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Creator: Holmes, Thomas J., McGrattan, Ellen R., and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 486 Abstract:
By the 1970s, quid pro quo policy, which requires multinational firms to transfer technology in return for market access, had become a common practice in many developing countries. While many countries have subsequently liberalized quid pro quo requirements, China continues to follow the policy. In this paper, we incorporate quid pro quo policy into a multicountry dynamic general equilibrium model, using microevidence from Chinese patents to motivate key assumptions about the terms of the technology transfer deals and macroevidence on China’s inward foreign direct investment (FDI) to estimate key model parameters. We then use the model to quantify the impact of China’s quid pro quo policy and show that it has had a significant impact on global innovation and welfare.
Palavra-chave: China, FDI, and Quid Pro Quo Sujeito: O33 - Technological Change: Choices and Consequences; Diffusion Processes, F41 - Open Economy Macroeconomics, F23 - Multinational Firms; International Business, and O34 - Intellectual Property and Intellectual Capital
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 472 Abstract:
A problem that faces many countries including the United States is how to finance retirement consumption as the population ages. Proposals for switching to a saving-for-retirement system that do not rely on high payroll taxes have been challenged on the grounds that welfare would fall for some groups such as retirees or the working poor. We show how to devise a transition path from the current U.S. system to a saving-for-retirement system that increases the welfare of all current and future generations, with estimates of future gains higher than those found in typically used macroeconomic models. The gains are large because there is more productive capital than commonly assumed. Our quantitative results depend importantly on accounting for differences between actual government tax revenues and what revenues would be if all income were taxed at the income-weighted average marginal tax rates used in our analysis.
Palavra-chave: Medicare, Retirement, Social Security, and Taxation Sujeito: E13 - General Aggregative Models: Neoclassical, H55 - Social Security and Public Pensions, and I13 - Health Insurance, Public and Private
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 407 Abstract:
Appendix A provides firm-level and industry-level evidence that is consistent with several key features of our model, including the predictions that rates of return increase with a firm’s intangible investments and foreign affiliate rates of return increase with age and with their parents’ R&D intensity. Appendix B provides details for the computation of our model’s equilibrium paths, the construction of model national and international accounts, and the sensitivity of our main findings to alternative parameterizations of the model. We demonstrate that the main finding of our paper—namely, that the mismeasurement of capital accounts for roughly 60 percent of the gap in FDI returns—is robust to alternative choices of income shares, depreciation rates, and tax rates, assuming the same procedure is followed in setting exogenous parameters governing the model’s current account. Appendix C demonstrates that adding technology capital and locations to an otherwise standard two-country general equilibrium model has a large impact on the predicted behavior of labor productivity and net exports.
Sujeito: F23 - Multinational Firms; International Business and F32 - Current Account Adjustment; Short-term Capital Movements
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 406 Abstract:
The U.S. Bureau of Economic Analysis (BEA) estimates the return on investments of foreign subsidiaries of U.S. multinational companies over the period 1982–2006 averaged 9.4 percent annually after taxes; U.S. subsidiaries of foreign multinationals averaged only 3.2 percent. Two factors distort BEA returns: technology capital and plant-specific intangible capital. Technology capital is accumulated know-how from intangible investments in R&D, brands, and organizations that can be used in foreign and domestic locations. Used abroad, it generates profits for foreign subsidiaries with no foreign direct investment (FDI). Plant-specific intangible capital in foreign subsidiaries is expensed abroad, lowering current profits on FDI and increasing future profits. We develop a multicountry general equilibrium model with an essential role for FDI and apply the BEA’s methodology to construct economic statistics for the model economy. We estimate that mismeasurement of intangible investments accounts for over 60 percent of the difference in BEA returns.
Sujeito: F23 - Multinational Firms; International Business and F32 - Current Account Adjustment; Short-term Capital Movements
Creator: Cole, Harold Linh, 1957-, Ohanian, Lee E., Riascos, Alvaro, and Schmitz, James Andrew Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 351 Abstract:
Latin American countries are the only Western countries that are poor and that aren’t gaining ground on the United States. This paper evaluates why Latin America has not replicated Western economic success. We find that this failure is primarily due to TFP differences. Latin America’s TFP gap is not plausibly accounted for by human capital differences, but rather reflects inefficient production. We argue that competitive barriers are a promising channel for understanding low Latin TFP. We document that Latin America has many more international and domestic competitive barriers than do Western and successful East Asian countries. We also document a number of microeconomic cases in Latin America in which large reductions in competitive barriers increase productivity to Western levels.
Palavra-chave: Latin America Sujeito: N20 - Economic History: Financial Markets and Institutions: General, International, or Comparative and N26 - Economic History: Financial Markets and Institutions: Latin America; Caribbean
Creator: Chari, V. V., Kehoe, Patrick J., and McGrattan, Ellen R. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 328 Abstract:
We propose a simple method to help researchers develop quantitative models of economic fluctuations. The method rests on the insight that many models are equivalent to a prototype growth model with time-varying wedges which resemble productivity, labor and investment taxes, and government consumption. Wedges corresponding to these variables—efficiency, labor, investment, and government consumption wedges—are measured and then fed back into the model in order to assess the fraction of various fluctuations they account for. Applying this method to U.S. data for the Great Depression and the 1982 recession reveals that the efficiency and labor wedges together account for essentially all of the fluctuations; the investment wedge plays a decidedly tertiary role, and the government consumption wedge, none. Analyses of the entire postwar period and alternative model specifications support these results. Models with frictions manifested primarily as investment wedges are thus not promising for the study of business cycles. (See Additional Material for a response to Christiano and Davis (2006).)
Palavra-chave: Capacity utilization, Sticky prices, Equivalence theorems, Financial frictions, Productivity decline, Great Depression , and Sticky wages Sujeito: E10 - General Aggregative Models: General and E12 - General Aggregative Models: Keynes; Keynesian; Post-Keynesian
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 294 Abstract:
Many stock market analysts think that in 1929, at the time of the crash, stocks were overvalued. Irving Fisher argued just before the crash that fundamentals were strong and the stock market was undervalued. In this paper, we use growth theory to estimate the fundamental value of corporate equity and compare it to actual stock valuations. Our estimate is based on values of productive corporate capital, both tangible and intangible, and tax rates on corporate income and distributions. The evidence strongly suggests that Fisher was right. Even at the 1929 peak, stocks were undervalued relative to the prediction of theory.
Sujeito: E62 - Fiscal Policy, N22 - Economic History: Financial Markets and Institutions: U.S.; Canada: 1913-, and G12 - Asset Pricing; Trading Volume; Bond Interest Rates
Creator: McGrattan, Ellen R. and Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 309 Abstract:
We derive the quantitative implications of growth theory for U.S. corporate equity plus net debt over the period 1960–2001. There were large secular movements in corporate equity values relative to GDP, with dramatic declines in the 1970s and dramatic increases starting in the 1980s and continuing throughout the 1990s. During the same period, there was little change in the capital-output ratio or earnings share of output. We ask specifically whether the theory accounts for these observations. We find that it does, with the critical factor being changes in the U.S. tax and regulatory system. We find that the theory also accounts for the even larger movements in U.K. equity values relative to GDP in this period.
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 295 Abstract:
Between 1913 and 1929, real GDP per person in the UK fell 1 percent, while this same measure of economic activity rose about 25 percent in the rest of the world. Why was Britain so depressed in a decade of strong economic activity around the world? This paper argues that the standard explanations of contractionary monetary shocks and an overvalued nominal exchange rate are not the prime suspects for killing the British economy. Rather, we argue that large, negative sectoral shocks, coupled with generous unemployment benefits and housing subsidies, are the primary causes of this long and deep depression.
Palavra-chave: Workweek restriction, Sectoral shocks, and Unemployment benefits Sujeito: E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) and E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 296 Abstract:
Many view the period after the Second Industrial Revolution as a paradigmatic example of a transition to a new economy following a technological revolution and conjecture that this historical experience is useful for understanding other transitions, including that after the Information Technology Revolution. We build a model of diffusion and growth to study transitions. We quantify the learning process in our model using data on the life cycle of U.S. manufacturing plants. This model accounts quantitatively for the productivity paradox, the slow diffusion of new technologies, and the ongoing investment in old technologies after the Second Industrial Revolution. The main lesson from our model for the Information Technology Revolution is that the nature of transition following a technological revolution depends on the historical context: transition and diffusion are slow only if agents have built up through learning a large amount of knowledge about old technologies before the transition begins.
Sujeito: O33 - Technological Change: Choices and Consequences; Diffusion Processes, N71 - Economic History: Transport, Trade, Energy, Technology, and Other Services: U.S.; Canada: Pre-1913, N61 - Economic History: Manufacturing and Construction: U.S.; Canada: Pre-1913, N72 - Economic History: Transport, Trade, Energy, Technology, and Other Services: U.S.; Canada: 1913-, L60 - Industry Studies: Manufacturing: General, and N62 - Economic History: Manufacturing and Construction: U.S.; Canada: 1913-
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 297 Abstract:
Monetary policy instruments differ in tightness—how closely they are linked to inflation—and transparency—how easily they can be monitored. Tightness is always desirable in a monetary policy instrument; when is transparency? When a government cannot commit to follow a given policy. We apply this argument to a classic question: Is the exchange rate or the money growth rate the better monetary policy instrument? We show that if the instruments are equally tight and a government cannot commit to a policy, then the exchange rate’s greater transparency gives it an advantage as a monetary policy instrument.
Palavra-chave: Monetary Instrument, Exchange Rate Regime, Fixed Exchange Rates, Time Consistency, and Nominal Anchor Sujeito: E52 - Monetary Policy, F41 - Open Economy Macroeconomics, F33 - International Monetary Arrangements and Institutions, E50 - Monetary Policy, Central Banking, and the Supply of Money and Credit: General, and E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination
Creator: Holmes, Thomas J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 298 Abstract:
What is the force of attraction of cities? Leading explanations include the advantages of a concentrated market and knowledge spillovers. This paper develops a model of firm location decisions in which it is possible to distinguish the importance of the concentrated-market motive from other motives, including knowledge spillovers. A key aspect of the model is that it allows for the firm to choose multiple locations. The theory is applied to study the placement of manufacturing sales offices. The implications of the concentrated-market motive are found to be a salient feature of U.S. Census micro data. The structural parameters of the model are estimated. The concentrated-market motive is found to account for approximately half of the concentration of sales offices in large cities.
Creator: Heathcote, Jonathan, Storesletten, Kjetil, and Violante, Giovanni L. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 496 Abstract:
What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. On the other hand, progressivity reduces incentives to work and to invest in skills, distortions that are especially costly when the government must finance public goods. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how preference, technology, and market structure parameters influence the optimal degree of progressivity. A calibration for the U.S. economy indicates that endogenous skill investment, flexible labor supply, and the desire to finance government purchases play quantitatively similar roles in limiting optimal progressivity. In a version of the model where poverty constrains skill investment, optimal progressivity is close to the U.S. value. An empirical analysis on cross-country data offers support to the theory.
Palavra-chave: Skill investment, Welfare, Income distribution, Cross-country evidence, Partial insurance, Tax progressivity, Labor supply, and Government expenditures Sujeito: E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), D30 - Distribution: General, H40 - Publicly Provided Goods: General, J24 - Human Capital; Skills; Occupational Choice; Labor Productivity, H20 - Taxation, Subsidies, and Revenue: General, and J22 - Time Allocation and Labor Supply
Creator: Chari, V. V. and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 308 Abstract:
We analyze the setting of monetary and nonmonetary policies in monetary unions. We show that in these unions a time inconsistency problem in monetary policy leads to a novel type of free-rider problem in the setting of nonmonetary policies, such as labor market policy, fiscal policy, and bank regulation. The free-rider problem leads the union’s members to pursue lax nonmonetary policies that induce the monetary authority to generate high inflation. The free-rider problem can be mitigated by imposing constraints on the nonmonetary policies, like unionwide rules on labor market policy, debt constraints on members’ fiscal policy, and unionwide regulation of banks. When there is no time inconsistency problem, there is no free-rider problem, and constraints on nonmonetary policies are unnecessary and possibly harmful.
Palavra-chave: Fixed exchange rates, Monetary regime, European Union, Dollarization, and Maastricht Treaty Sujeito: F42 - International Policy Coordination and Transmission, F41 - Open Economy Macroeconomics, E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy, E58 - Central Banks and Their Policies, F30 - International Finance: General, F33 - International Monetary Arrangements and Institutions, E61 - Policy Objectives; Policy Designs and Consistency; Policy Coordination, and E42 - Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems
Creator: Prescott, Edward C. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 312 Abstract:
This paper reviews the role of micro non-convexities in the study of business cycles. One important non-convexity arises because an individual can work only one workweek length in a given week. The implication of this non-convexity is that the aggregate intertemporal elasticity of labor supply is large and the principal margin of adjustment is in the number employed—not in the hours per person employed—as observed. The paper also reviews a business cycle model with an occasionally binding capacity constraint. This model better mimics business cycle fluctuations than the standard real business cycle model. Aggregation in the presence of micro non-convexities is key in the model.
Creator: Buera, Francisco and Nicolini, Juan Pablo Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 540 Abstract:
We study a model with heterogeneous producers that face collateral and cash-in-advance constraints. A tightening of the collateral constraint results in a credit-crunch-generated recession that reproduces several features of the ﬁnancial crisis that unraveled in 2007 in the United States. The model can be used to study the effects of the credit-crunch on the main macroeconomic variables and the impact of alternative policies. The policy implications regarding forward guidance are in contrast with the prevalent view in most central banks, based on the New Keynesian explanation of the liquidity trap.
Palavra-chave: Liquidity trap, Ricardian equivalence, Collateral constraints, Monetary policy, and Credit crunch Sujeito: E52 - Monetary Policy, E44 - Financial Markets and the Macroeconomy, E58 - Central Banks and Their Policies, and E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
Creator: Bils, Mark, Klenow, Peter J., and Malin, Benjamin A. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 516 Abstract:
Employment and hours appear far more cyclical than dictated by the behavior of productivity and consumption. This puzzle has been called “the labor wedge” — a cyclical intratemporal wedge between the marginal product of labor and the marginal rate of substitution of consumption for leisure. The intratemporal wedge can be broken into a product market wedge (price markup) and a labor market wedge (wage markup). Based on the wages of employees, the literature has attributed the intratemporal wedge almost entirely to labor market distortions. Because employee wages may be smoothed versions of the true cyclical price of labor, we instead examine the self-employed and intermediate inputs, respectively. Looking at the past quarter century in the United States, we find that price markup movements are at least as important as wage markup movements — including during the Great Recession and its aftermath. Thus, sticky prices and other forms of countercyclical markups deserve a central place in business cycle research, alongside sticky wages and matching frictions.
Palavra-chave: Price markups, Business cycles, Labor wedge, and Wage markups Sujeito: E24 - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity and E32 - Business Fluctuations; Cycles
Creator: Fitzgerald, Doireann, Haller, Stefanie, and Yedid-Levi, Yaniv Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 524 Abstract:
We document how export quantities and prices evolve after entry to a market. Controlling for marginal cost, and taking account of selection on idiosyncratic demand, there are economically and statistically significant dynamics of quantities, but no dynamics of prices. To match these facts, we estimate a model where firms invest in customer base through non-price actions (e.g. marketing and advertising), and learn gradually about their idiosyncratic demand. The model matches quantity, price and exit moments. Parameter estimates imply costs of adjusting investment in customer base, and slow learning about demand, both of which generate sluggish responses of sales to shocks.
Palavra-chave: Customer base, Exporter dynamics, and Firm dynamics Sujeito: E20 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy: General (includes Measurement and Data), L10 - Market Structure, Firm Strategy, and Market Performance: General, and F10 - Trade: General