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2009 Recruitment Papers

"Industrial Structure and Financial Capital Flows"
Keyu Jin (Harvard University)

Wednesday, February 4, 4-5:30, room MC 3-570

Factor-proportions trade and financial asset trade are both integral parts of globalization, yet
little has been studied on their interplay. In a framework that integrates these two paradigms
of trade, a new force driving international capital flows emerges: capital tends to flow towards
countries that become more specialized in capital-intensive industries (a composition effect).
This force competes with the "neoclassical force" which channels capital towards the location
where it is more scarce, in response to shocks such as globalization, country-specific labor force
or labor productivity shocks. If the composition effect dominates, capital flows away from the
country hit by the positive shock ─"a flow reversal"─ and asset prices rise globally rather than
locally. Two implications arise: rich countries' current account deficits may be a consequence of
their shifting towards capital-intensive industries; young and fast growing developing countries
may help sustain asset prices in an aging industrialized world. Predictions of the current account
and specialization patterns are shown to be consistent with the data.

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"Income Differences and Prices of Tradables"
Ina Simonovska (UMN)

Tuesday, February 10, 4-5:30, room MC 3-570

Empirical studies find a strong positive relationship between a country's per-capita income and price level of tradable goods. Among alternative explanations of this observation, the author focus on variable mark-ups by firms. Mark-ups that vary with destinations' incomes are evident from a clothing manufacturer's online catalogue featuring unit prices of identical goods sold in 24 countries. Such price discrimination on the basis of income suggests that firms exploit lower price elasticity of demand for identical goods in richer countries. In order to capture that, the author introduces non-homothetic preferences in a model of trade with product differentiation and heterogeneity in firm productivity. The model helps bring theory and data closer along a key dimension: it generates positively related prices and incomes, while preserving desirable features of firm behavior and trade flows of existing frameworks. Quantitatively, the model suggests that variable mark-ups can account for as much as a third of the observed positive relationship between prices of tradables and income across a large sample of countries.

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"Sovereign Debt and Domestic Economic Fragility"
Suman Basu (MIT)

Wednesday, February 11, 4-5:30, room MC 3-570

Recent sovereign default episodes have been associated with substantial output costs. The sovereign's default decision should take into account that debt repudiation may exacerbate such costs. We construct a model where sovereign debt is held by both foreign creditors and domestic residents, and the sovereign is constrained to default equally on the two categories of lenders. Default on foreign lenders benefits domestic consumption, but default on domestic residents generates an output cost that increases with the extent of the default. This makes the sovereign reluctant to initiate default. We present two sets of results. Firstly, we characterize the optimal default decision and show that full repudiation of debt is not optimal when domestic output costs are sufficiently high. A corollary is that in this model the sovereign can issue debt even in the absence of reputational mechanisms. Secondly, the sovereign finds it optimal to render the domestic economy vulnerable to the adverse e¤ects of default, in order to raise funds cheaply from abroad. Economic fragility is an optimal response to the lack of commitment of the sovereign.

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"Housing Markets and Current Account Dynamics"
Pedro Gete (Chicago)

Tuesday, February 17, 4-5:30 pm, room MC 3-570

The author models global imbalances as arising from changes in preferences for housing relative to tradable goods. The key ingredients in the model are labor reallocation across sectors and consumption smoothing between housing and tradable goods. Countries import goods during periods when more domestic labor is devoted to housing construction. Housing booms are larger in countries that can run trade deficits. This occurs despite the absence of wealth e¤ects, and even if trade is not
primarily concentrated in capital goods. I provide several types of evidence to support the theory. First, over the last decade housing variables have decoupled from the business cycle while durable and total consumption expenditures have not. Second, for the same period there has been a strong cross-country correlation between housing variables and current account dynamics. Third, in a parameterized version of the model, housing demand shocks that match the cross-country dynamics of housing quantities generate current account dynamics matching recent global imbalances. Fourth, I use sign restrictions implied by the model to estimate a vector autoregression and identify the effects of housing shocks on the U.S. trade deficit. The results suggest that housing shocks are an important driving force of current account dynamics.

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"Fiscal Decentralization, Endogenous Policies, and Technology
Adoption: Theory and Evidence from China and India's
Yong Wang (University of Chicago)

Wednesday, February 25, 4-5:30 pm, room MC 3-570

This paper explores how the distributions of political power and productivity would determine the coalition formation among different social groups and how the endogenous social infrastructure affects the growth rate and consumption inequality. By focusing on the Markov-Nash perfect equilibria with full commitment, we obtain the close-form solutions. We show that: (1) The social infrastructure of a meritocracy can be fully characterized on a simplex, indicating that a more equal distribution of political power and labor productivity will lead to more coalitions and hence a higher growth rate; (2) A minor change in the distribution of productivities (or interpreted as an adoption of a different technology) could result in a non-monotonic and drastic variation in the coalition structure and in the macroeconomic performance; (3) The ruling class in a non-democracy, even if there exists no risk of being overthrown, might voluntarily relegate some political powers to the other social groups, which could lead to growth maximization incidentally. Moreover, the existence of asymmetric equilibrium suggests that endogenous inequality might arise among the perfectly ex ante identical agents in the absence of any exogenous shocks.

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"Sudden Stops and Reallocation: Evidence from Labor Market Flows in Latin America"
José Tessada (UMD)
 jointly written with Francisco A. Gallego (Pontificia Universidad Católica de Chile)

Thursday, February 26, 12:30-2:00 pm, room MC10-100

Sudden stops and international financial crises have been a main feature of developing countries in the last 25 years. While their aggregate effects are well known, the microeconomic channels through which they work have yet to be explored. In this paper, we study the relevance of financial and labor factors in the restructuring process that take place over episodes of sudden stops. Using microeconomic variables related to job flows using sectoral panel data for four Latin American countries, we find that sudden stops are associated with lower job creation and increased job destruction. Furthermore, these effects are heterogeneous across sectors and across countries. Consistent with the idea that dependence of external financing affects mainly the creation margin and that liquidity needs affect affects mainly the destruction margin, we find that while sectors with higher dependence on external financing experience lower creation, sectors with higher indicators of liquidity needs experience significantly larger negative job flows. Finally, we find a negative correlation between a country’s firing and dismissal costs and labor destruction during sudden stops, mostly affecting the decisions of continuing firms. Overall, our results provide evidence of financial conditions being an important transmission channel of sudden stops within a country, confirming the role of financial friction in the restructuring process in general.

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"Firm Size, Innovation Dynamics and Growth"
Ufuk Akcigit (MIT)

Friday, February 27, 12:30-2:00 pm, room MC 5-100

This paper investigates the relationship between the size of the firm and the quality of
innovations of the firm. Much of the previous literature on innovation focuses on innovation
frequency with an economy-wide uniform innovation quality. In contrast to the previous liter-
ature, this paper allows firms to choose not only the stochastic innovation frequency but also
the innovation quality and focuses on how this heterogeneity in innovation quality is affected
by the size of the firm.

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"Valuation Effects with Transitory and Trend Output Shocks"
Ha Nguyen

Wednesday, March 4, 4-5:30 pm, room MC 7-100

This paper investigates the role of valuation effects on a country's net foreign asset position. It shows that following transitory outputshocks, valuation effects are stabilizing; they counteract current ac-count movements and mitigate the impact of the current account ona country's net foreign assets. Following trend shocks, valuation effects are amplifying; they move in the same direction as the current account and reinforce the impact of the current account on net foreign assets. The results are illustrated by the external imbalances between the U.S. and other industrialized countries since the 1990s.

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"Exchange Rate Forecasting with Structural Shocks as Predictors"
Konstantin Styrin (Harvard)

Thursday, March 5, 12:30-2:00 pm, room MC 6-100

As documented by many studies, monetary policy (MP) shocks account for a considerable fraction in forecast error variance decomposition of exchange rates. Impulse responses of exchange rates to identified MP shock are characterized by “delayed overshooting” with peak effect in 1 to 3 years. This implies that estimated MP shock should have a non-trivial forecasting value with respect to exchange rates. I examine this conjecture by forecasting exchange rates of 9 non-Euro OECD currencies against the US dollar out of sample at horizons up to 24 months with the US MP shock as predictor. The MP shock is identified and estimated in a multi-country Factor Augmented VAR using a block-recursive identification scheme. I do not find any evidence that forecasts with the US MP shock tend to robustly outperform a driftless random walk at any horizons. However, partially identified group of shocks that contemporaneously affect mostly financial market variables are shown to be good predictors for exchange rates of commodity exporters 4-24 months ahead. I interpret these shocks as news about future prospects of the US economy.

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