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This paper was presented at the Royal Economic Society Annual Conference University of Warwick (1 April 1998). We thank Paul Masson and Peter Isard for their comments, and Susanna Mursula and Dirk Muir for research assistance.
This paper complements and extends Bayoumi, Coe, and Helpman (1998), who use a similar augmented model based on an earlier version of MULTIMOD to look at the impact of increases in R&D expenditures in industrial countries, including the spillover effects to other industrial countries and to four developing country regions.
MULTIMOD Mark III also contains aggregate models for developing countries and for transition countries. A detailed description of MULTIMOD Mark III is presented in Laxton and others (1998). See also Bayoumi, Coe, and Helpman (1998), and Masson, Symansky, and Meredith (1990).
The equations reported in Coe and Helpman (1995) (CH) have been modified in light of Lichtenberg and van Pottelsberghe de la Potterie (1998), who point out that the CH estimates of the elasticity of TFP with respect to the foreign R&D capital stock are sensitive to the normalization of the foreign R&D capital stock series, which was indexed to equal 1.0 in 1985. For this reason we have reestimated the CH equations, using the unindexed data on foreign R&D capital stocks and adding the import share as an independent variable (the import share was omitted in the CH specification because the estimated coefficient was insignificant). This modification has only a small effect on the estimated elasticity of TFP with respect to the foreign R&D capital stock (the new elasticity is 0.26, compared with 0.29 in CH). We report the corrected estimates in the text below and use them in the simulations.
Coe, Helpman, and Hoffmaister (1997) include a proxy for human capital, in addition to R&D spillovers and trade, as a determinant of TFP in developing countries.
Although the coefficient on the import share by itself is negative, given an average value of the logarithm of foreign R&D capital of about 12, the “total” elasticity of TFP with respect to the import share is roughly zero.
See also Eaton and Kortum (1996), who find large and significant international technology spillovers based on patent data.
Keller (1998) has argued, based on a Monte Carlo study, that weights based on random import shares perform as well as bilateral import shares. As shown in Bayoumi, Coe, and Helpman (1998), if the foreign R&D capital is constructed as an unweighted average of the domestic R&D stocks of trading partners, which is similar to the weights used by Keller, the simulation results are broadly unchanged except for the distribution of spillovers among trading partners.
The baseline for the simulations is constructed from the projections to the year 2002 in the IMF’s (1997) World Economic Outlook, by this time, unemployment is assumed equal to the natural rate, and actual output is assumed to be equal to potential. After 2002, employment and output remain in equilibrium as each country in the model slowly moves to a full stock-flow equilibrium, in which some countries are net debtors and others are net creditors. Because the model has forward-looking behavior, it is necessary to specify terminal conditions for the simulations; these conditions are obtained from the steady state analog model that is embedded in the Mark III version of MULTIMOD.
Laxton and others (1998) illustrate how the short-run effects of fiscal shocks depend on the reactions of the monetary authorities.
These estimates are from OECD (1995a) and refer to the average of the G-7 countries other than the United States (for which a breakdown is not available). Only R&D capital expenditures would be included directly as an element of aggregate demand in the national accounts, although these represented less than 1 percent of business fixed investment. Other R&D expenditures would affect aggregate demand indirectly through their effects on incomes and production.
MULTIMOD Mark III version contains distortionary capital taxes, as well as nondistortionary labor taxes. In the fiscal experiments reported here, the tax rate on capital income is unchanged.
These calculations assume a discount rate of 4.2 percent which is equal to the equilibrium real interest rate on government debt and is greater than the growth rate of potential output in the baseline, a necessary condition to rule out Ponzi games.