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  • Author: Simeon Djankov
  • Publication Date: 07-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Since the promising start of its transition from a centrally planned economy to capitalism, Hungary has failed to join Western Europe in terms of living standards and democracy. The dominant political figure in Hungary, Prime Minister Viktor Orbán, shares many features with Russian president Vladimir Putin. Both view the increasing role of the state as economically beneficial, and both consider the Western European economic model to be flawed. Hungary is headed towards centrally planned capitalism, demonstrated by the partial nationalization of the banking sector, the monopolization of some sectors of the economy, and the reversal of the pension reforms of 1998. Plagued by the most persistent budget deficit of any post-communist country, Hungary's greatest challenge is to establish a fiscally sustainable growth path.
  • Topic: Communism, Economics, Politics, Governance, Authoritarianism, Russia
  • Political Geography: Hungary, Western Europe
  • Author: Olivier Blanchard, Eugenio Cerutti, Lawrence H. Summers
  • Publication Date: 11-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Blanchard, Cerutti, and Summers explore two issues triggered by the global financial crisis. First, in most advanced countries, output remains far below the prerecession trend, suggesting hysteresis. The authors look at 122 recessions over the past 50 years in 23 countries and find that a high proportion of them have been followed by lower output or even lower growth. Second, while inflation has decreased, it has decreased less than anticipated, suggesting a breakdown of the relation between inflation and activity. The authors estimate a Phillips curve relation over the past 50 years for 20 countries and find that the effect of unemployment on inflation, for given expected inflation, decreased until the early 1990s but has remained roughly stable since then. The paper concludes with implications for monetary policy.
  • Topic: Economics, Labor Issues, Monetary Policy, Financial Crisis, GDP
  • Political Geography: Global Focus
  • Author: Olivier Blanchard, Gustavo Adler, Irineu de Carvalho Filho
  • Publication Date: 11-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Many emerging-market economies have relied on foreign exchange intervention (FXI) in response to gross capital inflows. The authors study whether FXI has been an effective tool to dampen the effects of these inflows on the exchange rate. To deal with endogeneity issues, they look at the response of different countries to plausibly exogenous gross inflows and explore the cross-country variation of FXI and exchange rate responses. Consistent with the portfolio balance channel, they find that larger FXI leads to less exchange rate appreciation in response to gross inflows.
  • Topic: Economics, Emerging Markets, Foreign Exchange, Monetary Policy
  • Political Geography: Global Focus
  • Author: Olivier Blanchard, Jonathan D. Ostry, Atish R. Ghosh, Marcos Chamon
  • Publication Date: 11-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: The workhorse open-economy macro model suggests that capital inflows are contractionary because they appreciate the currency and reduce net exports. Emerging-market policymakers, however, believe that inflows lead to credit booms and rising output, and the evidence appears to go their way. To reconcile theory and reality, the authors extend the set of assets included in the Mundell-Fleming model to include both bonds and nonbonds. At a given policy rate, inflows may decrease the rate on nonbonds, reducing the cost of financial intermediation, potentially offsetting the contractionary impact of appreciation. The authors explore the implications theoretically and empirically and find support for the key predictions in the data.
  • Topic: Economics, Emerging Markets, International Trade and Finance, Monetary Policy
  • Political Geography: Global Focus
  • Author: William R. Cline
  • Publication Date: 10-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Cline critiques OECD findings on "too much finance," which seem to imply that the optimal amount of credit in an economy is zero, given the linear specification of the main tests. If these results were taken literally, there would be a radical policy implication: Growth would be maximized by completely eliminating credit finance. He then finds that the negative impact of additional finance on growth is reversed when the appropriate (purchasing-power-parity) per capita income is applied and country fixed effects are removed. Separate tests for countries with intermediated finance below and above 60 percent of GDP show a significant positive effect of finance on growth in the lower group but an insignificant effect in the higher group. He also responds to critics of his earlier study.
  • Topic: Economics, International Political Economy, International Trade and Finance, GDP
  • Political Geography: Global Focus
  • Author: J. Bradford Jensen, Dennis P. Quinn, Stephen Weymouth
  • Publication Date: 09-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: The authors investigate a puzzling decline in US firm antidumping (AD) filings in an era of persistent foreign currency undervaluations and increasing import competition. Firms exhibit heterogeneity both within and across industries regarding foreign direct investment (FDI). Firms making vertical, or resource-seeking, investments abroad are less likely to file AD petitions and firms are likely to undertake vertical FDI in the context of currency undervaluation. Hence, the increasing vertical FDI of US firms makes trade disputes far less likely. Data on US manufacturing firms reveals that AD filers generally conduct no intrafirm trade with filed-against countries. Persistent currency undervaluation is associated over time with increased vertical FDI and intrafirm trade by US multinational corporations (MNCs) in the undervaluing country. Among larger US MNCs, the likelihood of an AD filing is negatively associated with increases in intrafirm trade. The authors confirm that undervaluation is associated with more AD filings. However, high levels of intrafirm imports from countries with undervalued currencies significantly decrease the likelihood of AD filings. The study also highlights the centrality of firm heterogeneity in international trade and investment in understanding political mobilization over international economic policy.
  • Topic: Economics, International Political Economy, International Trade and Finance, Foreign Direct Investment
  • Political Geography: United States of America
  • Author: Gary Clyde Hufbauer, Eujiin Jung, Tyler Moran, Martin Vieiro
  • Publication Date: 09-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Hufbauer and colleagues critically evaluate the Organization for Economic Cooperation and Development’s ambitious multipart project titled Base Erosion and Profit Shifting (BEPS), which contains 15 "Actions" to prevent multinational corporations (MNCs) from escaping their "fair share" of the tax burden. Spurred by G-20 finance ministers, the OECD recommends changes in national legislation, revision of existing bilateral tax treaties, and a new multilateral agreement for participating countries. The proposition that MNCs need to pay more tax enjoys considerable political resonance as government budgets are strained, the world economy is struggling, income inequality is rising, and the news media have publicized instances of corporations legally lowering their global tax burdens by reporting income in low-tax jurisdictions and expenses in high-tax jurisdictions. Given that the US system taxes MNCs more heavily than other advanced countries and provides fewer tax incentives for research and development (R&D), implementation of the BEPS Actions would drive many MNCs to relocate their headquarters to tax-friendly countries and others to offshore significant amounts of R&D activity.
  • Topic: Development, Economics, International Political Economy, International Trade and Finance
  • Political Geography: Global Focus
  • Author: Adam S. Posen, Nicolas Veron
  • Publication Date: 09-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Given no generally accepted framework for financial stability, policymakers in developing Asia need to manage, not avoid, financial deepening. This paper supports Asian policymakers' judgment through analysis of the recent events in the United States and Europe and of earlier crisis episodes, including Asia during the 1990s. There is no simple linear relationship between financial repression and stability—financial repression not only has costs but, so doing can itself undermine stability. Bank-centric financial systems are not inherently safer than systems that include meaningful roles for securities and capital markets. Domestic financial systems should be steadily diversified in terms of both number of domestic competitors and types of savings and lending instruments available (and thus probably types of institutions). Financial repression should be focused on regulating the activities of financial intermediaries, not on compressing interest rates for domestic savers. Cross-border lending should primarily involve creation of multinational banks' subsidiaries in the local economy—and local currency lending and bond issuance should be encouraged. Macroprudential tools can be useful, and, if anything, are more effective in less open or less financially deep economies than in more advanced financial centers.
  • Topic: Economics, International Trade and Finance, Markets, Politics
  • Political Geography: Asia
  • Author: Antoine Gervais
  • Publication Date: 08-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: To date, empirical studies have focused almost exclusively on the trade exposure of the manufacturing sector, implicitly assuming that services are not tradable. However, because service trade has grown over time and now accounts for about 20 percent of global international transactions (and 30 percent of US exports), the traditional assumption that goods are tradable and services are not is increasingly inadequate. Gervais and Jensen use a unique dataset on the distribution of producers and consumers across regions of the United States to estimate the share of economic activity exposed to international competition. Their estimation method is a natural extension of the gravity model of trade and identifies trade costs in the absence of trade data. The estimated trade costs are higher on average for service industries, but there is considerable variation across industries within sectors. Using the trade cost estimates, they classify industries into tradable and nontradable categories. They find that accounting for tradable service industries nearly doubles the international exposure of the US economy, tradable services value added is unevenly distributed across geographical regions, labor productivity and wages are higher on average for tradable industries, and potential welfare gains from trade liberalization in the service sector are sizable.
  • Topic: Economics, International Trade and Finance, Labor Issues, Global Markets
  • Political Geography: Global Focus
  • Author: Robert Z. Lawrence
  • Publication Date: 06-2015
  • Content Type: Working Paper
  • Institution: Peterson Institute for International Economics
  • Abstract: Over the past decade, the US economy has been plagued by sluggish wage growth and rising income inequality. The debate over inequality in the 1980s and 1990s focused on the growing disparity between the earnings of skilled and unskilled workers and the earnings of the super-rich. Growing inequality between capital and labor income has now been added to these concerns. Remarkably, the growth in real GDP per worker over the decade of the 2000s, which averaged 1.7 percent annually, was actually more rapid than in the 1970s, 1980s, or 1990s, yet in the 2000s workers saw almost no increase in their take-home pay. Consistent with this gap between labor productivity and wage growth was a pronounced decline in the share of US national income earned by workers. As labor's share has declined, the share of capital has risen and has been especially concentrated in corporate profits. As profits are far less equally distributed than wages, this increase has contributed to rising income inequality. There are several plausible reasons for this development—globalization, automation, weak bargaining power of labor, political capture, higher markups—but the natural starting point for explaining factor income shares is the neoclassical theory of the functional distribution of income enumerated by John Hicks and Joan Robinson in the 1930s. In this framework there are two possible explanations for labor's recent declining share. The first is that capital and labor are gross substitutes, and the second is that capital and labor are gross complements. Several papers have explained the recent decline in labor's share in income by claiming that capital has been substituted for labor. Lawrence puts forward the alternative "gross complements" explanation for the declining US labor share. He shows that despite a rise in measured capital-labor ratios, labor-augmenting technical change in the United States has been sufficiently rapid that effective capital-labor ratios have actually fallen in the sectors and industries that account for the largest portion of the declining labor share in income since 1980. In combination with estimates that corroborate the consensus in the literature that the elasticity of substitution is less than 1, these declines in the effective capital-labor ratio can account for much of the recent fall in labor's share in US income at both the aggregate and industry level. Paradoxically, these results also suggest that increased capital formation, ideally achieved through a progressive consumption tax, would raise labor's share in income.
  • Topic: Economics, Globalization, Markets, Labor Issues
  • Political Geography: United States