Download This PDF is a selection from a published volume from... Bureau of Economic Research Volume Title: NBER International Seminar on Macroeconomics

This PDF is a selection from a published volume from the National
Bureau of Economic Research
Volume Title: NBER International Seminar on Macroeconomics
2011
Volume Author/Editor: Jeffrey Frankel and Christopher Pissarides,
organizers
Volume Publisher: University of Chicago Press
Volume ISBN: 0-226-26035-6; 978-0-226-26034-1 (cloth);
978-0-226-26035-8 (paper)
Volume URL: http://www.nber.org/books/fran11-1
Conference Date: June 17-18, 2011
Publication Date: May 2012
Chapter Title: Introduction to "NBER International Seminar on
Macroeconomics 2011"
Chapter Author(s): Jeffrey Frankel, Christopher Pissarides
Chapter URL: http://www.nber.org/chapters/c12479
Chapter pages in book: (p. 1 - 7)
Introduction
Jeffrey Frankel, Harvard and NBER
Christopher Pissarides, London School of Economics
The International Seminar on Macroeconomics (ISOM) meets every
June in a different European city, bringing together American and European economists to study a variety of topics within “macroeconomics”
defined very broadly. NBER’s 34th International Seminar on Macroeconomics (ISOM) took place on June 17 and 18, 2011. Jeffrey Frankel
is overall codirector of ISOM on behalf of the NBER, with Francesco
Giavazzi as his European counterpart.
We continue to work with a local host in a different European country each summer, and to divide the authors and discussants equally
between Americans and Europeans. Geographically, ISOM has been
venturing farther afield than its origins in the major countries of Western Europe. Since 2005 we have often held meetings among countries
that have recently acceded, or hope to accede, to the European Union or
euro. Our 2011 host country, Malta, joined the European Union in 2004
and the euro in 2008.
Frankel and Christopher Pissarides organized this year’s program.
The papers published here have gone through a rigorous refereeing
process, chiefly by the ISOM Board. The University of Chicago Press
Journals Division publishes them as a companion volume to the NBER
Macroeconomics Annual.
Overview of the Volume
The eight papers published in the 34th volume of ISOM, as usual,
cover quite a range of topics. While the subject matter of the papers
ranges widely, one can weave some overarching themes. The chapters
fall roughly into three categories, represented by three parts of the vol-
© 2012 by the National Bureau of Economic Research. All rights reserved.
978-0-226-26034-1/2012/2011-0001$10.00
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions
2
Frankel and Pissarides
ume: productivity in the international economy; in what countries are
downturns not susceptible to demand stimulus; and nominal and real
exchange rates.
Part I: Productivity in the International Economy
The first three papers concern aspects of productivity. In the first chapter, “Long-Term Barriers to the International Diffusion of Innovations,”
Enrico Spolaore and Romain Wacziarg explore what is perhaps the important question in economics: what determines which countries are
able to achieve rapid progress in total factor productivity and hence
per capita income? In particular, why do some countries adopt the latest technological innovations quickly, and others slowly or not at all?
The authors’ approach begins with the observation that people do not
necessarily know whether a given new technology will work, and
tend to adopt it only if the new technique is visibly demonstrated or
explained to them in a way that they can understand it. The authors’
central hypothesis is that countries where the population is more
closely related, in a biological (genetic) sense, to the country that is at
the frontier of the technology in question, will adopt the technology
more quickly than countries that are genetically distant from the frontier. Presumably an American entrepreneur who is ethnically Chinese
is better able to transfer a given manufacturing technology to China
than is someone of a different ethnicity. The authors offer a theoretical model, and then test various hypotheses empirically. They use data
that were originally collected by population geneticists, providing allele
frequencies for 120 gene loci covering 42 world populations, and an
implied measure of measure of genetic distance between pairs of these
populations. (The Danish and the English are found to be the closest
pair genetically, Mbuti Pygmies and Papua New Guineans the most
distant.) They also use data collected by economists on the extent to
which 24 specific technologies were used among each of 113 contemporary conturies in 1500 and the extent to which 33 modern technologies
are in use in various countries today. They find that societies which
are genetically more distant from the technological frontier tend to
face higher imitation costs and thus tend to be slower to adopt the new
technologies.
Schumpeter introduced “creative destruction,” the idea that aggregate economic productivity rises over time as inefficient old firms go
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions
Introduction
3
out of business and energetic new firms take their place. In “Firm Heterogeneity, Endogenous Entry, and the Business Cycle,” Gianmarco Ottaviano explores the tendency of new firms to enter when the economy
is booming, more so than in downturns, and the tendency of old firms
to exit the economy in downturns, more so than in booms. These patterns are reminiscent of the view that recessions ultimately serve a useful role by “cleansing” the economy of subpar performers. The paper
addresses the implications of these cyclical patterns of entry and exit
for movements in overall productivity in the economy and in the overall markup rate, averaging across strong and weak firms. It builds in
variation in markups over the business cycle, which are low when firms
must compete with many rivals and face high elasticities of demand.
Crucially, firms are not all the same. As a result, entry and exit affect the
overall elasticity of demand. The author implements a numerical version of the model. He then concludes that when a positive productivity
shock causes a cyclical upswing, the tendency of new firms to enter the
expanding economy works to dampen the increase in average productivity because the composition shifts toward marginal firms.
In “The Risk Content of Exports: A Portfolio View of International
Trade,” Julian di Giovanni and Andrei Levchenko study why some
countries experience high volatility via international trade and others
low volatility. One might expect the answer to depend on how open
to trade the country is or on whether the products that it specializes
in happen to be highly volatile (on world markets). But the authors
develop a model of trade where a country’s decision which sectors to
specialize its production in depends on their volatility as much as it
is a determinant of volatility. In classical trade theory, countries that
have a strong comparative advantage in a particular sector (due, for
example, to factor endowments or productivity) will specialize entirely
in that sector. Similarly in the authors’ model, a country with a comparative advantage in a low-risk product will specialize in that product:
they reap the advantages of both greater efficiency and lower risk. For
a country with a comparative advantage in a high- risk product, the
comparative advantage must be especially strong, so that the efficiency
gain overwhelms the effects of risk-aversion, if it is to specialize entirely
in that sector. For countries in between, which have some comparative
advantage in the high- risk product but only weakly so, they will not
specialize at all, but produce both products. By diversifying in this way,
the country reduces its overall economic risk.
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions
4
Frankel and Pissarides
Part II: In What Countries Are Downturns Unsusceptible to
Demand Stimulus?
The next three papers might be viewed through the lens of the high
level of unemployment that most advanced countries experienced in
the recent global recession. Did it reflect a deficiency of aggregate demand that fiscal stimulus might be able to ameliorate? Different observers had very different answers to this question. To some extent, the
correct answer might be different for different countries.
In “The Cyclical Behavior of Unemployment and Vacancies in the
United States and Europe,” Alejandro Justiniano and Claudio Michelacci construct a real business cycle model in which search and matching frictions in the labor market give rise to unemployment and vacancies. This follows in a line of research for which the 2010 Economics
Science Prize in Memory of Nobel was awarded. Different possible
shocks include matching shocks, job destruction shocks, and a residual
category labeled technology shocks. The model is statistically estimated
for the United States, United Kingdom, Germany, France, Sweden, and
Norway. They find that different kinds of shocks dominate in different
countries. Matching shocks and job destruction shocks play a larger role
in most European countries than in the United States. This sounds consistent with the observed international experience in the great recession
of 2007–2009: unemployment rose and vacancies declined sharply in
the United States, but not in Germany and some other European countries. Labor markets on the Continent have long been considered more
rigid, but German unemployment hardly rose at all in the recession.
The trans- Atlantic difference found by the authors is consistent with
the idea that the United States suffered from a deficiency of aggregate
demand after the global financial crisis, but Germany did not.
Economists disagree on such questions as the extent to which downturns reflect deficient aggregate demand versus supply shocks and the
extent to which fiscal expansion is a useful tool to remedy deficient
aggregate demand. In “Toward a Political Economy of Macroeconomic
Thinking,” Gilles Saint- Paul ventures into underexplored territory by
considering what happens, not just if different economists expound different models because it is genuinely hard to figure out what model is
right, but if those differences are the outcome of deliberate deception
on the part of each economist in an effort to influence public policy in
the direction that he or she prefers. (That such deception is conscious
is characterized as a stark assumption.) For concreteness, he considers
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions
Introduction
5
that the economist could be either a “conservative” or a “progressive.”
Conservative economists will tend to report a lower Keynesian multiplier, and a greater long-term inflationary impact of output expansions,
in order to influence public policy in the direction of fiscal expansion.
But the economist is constrained by “autocoherence conditions,” and
so cannot say anything he or she wants. A progressive economist who
promotes a Keynesian multiplier larger than it really is, must, to remain
consistent, also claim that demand shocks are more volatile than they
really are. Otherwise, people will be disappointed by the stabilization
performance of fiscal policy and reject the hypothesized value of the
multiplier. In some cases, autocoherence induces the experts to make,
loosely speaking, ideological concessions on some parameter values.
The author looks at data from Survey of Professional Forecasters and
finds evidence that forecasters who believe that expansions are less inflationary, indeed tend to believe that public spending is more expansionary.
In “The Fiscal Stimulus of 2009–2010: Trade Openness, Fiscal Space,
and Exchange Rate Adjustment,” Joshua Aizenman and Yothin Jinjarak study econometrically why some countries responded to the recession with strong increases in government spending and others did
not. Some large emerging market countries such as China, Russia, and
South Korea undertook larger fiscal expansion than many European
countries, for example. First, they find that an important determinant
of how much the fiscal expansion of countries in 2009–2010 was the
amount of “fiscal space” that existed before the crisis. This makes sense:
if public debt is already large, then there is not much capacity to run
further deficits. (By 2008, debt levels in many advanced countries had
climbed above those in many emerging market countries.) Second, they
also find that higher openness to trade is associated with a smaller fiscal
stimulus, and with greater exchange rate depreciation. This finding is
just what we would expect from the open- economy Keynesian model
developed long ago by James Meade. In a highly open economy, a high
fraction of spending “leaks abroad” through spending on imports (or
tradable goods, more generally). As a result, the Keynesian multiplier
is smaller and fiscal policy is a less useful instrument. But this effect
is mitigated if the country has a floating exchange rate, because the
currency automatically depreciates and thus stimulates net exports.
These effects on policy estimated by the authors are substantial: a one
standard deviation increase of the public debt / average tax base lowers
the size of the fiscal stimulus by 2% of GDP. A one standard deviation
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions
6
Frankel and Pissarides
increase of trade / GDP increases the extent of nominal depreciation by
about 7 percentage points.
Part III: Exchange Rates, Nominal and Real
The final two papers concern exchange rates—nominal exchange rates
in one case and real exchange rates (relative prices) in the other. In
“Flexing Your Muscles: Abandoning a Fixed Exchange Rate for Greater
Flexibility,” Barry Eichengreen and Andrew Rose study how countries
that move from a regime of pegged exchange rates to greater flexibility—not under the pressure of a balance of payments crisis, but in a
controlled manner at a time of their choosing—fare subsequently. This
question arose in the 1990s, when some countries that attempted to
cling to fixed exchange rates eventually suffered crises (Italy, Mexico,
Thailand, Korea, Russia, Turkey, Argentina), while others that arguably had exited from their pegs during relatively good times, before
coming under severe downward pressure, did better (Australia, Chile,
Colombia, Israel). In recent years many economists have argued that
China should take advantage of the period of upward pressure on its
currency to allow increased flexibility (which would presumably result in a strong appreciation) rather than waiting for some future time
when a crisis pushes the yuan off its target. The authors look at the
historical record: 51 instances since 1957 when a country moved from a
regime that is classified as fixed to a regime that is classified as flexible,
under circumstances where the outcome was either an appreciation or
a small depreciation (anything but a large depreciation). Of necessity,
many of these observations are nondollar currencies around the time
of the break- up of the Bretton Woods system, 1971–1973. Subsequent
economic performance is quite varied within this set of cases. Generalization is difficult, especially without observation of the counterfactual
as to what would have happened to such countries if they had sought
to maintain their pegs as long as possible. But the authors report several
findings. Countries with high investment rates and rapidly growing
trade experienced declines in growth, while more open economies and
countries with more international reserves tended to experience falls in
inflation.
In the final chapter, “Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation,” Giancarlo Corsetti,
Luca Dedola, and Francesca Viani focus on a correlation that is considered important to evaluating the ability of international financial mar-
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions
Introduction
7
kets to share risk efficiently across countries. According to a prominent
theory (the Backus-Smith Puzzle), consumption should be relatively
low in countries where its international relative price (the real exchange
rate) is high. Indeed, the correlation coefficient should actually be 1.0.
But the standard empirical finding is, if anything, the opposite: consumption is relatively high in countries where its international relative
price is also high. The contribution of this paper involves the fact that
the domestic price index includes goods that are not traded internationally along with those that are. The authors decompose the overall real
exchange rate into the relative price of nontraded goods and the domestic price of traded goods relative to the world price of traded goods (the
terms of trade). In their theoretical model, they derive a necessary condition for perfect risk sharing in models with nontraded goods and
Harrod-Balassa- Samuelson effects: a rise in relative consumption must
be associated with a tradable depreciation that is large enough to more
than offset the rise in the price of nontradables. Using data for Organization of Economic Cooperation and Development (OECD) countries,
the authors find in most cases that the perverse positive correlation
with consumption holds for both components of the real exchange rate:
relative prices of traded goods and relative prices of nontraded goods.
Endnote
For acknowledgments, sources of research support, and disclosure of the authors’ material financial relationships, if any, please see http: // www.nber.org / chapters / c12479
.ack.
This content downloaded from 128.135.181.197 on Fri, 30 May 2014 15:50:47 PM
All use subject to JSTOR Terms and Conditions