Estimating Trade and Investment Flows: Partners and Volumes

I present a new stylized fact from a large sample of countries for the period 2000-2006: bilateral foreign direct investment (FDI) flows are almost never observed in the absence of bilateral trade flows. I document a similar pattern using bilateral foreign affiliate sales (FAS), aggregating them up from a large firm level dataset (ORBIS), which includes over 45,000 firms. I propose a model where heterogeneous firms can decide whether to serve foreign markets through export or FDI. I derive theory-based gravity-type equations for the aggregate bilateral trade and foreign affiliate sales (FAS) flows. I then suggest a two-stage estimation procedure structurally derived from the model. In the first stage, an ordered Probit model is used to retrieve consistent estimates of the terms needed to correct the flows equations for firms’ heterogeneity and selection into exports and FDI. In the second stage, a maximum likelihood estimator is applied to the corrected trade and FAS equations. The main results of the analysis are as follows: 1) The impact of distance, border and regional trade agreements on the amount bilateral foreign affiliate sales becomes substantially smaller after controlling for selection and firms’ heterogeneity (hence separating the impact on the extensive versus the intensive margin). 2) The same “attenuation” result is found also for the trade equations, consistently with previous literature. 3) When FAS are observed, failing to take this into account when correcting for heterogeneity and selection in the trade equations does not leads to significant differences in the estimated coefficients.Trade Flows, Investment Flows, Gravity, Two-stage Estimation Procedure

Comparative Advantage, Service Trade, and Global Imbalances

The large current account deficit of the U.S. is the result of a large deficit in the goods balance and a modest surplus in the service balance. The opposite is true for Japan, Germany and China. Moreover, I document the emergence from the mid-nineties of a strong negative relation between specialization in export of services and current account balances in a large sample of OECD and developing countries. Starting from these new stylized facts, I propose in this paper a “service hypothesis” for global imbalances, a new explanation based on the interplay between the U.S. comparative advantage in services and the asymmetric trade liberalization process in goods trade versus service trade that took place in the last 15 years. First, I use a structural gravity model to show that service trade liberalization lagged behind goods trade liberalization, and I quantify the extent of this asymmetry. Second, I show that a simple two-period model can rationalize the emergence of current account deficits in the presence of such asymmetric liberalization. The key inter-temporal mechanism is the asymmetric timing of trade policies, which affects savings decisions. Finally, I explore the quantitative relevance of this explanation for global imbalances. A multi-period version of the model, fed with the asymmetric trade liberalization path found in the data, generates a current account deficit of about 1% of GDP (roughly 20% of what was observed in the U.S. in 2006).Comparative Advantage, Service Trade, Global Imbalances

Import Penetration, Intermediate Inputs and Productivity: Evidence from Italian Firms

We test the impact of import penetration on the productivity of a sample of roughly 35,000 Italian manufacturing firms operating in the period 1996-2003, considering the impact on productivity of both import penetration in the same industry and import penetration in the up-stream industries. We find that import penetration has a positive effect on productivity, but the effects are three times as large for import penetration in up-stream industries. Trade-related variables do not account however for the bulk of variation in individual firms' TFP.DYNREG, import penetration, intermediate inputs, productivity

Some Evidence on the Importance of Sticky Wages

Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population. The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.wage stickiness, micro-level evidence, measurement error

Comparative Advantage, Service Trade, and Global Imbalances

The large current account deficit of the U.S. is the result of a large deficit in the goods balance and a modest surplus in the service balance. The opposite is true for Japan, Germany and China. Moreover, I document the emergence from the mid-nineties of a strong negative relation between specialization in export of services and current account balances in a large sample of OECD and developing countries. Starting from these new stylized facts, I propose in this paper a “service hypothesis” for global imbalances, a new explanation based on the interplay between the U.S. comparative advantage in services and the asymmetric trade liberalization process in goods trade versus service trade that took place in the last 15 years. First, I use a structural gravity model to show that service trade liberalization lagged behind goods trade liberalization, and I quantify the extent of this asymmetry. Second, I show that a simple two-period model can rationalize the emergence of current account deficits in the presence of such asymmetric liberalization. The key inter-temporal mechanism is the asymmetric timing of trade policies, which affects savings decisions. Finally, I explore the quantitative relevance of this explanation for global imbalances. A multi-period version of the model, fed with the asymmetric trade liberalization path found in the data, generates a current account deficit of about 1% of GDP (roughly 20% of what was observed in the U.S. in 2006)

Essays in international economics and macroeconomics

Thesis advisor: Fabio GhironiThesis advisor: Susanto BasuThe present dissertation is composed by three essays. The first essay is titled ``Comparative Advantage, Service Trade, and Global Imbalances''. The large current account deficit of the U.S. is the result of a large deficit in the goods balance and a modest surplus in the service balance. The opposite is true for Japan, Germany and China. Moreover, I document the emergence from the mid-nineties of a strong negative relation between specialization in export of services and current account balances in a large sample of OECD and developing countries. Starting from these new stylized facts, I propose in this essay a ``service hypothesis'' for global imbalances, a new explanation based on the interplay between the U.S. comparative advantage in services and the asymmetric trade liberalization process in goods trade versus service trade that took place in the last 15 years. I use a structural gravity model to quantify the extent of this asymmetry. I show that a simple two-period model can rationalize the emergence of current account deficits in the presence of such asymmetric liberalization. The key inter-temporal mechanism is the asymmetric timing of trade policies, which affects savings decisions. Finally, I explore the quantitative relevance of this explanation for global imbalances. A multi-period version of the model, fed with the asymmetric trade liberalization path found in the data, generates a current account deficit of about 1% of GDP (roughly 20% of what was observed in the U.S. in 2006). The policy implications of the analysis proposed could be relevant for the evolution of the WTO DOHA Development Round. A major focus on services, in fact, could help expanding the ``policy space'' faced by the negotiators, possibly increasing the likelihood of a successful conclusion of the round. Moreover, this paper inform also the recent debate about the need of a revaluation of the yuan. Allowing the U.S. to increase its exports of services (not necessarily to China) might help alleviating global imbalances even without movements in the exchange rates. The second essay is titled ``Estimating Trade and Investment Flows: Partners and Volumes''. I present empirical evidence from a large sample of countries for the period 2000-2006. Bilateral foreign direct investment (FDI) flows are almost never observed in the absence of bilateral trade flows, thus configuring an order of trade and investment flows. I document a similar pattern using bilateral foreign affiliate sales (FAS), aggregating them up from a large firm level dataset (ORBIS), which includes over 45,000 firms. I propose a model where heterogeneous firms face a proximity-concentration tradeoff when they decide whether to serve foreign markets through export or FDI. I derive theory-based gravity-type equations for the aggregate bilateral trade and foreign affiliate sales (FAS) flows. I then suggest a two-stage estimation procedure. In the first stage, a ordered Probit model is used to retrieve consistent estimates of the terms needed to correct the flows equations for heterogeneity and selection. In the second stage, a maximum likelihood estimator is applied to the corrected trade and FAS equations. The main results of the analysis are as follows: 1) The impact of distance, border and regional trade agreements on bilateral foreign affiliate sales becomes substantially smaller after controlling for selection and firms' heterogeneity (hence separating the impact on the extensive versus the intensive margin). 2) The same ``attenuation'' result is found also for the trade equations, consistently with HMR. 3) When FAS are observed, failing to take this into account when correcting for heterogeneity and selection in the trade equations leads to differences in the estimated coefficients. The third essay is titled ``Some Evidence on the Importance of Sticky Wages'', and is co-authored with Susanto Basu and Peter Gottshalk. Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population. The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate. To a certain extent, the three essays presented here are self-contained and deal with three different issues regarding international economics and macroeconomics. Going to a deeper level, however, the essays are linked by a common feature: they are three examples of economic research across fields. The first essay, in fact, is an example of the growing fields at the edge between international trade and international macroeconomics. While the trade of goods and services and the dynamics of macroeconomic variables such as the current account are highly interconnected in the real world, these two fields have been characterized by a large divide in the last thirty years in the economic literature. The second essay is an example of a joint study of international trade and investment flows. Also in this case, while conceptually clearly interconnected, these topics have been usually studied separately by the economic literature. Finally, the third essay is an example of research across fields (labor economics and macroeconomics) and techniques (micro-level analysis informing macroeconomic models). In this last case, macroeconomists were interested in estimating certain wage dynamics parameters highly used in macro models. However, they were largely unaware of the fact that labor economists had the data to answer those research questions. On the other hand, the labor economists had the data, but not the questions. I hope that these essays might help increasing further the awareness that more communication between economists working in different fields can bring to valuable insights.Thesis (PhD) — Boston College, 2011.Submitted to: Boston College. Graduate School of Arts and Sciences.Discipline: Economics

Estimating Trade and Investment Flows: Partners and Volumes

I present a new stylized fact from a large sample of countries for the period 2000-2006: bilateral foreign direct investment (FDI) flows are almost never observed in the absence of bilateral trade flows. I document a similar pattern using bilateral foreign affiliate sales (FAS), aggregating them up from a large firm level dataset (ORBIS), which includes over 45,000 firms. I propose a model where heterogeneous firms can decide whether to serve foreign markets through export or FDI. I derive theory-based gravity-type equations for the aggregate bilateral trade and foreign affiliate sales (FAS) flows. I then suggest a two-stage estimation procedure structurally derived from the model. In the first stage, an ordered Probit model is used to retrieve consistent estimates of the terms needed to correct the flows equations for firms’ heterogeneity and selection into exports and FDI. In the second stage, a maximum likelihood estimator is applied to the corrected trade and FAS equations. The main results of the analysis are as follows: 1) The impact of distance, border and regional trade agreements on the amount bilateral foreign affiliate sales becomes substantially smaller after controlling for selection and firms’ heterogeneity (hence separating the impact on the extensive versus the intensive margin). 2) The same “attenuation” result is found also for the trade equations, consistently with previous literature. 3) When FAS are observed, failing to take this into account when correcting for heterogeneity and selection in the trade equations does not leads to significant differences in the estimated coefficients

Some Evidence on the Importance of Sticky Wages

Nominal wage stickiness is an important component of recent medium-scale structural macroeconomic models, but to date there has been little microeconomic evidence supporting the assumption of sluggish nominal wage adjustment. We present evidence on the frequency of nominal wage adjustment using data from the Survey of Income and Program Participation (SIPP) for the period 1996-1999. The SIPP provides high-frequency information on wages, employment and demographic characteristics for a large and representative sample of the US population. The main results of the analysis are as follows. 1) After correcting for measurement error, wages appear to be very sticky. In the average quarter, the probability that an individual will experience a nominal wage change is between 5 and 18 percent, depending on the samples and assumptions used. 2) The frequency of wage adjustment does not display significant seasonal patterns. 3) There is little heterogeneity in the frequency of wage adjustment across industries and occupations. 4) The hazard of a nominal wage change first increases and then decreases, with a peak at 12 months. 5) The probability of a wage change is positively correlated with the unemployment rate and with the consumer price inflation rate.

The short-run, dynamic employment effects of natural disasters: New insights from Puerto Rico

We study the short-run, dynamic employment effects of natural disasters. We exploit monthly data for 70 3-digits NAICS industries and 78 Puerto Rican counties over the period 1995–2019. Our exogenous measure of exposure to natural disasters is computed using the maximum wind speed recorded in each county during each hurricane. Using panel local projections, we find that after the “average” hurricane, employment falls by 0.5% on average. Across industries, we find substantial heterogeneity in the employment responses. Employment increases in some industries while in others employment decreases after a hurricane. This heterogeneity can be partly explained by input–output linkages

The Connection between Wall Street and Main Street: Measurement and Implications for Monetary Policy

We propose a measure of the extent to which a financial sector is connected to the real economy. The Measure of Connectedness is the share of credit market instruments represented by claims whose direct counterpart belongs to the non-financial sectors. The aggregate U.S. Measure of Connectedness declines by about 27% in the period 1952-2009. We suggest that this increase in disconnectedness between the financial sector and the real economy may have dampened the sensitivity of the real economy to monetary shocks. We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to the entrepreneur’s net worth, thereby dampening the credit channel transmission of monetary policy. Finally, we interact our measure with both a SVAR and a FAVAR for the U.S. economy, and establish that the impulse responses to monetary policy shocks are dampened as the level of connection declines