Creator: Guvenen, Fatih, Mataloni Jr., Raymond J., Rassier, Dylan G., and Ruhl, Kim J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 751 Abstract:
Official statistics display a significant slowdown in U.S. aggregate productivity growth that begins in 2004. We show how offshore profit shifting by U.S. multinational enterprises affects GDP and, thus, productivity measurement. Under international statistical guidelines, profit shifting causes part of U.S. production generated by multinationals to be excluded from official measures of U.S. production. Profit shifting has increased significantly since the mid-1990s, resulting in lower measures of U.S. aggregate productivity growth. We construct an alternative measure of value added that adjusts for profit shifting. The adjustments raise aggregate productivity growth rates by 0.09 percent annually for 1994-2004, 0.24 percent annually for 2004-2008, and lowers annual aggregate productivity growth rates by 0.09 percent after 2008. Our adjustments mitigate, but do not eliminate, the measured productivity slowdown. The adjustments are especially large in R&D-intensive industries, which most likely produce intangible assets that facilitate profit shifting. The adjustments boost value added in these industries by as much as 8 percent in the mid-2000s.
Keyword: Tax havens, Productivity slowdown, and Formulary apportionment Subject (JEL): O40 - Economic Growth and Aggregate Productivity: General, E01 - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts, and F23 - Multinational Firms; International Business
Creator: Kehoe, Timothy Jerome, 1953-, Rossbach, Jack, and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 492 Abstract:
This paper develops a methodology for predicting the impact of trade liberalization on exports by industry (3-digit ISIC) based on the pre-liberalization distribution of exports by product (5-digit SITC). Using the results of Kehoe and Ruhl (2013) that much of the growth in trade after trade liberalization is in products that are traded very little or not at all, we predict that industries with a higher share of exports generated by least traded products will experience more growth. Using our methodology, we develop predictions for industry-level changes in trade for the United States and Korea following the U.S.-Korea Free Trade Agreement (KORUS). As a test for our methodology, we show that it performs significantly better than the applied general equilibrium models originally used for the policy evaluation of the North American Free Trade Agreement (NAFTA).
Keyword: Trade liberalization, Product , and Industry Subject (JEL): F14 - Empirical Studies of Trade, F13 - Trade Policy; International Trade Organizations, and F17 - Trade: Forecasting and Simulation
Creator: Kehoe, Timothy Jerome, 1953-, Ruhl, Kim J., and Steinberg, Joseph B. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 489 Abstract:
Since the early 1990s, as the United States borrowed heavily from the rest of the world, employment in the U.S. goods-producing sector has fallen. We construct a dynamic general equilibrium model with several mechanisms that could generate declining goods-sector employment: foreign borrowing, nonhomothetic preferences, and differential productivity growth across sectors. We find that only 15.1 percent of the decline in goods-sector employment from 1992 to 2012 stems from U.S. trade deficits; most of the decline is due to differential productivity growth. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall.
Keyword: Real exchange rate, Structural change, and Global imbalances Subject (JEL): F34 - International Lending and Debt Problems, E13 - General Aggregative Models: Neoclassical, and O41 - One, Two, and Multisector Growth Models
Creator: Kehoe, Timothy Jerome, 1953- and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 453 Abstract:
Following its opening to trade and foreign investment in the mid-1980s, Mexico’s economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. Absent continuing reforms, Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico’s real GDP per working-age person.
Subject (JEL): E23 - Macroeconomics: Production, F14 - Empirical Studies of Trade, E65 - Studies of Particular Policy Episodes, O20 - Development Planning and Policy: General, O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence, and O10 - Economic Development: General
Creator: Conesa, Juan Carlos, Kehoe, Timothy Jerome, 1953-, and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 401 Abstract:
This paper is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990–93 was driven by a combination of a drop in total factor productivity (TFP) during 1990–92 and of increases in taxes on labor and consumption and increases in government consumption during 1989–94, which drove down hours worked in Finland. We attempt to endogenize the drop in TFP in variants of the model with an investment sector and with terms-of-trade shocks but are unsuccessful.
Subject (JEL): E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, E13 - General Aggregative Models: Neoclassical, E32 - Business Fluctuations; Cycles, F59 - International Relations and International Political Economy: Other, and F41 - Open Economy Macroeconomics
Creator: Asturias, Jose, Hur, Sewon, Kehoe, Timothy Jerome, 1953-, and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 544 Abstract:
Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption into a calibrated model, we find that the entry and exit terms in the FHK decomposition become more important as GDP grows rapidly, just as they do in the data from Chile and Korea.
Keyword: Entry costs, Entry, Exit, Productivity, and Barriers to technology adoption Subject (JEL): O10 - Economic Development: General, E22 - Investment; Capital; Intangible Capital; Capacity, O38 - Technological Change: Government Policy, and O47 - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 533 Abstract:
We show that a trade model with an exogenous set of heterogeneous firms with fixed operating costs has the same aggregate outcomes as a span-of-control model. Fixed costs in the heterogeneous-firm model are entrepreneurs' forgone wage in the span-of-control model.
Keyword: Span-of-control model, Firm heterogeneity, Income distribution, and International trade Subject (JEL): D31 - Personal Income, Wealth, and Their Distributions, D43 - Market Structure, Pricing, and Design: Oligopoly and Other Forms of Market Imperfection, and F12 - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
Creator: Asturias, Jose, Hur, Sewon, Kehoe, Timothy Jerome, 1953-, and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 521 Abstract:
In what order should a developing country adopt policy reforms? Do some policies complement each other? Do others substitute for each other? To address these questions, we develop a two-country dynamic general equilibrium model with entry and exit of firms that are monopolistic competitors. Distortions in the model include barriers to entry of firms, barriers to international trade, and barriers to contract enforcement. We find that a reform that reduces one of these distortions has different effects depending on the other distortions present. In particular, reforms to trade barriers and barriers to the entry of new firms are substitutable, as are reforms to contract enforcement and trade barriers. In contrast, reforms to contract enforcement and the barriers to entry are complementary. Finally, the optimal sequencing of reforms requires reforming trade barriers before contract enforcement.
Keyword: Trade barriers, Sequencing reforms, Contract enforcement, and Entry barriers Subject (JEL): O11 - Macroeconomic Analyses of Economic Development, F13 - Trade Policy; International Trade Organizations, O24 - Development Planning and Policy: Trade Policy; Factor Movement; Foreign Exchange Policy, F40 - Macroeconomic Aspects of International Trade and Finance: General, and O19 - International Linkages to Development; Role of International Organizations
Creator: Kehoe, Timothy Jerome, 1953- and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 391 Abstract:
International trade is frequently thought of as a production technology in which the inputs are exports and the outputs are imports. Exports are transformed into imports at the rate of the price of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that this line of reasoning cannot work in standard models. Starting with a simple model and then generalizing, we show that changes in the terms of trade have no first-order effect on productivity when output is measured as chain-weighted real GDP. The terms of trade do affect real income and consumption in a country, and we show how measures of real income change with the terms of trade at business cycle frequencies and during financial crises.
Keyword: Total factor productivity, Terms of trade, Gross domestic product, and National income accounting Subject (JEL): E23 - Macroeconomics: Production, F43 - Economic Growth of Open Economies, and F41 - Open Economy Macroeconomics
Creator: Kehoe, Timothy Jerome, 1953- and Ruhl, Kim J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 324 Abstract:
We propose a methodology for studying changes in bilateral commodity trade due to goods not exported previously or exported only in small quantities. Using a panel of 1,900 country pairs, we find that increased trade of these “least-traded goods” is an important factor in trade growth. This extensive margin accounts for 10 percent of the growth in trade for NAFTA country pairs, for example, and 26 percent in trade between the United States and Chile, China, and Korea. Looking at country pairs with no major trade policy change or structural change, however, we find little change in the extensive margin.
Keyword: NAFTA , Trade liberalization, Structural change, Extensive margin, and International trade Subject (JEL): F13 - Trade Policy; International Trade Organizations, F10 - Trade: General, F44 - International Business Cycles, and O14 - Industrialization; Manufacturing and Service Industries; Choice of Technology