition of business cycles to analyze the characteristics-duration, amplitude, steepness, and cumulative output movements-of the real GDP series of France, Germany, Italy, the rest of the euro area, and the United States. An index of concordance and its test statistic suggest a great deal of comovement/synchronization between output cycles. Following that result, a dynamic factor model is estimated. Output fluctuations are mostly explained by a global common component and an euro area common component. However, idiosyncratic components also matter, especially for France, the rest of the euro area, and the United States.
Ms. Aude Pommeret and Ms. Anne Epaulard
This paper aims to measure the risk premium on French equities during 1960-92 and to evaluate how well theoretical models based on various representations of agents' preferences can explain it. Aside from the standard, time-additive utility function with constant relative risk aversion, three other utility functions are reviewed: a recursive utility function, a habit formation utility function, and a utility function that accounts for the interdependence of preferences. Both calibration and econometric estimations show that none of the studied marginal changes in the representation of agents' preferences are sufficient to solve both the equity premium puzzle and the risk-free rate puzzle.
Ary Lars Bovenberg
This paper examines how two types of fiscal policy models, namely, dynamic macroeconomic models and applied general equilibrium models, have integrated macro- and microeconomic relationships within a framework of intertemporal equilibrium. After emphasizing the potential advantages of integrating macro- and microeconomic relations, the study discusses the limitations of intertemporal equilibrium models--in particular the weaknesses of saving and investment theories incorporated in the models. It concludes that, despite recent important advances, policymakers need to exercise caution when they interpret results derived from these models.