Most global and country shocks are in fact sector shocks, January 2024, with Lukas Boeckelmann and Laurent Pauwels.
We construct a multi-country multi-sector model with a rich international input-output
structure to separate out the global, country, and sector-level components
of economic fluctuations. The model is designed to distinguish country or global
shocks from sector-level shocks that propagate via the supply chain. We compare
the model-implied decompositions to standard reduced form results and show that
the magnitude of true global shocks is significantly smaller than usual. We then
show that a closed economy version of the structural model implies a higher contribution
of country-level shocks to volatility than is actually the case, because the
closed-economy model apportions to domestic aggregate shocks any foreign shock
with consequences on more than a few domestic sectors. This is even the case in
large economies like the US that are usually assumed to be closed, which we illustrate
using the example of the 2011 Japanese earthquake. It is the emergence of
vertical trade, in capital and in intermediate goods that explains the bulk of this
misallocation.
JEL Codes: E44, E58, G21, G32.
Keywords: Shock Propagation, Global Supply Chains, Sector Shocks, Aggregate Shocks, Regional Shocks, Global Shocks.
The Real
Effects of the Bank Lending Channel of Monetary Policy, December 2023, with Anne-Laure Delatte and Pranav Garg. Supersedes
CEPR Discussion Paper No 13693
We present evidence that a loosening in collateral
requirements instigated by the European Central Bank in 2012 had economy-wide
real effects on firms' investment, productivity, and dividends, via an
aggregate expansion of bank lending. This is a novel result, obtained thanks to
our identification methodology. We partition banks into categories according to
the pre-reform distributions of their overall loan portfolios, so that the
comparison is performed between banks with different exposures to the change in
collateral constraint, but otherwise similar loan portfolios. The policy has
economy-wide real effects that are economically significant: Relaxing
collateral constraints by σ results in an increase of 0.3σ in
investment and productivity, and of 0.26σ in dividends.
JEL Codes: E44, E58, G21, G32.
Keywords: Bank lending
channel, Collateral constraints, Credit supply, Real effects of monetary
policy.
Measuring Foreign
Exposure, November 2023, with Laurent Pauwels. Supersedes CEPR DP 17230 and 14653. VoxEU coverage
We introduce a model-based measure of exposure to foreign shocks that incorporates propagation via high-order trade. The model implies that the response of output to foreign shocks (i.e., foreign exposure) can be approximated by a simple decomposition of output according to the location of final demand. We perform the decomposition using sector data on international input-output trade and evaluate its empirical merits relative to common alternatives often used to capture foreign exposure.
JEL Codes: F15, F44, F62, C80.
Keywords: Foreign Shocks, Global Value Chains, Shock Propagation, Growth, Synchronization.
Fundamental Moments, with
Laurent Pauwels. CEPR DP 13662
Global trade
can give rise to global hubs, centers of activity whose influence on the global
economy is large enough that local disturbances have consequences in the
aggregate. This paper investigates the nature, existence, and rise of such hubs
using the World Input-Output Tables (WIOT) to evaluate the importance of
vertical trade in creating global hubs that significantly affect countries
volatility and their co-movement. Our results suggest that the world has become
more granular since 1995, with significant consequences on GDP volatility and
co-movements especially in developed countries. These consequences are well
explained by international trade.
JEL Codes: E32, F44
Keywords: Aggregate
volatility, GDP synchronization, global hubs, input-output linkages, World
Input-Output Tables.
An
Empirical Approximation of the Effects of Trade Sanctions with an Application
to Russia, Economic Policy, forthcoming, with Laurent Pauwels.
We propose a data-based
approximation of the effects of trade sanctions that can readily be computed on
the basis of international input-output data. Approximated effects are very close
to the exact responses obtained from a canonical multi-country multi-sector
model, without having to make difficult calibration choices. We illustrate the
approximation with trade sanctions against Russia and obtain estimates well
within the existing range. Russia is much more affected by trade sanctions than
the EU, even though the importance of EU markets for Russia has been falling,
especially since 2014 with China picking up the slack. Within the EU the
consequences are largest in ex-"satellite" countries of the Soviet Union: These
countries do not typically have access
to substitute markets and in fact have historically been highly dependent on
Russia. This extreme and persistent dependence is at least partly explained by
the existence of specific energy transporting infrastructure (pipelines) that
appears to constrain tightly the production of electricity. Our proposed
approximation is practical and can be implemented in a variety of contexts: We
have developed a web-based dashboard, accessible at exposure.trade that can be used to
approximate the costs of trade sanctions for any combinations of sanctioning
and sanctioned countries or sectors.
JEL Codes: F14, F42, F51.
Keywords: European Energy Imports,
Russian Sanctions, Economic Consequences of Sanctions, Global Value Chain.
The data are available from here and the replication
codes from here. Please consult
our web-based dashboard for bespoke simulations here.
Finance and Synchronization,
Journal of International Economics, January
2019, Vol.
116, pp. 74-87, with Ambrogio Cesa-Bianchi, and Jumana Saleheen.
In the workhorse model of international real business cycles,
financial integration exacerbates the cycle asymmetry created by
country-specific supply shocks. The prediction is identical in response to
purely common shocks in the same model augmented with simple country heterogeneity
(e.g., where depreciation rates or factor shares are different across
countries). This happens because common shocks have heterogeneous consequences
on the marginal products of capital across countries, which triggers
international investment. In the data, filtering out common shocks requires
therefore allowing for country-specific loadings. We show that finance and
synchronization correlate negatively in response to such common shocks,
consistent with previous findings. But finance and synchronization correlate
non-negatively, almost always positively, in response to purely
country-specific shocks.
JEL Codes: E32, F15, F36, G21,
G28.
Keywords: Financial
linkages, Business cycles synchronization, Contagion, Common
Shocks,
Idiosyncratic Shocks.
Link to non-confidential data and
replication files.
Trade
Elasticities, Review of International
Economics, May 2017, Vol. 25(2), pp. 383-402, with Isabelle Méjean.
Conventional aggregate trade elasticity estimates hardly vary across countries. We introduce an aggregate elasticity that is implied by theory: It is the value that equates the welfare gains from trade as implied by one- and multi-sector versions of the model in Arkolakis et al. (2012). These estimates are predicated on sector-level values for trade elasticities, which we provide at 3-digit levels for 28 developed and developing countries. The values for this aggregate elasticity vary greatly across countries, and they do so because of countries' patterns of production, and because a given sector-level elasticity displays considerable cross-country heterogeneity.
JEL Codes: F32, F02, F15, F41
Keywords: Price Elasticity of Imports, Sectoral Estimates, Trade Performance, Heterogeneity.
Pooling Risk among Countries, Journal of International Economics, May 2015, Vol. 96(1), pp. 88-99, with Michael Callen and Paulo Mauro.
Suppose that international sharing risk - worldwide or with
large numbers of countries - were costly. How much risk-sharing could be gained
in small sets (or "pools") of countries? To answer this question, we compute
the means and variances of poolwide gross domestic
product growth, for all possible pools of any size drawn from a sample of 74
countries, and compare them with the means and variances of consumption growth
in each country individually. From the difference, we infer potential
diversification and welfare gains. As much as two-thirds of the first best,
full worldwide welfare gains can be obtained in groupings of as few as seven
countries. The largest potential gains arise from pools consisting of countries
in different regions and including countries with weak institutions. We argue international risk-sharing fails to emerge because the largest potential gains are among countries that do not trust each other's willingness and ability to abide by international contractual obligations.
JEL Codes: E21, E32, E34, F41.
Keywords: Risk
Sharing, Diversification.
Elasticity Optimism, American Economic Journal: Macroeconomics, July 2015, Vol. 7(3), pp. 43-83, with Isabelle Méjean.
On average, estimates of trade elasticities are smaller in
aggregate data than at sector level. This is an artefact of aggregation:
Estimations performed on aggregate data constrain sector elasticities to
homogeneity, which creates a heterogeneity bias. The paper shows such a bias exists
in two prominent approaches used to estimate elasticities, which has meaningful
consequences for the calibration of the trade elasticity in one-sector,
aggregative models. With elasticities calibrated to aggregate data,
macroeconomic models can have predictions at odds with the implications of
their multi-sector counterparts. They do not when elasticities are calibrated
using a weighted average of sector elasticities.
JEL Codes: F41, F32, F21.
Keywords: Trade Elasticities, Heterogeneity Bias, Elasticity Puzzle.
Credit Supply and the Price of Housing, American Economic Review, March 2015, with Giovanni Favara.
An exogenous expansion in mortgage credit has significant
effects on house prices. This finding is established using US branching
deregulations between 1994 and 2005 as instruments for credit. Credit increases
for deregulated banks, but not in placebo samples. Such differential responses
rule out demand-based explanations, and identify an exogenous credit supply
shock. Because of geographic diversification, treated banks expand credit:
Housing demand increases, house prices rise, but to a lesser extent in areas
with elastic housing supply, where the housing stock increases instead. In an
instrumental variable sense, house prices are well explained by the credit
expansion induced by deregulation.
JEL Codes: G21, G10,
G12
Keywords: Diversification
Gains, Deregulation, Credit Supply, House Prices, Bank Branching.
Sectoral Phillips Curves and the Aggregate Phillips Curve, Journal of Monetary Economics, May 2011, Vol. 58(4), pp. 328-344, with Florian Pelgrin and Eric Jondeau.
Sector-level Phillips curves are estimated in French data. There is considerable heterogeneity across sectors, with vastly different estimates of the backward looking component of inflation and the duration of nominal rigidities. A multi-sector model of inflation dynamics is calibrated on the basis of these sectoral estimates. Aggregate inflation, simulated on the basis of heterogeneous sectors, displays comparable dynamics to actual data. A comparison is drawn between the policy trade-offs implied by a Phillips curve based on macroeconomic estimates, vs. one based on a model with heterogeneous sectors. The difference is sizeable.
JEL Codes: E31, E52, E60
Keywords: New Keynesian Phillips Curve,
Heterogeneity, Inflation Persistence, Marginal Costs.
Supplementary materials, Technical Appendix, Matlab Codes
What Happened to the East Asian Business Cycle?, Chapter 11, pp.284-310, in Devereux, M., P. Lane, C.Y. Park, and S.J. Wei. (Eds.). The Dynamics of Asian Financial Integration, Routledge Studies in the Modern World Economy (2011)
I examine the dynamics of business cycle correlations within emerging East Asia, and draw comparisons with alternative regional samples. There is overwhelming evidence bilateral cycle correlations have significantly shifted upwards since the 1980's. In emerging East Asia, the shift corresponds to the late 1990's Asian crisis - but not elsewhere. A spike in business cycles synchronization is evident from 2008Q3. However, it is substantially more pronounced amongst developed countries than in emerging East Asia, or indeed Latin America. The ongoing crisis appears to affect East Asian economies in more differentiated ways than the rest of the developed world. The paper proposes a decomposition of the dynamics in cycle synchronization into changes in goods trade and in financial linkages. Interestingly, while the change in cycles synchronization corresponds to a fall in bilateral trade for emerging East Asia, it is associated with a fall in financial trade in the rest of the world.
JEL Codes: E32, F15, F36, F41.
Keywords: International Business Cycle, Asian Crisis, Sub-Prime Crisis, Trade Linkages, Financial Linkages.
The Efficiency of Capital Allocation: Do Bank Regulations Matter?, Review of Finance, January 2011, Vol. 15(1), pp. 135-172, with Viral Acharya and Jason Sturgess
We document that the deregulation of bank branching restrictions in the United States triggered a reallocation across sectors, with end effects on state-level volatility. The change cannot be explained simply by shifts in sector-level returns and volatility. A reallocation effect is at play, which we study in the context of mean-variance portfolio theory applied to sectoral returns. We find the reallocation is particularly strong in sectors characterized by young, small and external finance dependent firms, and for states that have a larger share of such sectors. The findings suggest that improving bank access to branching affects the sectoral specialization of output, in a manner that depends on the variance-covariance properties of sectoral returns, rather than on their average only.
JEL Codes: E44, F02, F36, G11, G21, G28, O16
Keywords: Financial development, Growth, Volatility, Diversification, Deregulation, Liberalization, Mean-variance efficiency.
The First Global Recession in Decades, IMF Economic Review, December 2010, Vol. 58(2), pp.327-354.
This paper uses monthly data on industrial production to estimate the distribution of international business cycle correlations since the 1980s, with a focus on the current turmoil. The degree of international correlation in national business cycles since the end of 2008 is unprecedented in three decades. Since December 2008, there has been a sizable and significant upward shift in the cross-sectional distribution of cycles synchronization, especially between advanced economies. The magnitude of the shift is unprecedented in recent history, even relative to what happened following 1973 after alternative shocks with worldwide consequences. The shift does not arise because volatilities changed with the crisis. Both goods and assets trade have contributed to this synchronization. The (large and significant) synchronization among OECD economies is associated with financial openness. The (weaker) diffusion among developing economies tends to happen between trade partners.
JEL Codes: E32; F15; F36; F41
Keywords: International Business Cycle, Sub-Prime Crisis, Trade Linkages, Financial Linkages.
One TV, One Price?, Scandinavian Journal of Economics, December 2010, Vol.112(4), pp.753-781,with Haroon Mumtaz, Morten Ravn and Hélène Rey.
We study television prices across European countries and regions. Quality as measured by observable characteristics of televisions accounts for a large share of the international dispersion in prices. Rich economies tend to consume higher-quality goods, but sizeable international price differentials exist even for identical televisions. The valuation of brands differs significantly across borders. EMU countries display lower price dispersion but not necessarily because of the single currency. Absolute price differentials and relative price volatility increase with exchange rate volatility, but not with transport costs. Exchange rate pass-through is low in the short run but high in the long run.
JEL Codes: F15; F23; F41
Keywords: International and regional price differences; border effect; brand perception.
Finance, Institutions and Risk Sharing in International Portfolios, Journal of Financial Economics, December 2009, Vol. 94(3), pp.428-447, with Marcel Fratzscher
We develop a standard model to show how transaction costs in international investment affect conventional tests of consumption risk sharing, both in a multilateral and a bilateral setting. We implement the tests in a novel international data set on bilateral holdings of equity, bonds, foreign direct investment (FDI) and bank loans. In our data, high foreign capital holdings are associated with international consumption risk sharing as implied by our theory. This is especially true of investment in equity or bonds, but not of foreign direct investment or bank loans. In our model, the implication is that transaction costs are higher for FDI and international loans. The discrepancy could reflect technological differences, but also the prospect of expropriation, perhaps most stringent for FDI or loans. We argue that expropriation risk is endogenous to both the borrower's institutions and its openness to international markets. The detrimental impact of poor institutions is muted in open economies, where the possibility of subsequent exclusion from world markets deters expropriation of foreign capital. We show the implied effects of institutions prevail in both the cross-section of consumption risk sharing and in observed international investment patterns.
JEL Codes:
F21; F30; G15
Keywords: Risk sharing; Diversification; Portfolio choice; Financial integration; Cross-border investment
The Dynamics of Trade and Competition, Journal of International Economics, February 2009, Vol. 77(1), pp.50-62, with Natalie Chen and Andrew Scott.
We present, extend and estimate a model of international trade with firm heterogeneity in the tradition of Melitz (2003) and Melitz and Ottaviano (2005). The model is constructed to yield testable implications for the dynamics of international prices, productivity levels and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. Consistent with theory however, these effects diminish and may even revert in the longer term as less competitive economies become attractive havens from which to export from. We provide evidence that this entry into less open economies induces pro-competitive effects overseas in response to domestic trade liberalization.
JEL Codes: E31, F12, F15, L16.
Keywords: Competition, Globalization, Markups, Openness, Prices, Productivity, Trade.
Results available upon request
Growth and Volatility, Journal of Monetary Economics, October 2007, Vol. 54(7), pp.1848-1862.
Growth and volatility correlate negatively across countries, but positively across sectors. Analytically, whether or not sectoral growth and volatility are correlated positively is irrelevant in the aggregate. Cross-country estimates identify the detrimental effects of macroeconomic volatility on growth, but they cannot be used to dismiss theories implying a positive growth-volatility coefficient, which appear to hold in sectoral data. In particular, volatile sectors command high investment rates, as they would in a mean-variance framework.
JEL Codes:
E32; O40
Keywords: Sectors; Growth; Volatility
The Real Effects of Financial Integration, Journal of International Economics, March 2006, Vol. 68(2), pp.296-324.
This paper shows correlations in GDP fluctuations rise with financial integration. Finance serves to increase international correlations in both consumption and GDP fluctuations, which explains the persistent gap between the two in the data, a quantity puzzle. The positive association between financial integration and GDP correlation constitutes a puzzle, as theory suggests a negative relation if anything. Nevertheless, it prevails in the data even after the effects of finance on trade and specialization are accounted for.
JEL Codes: F30,
F41, E44
Keywords: Financial Integration, International Business Cycles, Risk Sharing, Quantity Puzzle
PPP Strikes Back: Aggregation and
the Real Exchange Rate, Quarterly Journal of Economics,
vol. 120(1): pp1-43, January 2005. Lead article, with Haroon Mumtaz, Morten
Ravn and Hélène Rey.
We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the "consensus view" of three to five years.
JEL Codes: F36, F41, C43
Keywords: Real Exchange Rate Persistence, Purchasing Power Parity, Parameter Heterogeneity.
Aggregation DOES explain the PPP puzzle
Trade, Finance, Specialization and Synchronization, Review of Economics and Statistics, August 2004, 86(3), pp.723-734.
I investigate the determinants of business cycle synchronization across regions. The linkages between trade in goods, financial openness, specialization, and business cycle synchronization are evaluated in the context of a system of simultaneous equations. The main results are as follows. (i) Specialization patterns have a sizable effect on business cycles. Most of this effect is independent of trade or financial policy, but directly reflects differences in GDP per capita. (ii) A variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized, even though they also tend to be more specialized. (iii) The estimated role of trade is closer to that implied by existing models once intra-industry trade is held constant. The results obtain in a variety of data sets, measurement strategies, and specifications. They relate to a recent strand of international business cycle models with incomplete markets and transport costs and, on the empirical side, point to an important omission in the list of criteria defining an optimal currency area, namely, specialization patterns.
JEL
Codes: F41, E32.
Keywords: Trade, Specialization, Financial Openness, International Business Cycle, Optimal Currency Area.
Results available upon request
Non-Linearities and Real Exchange
Rate Dynamics, Journal of the European Economic Association,
April-May 2003, 1 (2-3), , pp.639-649, with Haroon Mumta,
Morten Ravn and Hélène Rey.
We confirm the presence of substantial nonlinearities in real exchange rate dynamics at the sectoral level. There exists zones where arbitrage is not profitable because of transaction costs, and thus mean reversion is inexistent. We compute the speed of mean reversion of sector specific real exchange rates, conditional on the existence of arbitrage as implied by our nonlinear estimations, and relate them to plausible economic determinants such as tradability and exchange rate volatility.
JEL Codes: F36, F41, C43
Keywords: Non-Linearities, Exchange Rates, Transport costs
Stages of Diversification, American Economic Review, March 2003, 93, 1, pp.63-86, with Romain Wacziarg
This paper studies the evolution of sectoral labor concentration in relation to the level of per capita income. We show that various measures of sectoral concentration follow a U-shaped pattern across a wide variety of data sources: countries first diversify, in the sense that labor is spread more equally across sectors, but there exists, relatively late in the development process, a point at which they start to specialize again. We introduce a model with endogenous costs of trading internationally that provides an explanation for this new empirical fact. The model highlights a trade-off between the benefits of diversification in the context of high trading costs, and the benefits of specialization in a Ricardian sense.
JEL Codes: F43,
F15, O40
Keywords: Specialization, International Macroeconomics, International Trade, Comparative Advantage.
Technology, Growth and the Business Cycle, Journal of Monetary Economics, 44(1), pp.65-80, August 1999.
Using a partial equilibrium model that allows for factor hoarding, I construct series on input utilization rates for ten OECD countries. These series are used in growth accounting computations of total factor productivity which filter out cyclical variations in input utilization rates. The main findings are as follows: (i) adjusted Solow residuals grow consistently faster than standard measures; (ii) the variability of the adjusted Solow residual is in some cases smaller than the standard residual's; (iii) adjusted Solow residuals are less procyclical than standard residuals, and fare better at usual exogeneity tests; (iv) supply shocks are no more synchronized between European countries than elsewhere; and (v) observed increased output synchronization in Europe is due to demand factors.
JEL Codes: O47; F41;
E32
Keywords: Solow residuals; Factor hoarding; International business cycle