The Colonial and Geographic Origins of Comparative Development

While the direct impact of geographic endowments on prosperity is present in all countries, in former colonies, geography has also affected colonization policies and, therefore, institutional outcomes. Using non-colonized countries as a control group, I develop an empirical strategy that disentangles the partial effects of institutions and of endowments on income. I find that institutions are the main determinant of development, but that endowments have a sizeable direct impact, as well. Last, I apply the empirical strategy to examine the theories put forward by La Porta et al. (1999) and by Acemoglu et al. (2001), finding support for both theories, but also evidence that the authors’ estimates are biased since they mix up the effect of the historical determinants of institutions with the sizeable direct impact of access to trade and of disease environment.

Exchange rate pass-through, domestic competition and inflation -- evidence from the 2005/08 revaluation of the Renminbi

How important is the effect of exchange rate fluctuations on the competitive environment faced by domestic firms and the prices they charge? To answer this question, this paper examines the 17 percent appreciation of the yuan against the U.S. dollar from 2005 to 2008. In a monthly panel covering 110 sectors, a 1 percent appreciation of the Yuan increases U.S. import prices by roughly 0.8 percent. It is then shown that import prices, in turn, pass through into producer prices at an average rate of roughly 0.7, implying that a 1 percent Yuan appreciation increases the average U.S. producer price of tradable goods by 0.8 percent*0.7=0.56 percent. In contrast, exchange rate movements of other trade partners have much smaller effects on import prices and hardly any effect on producer prices. The paper next demonstrates that the pass through response into import prices is heterogeneous across sectors with different characteristics such as traded-input intensity or the shape of demand for the sector's goods. In contrast, the rate at which import prices pass through into domestic producer prices is found to be homogenous across the sectors. Finally, the insights of the analysis are employed to simulate the inflationary effect of a Yuan revaluation. For example, the relative price shock caused by a 25 percent appreciation of the Yuan spread evenly over 10 months is equivalent to a temporary increase of the U.S. PPI inflation rate by over five percentage points. Because such an appreciation would also influence the overall skewness of the distribution of price changes at the sectoral level, it would likely also impact U.S. equilibrium inflation.Imports - Prices ; International trade ; Labor market ; Macroeconomics ; Price levels

Product Heterogeneity, Within-Industry Trade Patterns, and the Home Bias of Consumption?

Starting with Krugman (1980), much literature has analyzed how trade liberalization affects the economy based on the notion that trade is motivated by consumer’s love of variety. In this paper, I augment these preferences by the determinants of demand for heterogeneous products. The model features products with heterogeneous attributes and consumers with heterogeneous tastes for attributes. Allowing for international trade, the model predicts a within-industry home market effect, i.e., that high domestic demand for an attribute leads to entry of firms producing a fitting output and, consequently, net exports of products embodying the attribute. Second, the model rationalizes why consumption is home-biased in the short run. Each country’s industry is optimized for the preferences of domestic consumers and thus somewhat inappropriate for the export market. Third, in the long run, countries specialize further and the within-industry home market effect intensifies. Intriguingly, (as long as it is incomplete) this specialization implies that the home bias disappears completely, thus demonstrating that Linder’s (1961) conjecture describes a temporary phenomenon that does not prevail in general equilibrium

Consumer Heterogeneity and the Impact of Trade Liberalization: How Representative is the Representative Agent Framework?

While it is well established that across-country taste differences are associated with "home market effects", there is very limited analysis of how such preference heterogeneity impacts the aggregate volume of trade and the welfare gains from liberalization. I develop a structural model of aggregate demand featuring products with heterogeneous attributes, consumers with heterogeneous tastes for attributes, and across-country differences in the distribution of tastes. The impact of across-country taste differences depends on whether the domestic industry can adjust to the mismatch between the attribute composition of imports and the domestic distribution of tastes. For the case of a large degree of across-country taste differences, countries specialize completely and the model supports notions along the lines of Linder (1961) that taste diversity impedes the volume of trade and leads to group-specific gains from trade. In contrast, if specialization is incomplete, free firm entry implies that the relative toughness of competition across different market segments must be invariant to liberalization. It is shown that therefore, both trade volume and welfare gains are entirely unaffected by the distribution of foreign tastes and coincide with those in a representative agent framework.Intra-Industry Trade, Monopolistic Competition, Heterogeneous Agents, Industrial Structure, Firm Dynamics

Are Imports from Rich Nations Deskilling Emerging Economies? - Human Capital and the Dynamic Effects of Trade

This paper starts by documenting that during the last decades, the human capital embodied in imports from skill abundant nations has noticeably reduced skill accumulation in the less developed world. To identify the causal relation between these variables, the analysis utilizes over-time variation in the supply of skilled labor and the extent to which this variation affects the skill content of trade given the bilateral distance between im- and exporter. In a panel estimation covering 41 non-OCED members, a one standard deviation higher geographic pressure to import human capital is associated with a 12% reduction in the national average length of schooling. The paper next develops a model to analyze the income and welfare consequences of such trade-induced human capital disaccumulation. The model is based on heterogeneous workers who make educational decisions in the presence of complete markets. When heterogeneous workers invest in schooling, high type agents earn a surplus from their investment. Trade shifts this surplus to rich countries that can use skills more efficiently. Consequently, the dynamic effects of liberalization tend to occur to initially rich countries, thus leading to divergence.Factor Content of Trade, Employment, Human Capital, Economic Growth

The Colonial Origins of Comparative Development: A Solution to the Debate on Settler Mortality Rates

I address David Albouy's (2006) critique of the data constructed by Daron Acemoglu, Simon Johnson and James Robinson (2001). The contribution of this paper is to instrument for settler mortality rates that are collected from historical sources - and that may be measured with error - with a geographic model of the determinants of disease. I first establish that my instruments are significant predictors of mortality and are otherwise excludable to institutions. Among other things, the excludability is established by a falsification exercise, in which I document that the geographic potential for mortality strongly affected institutions in former colonies, yet it had no effect on institutions in the rest of the world. This differential effect settler mortality had on development can only be rationalized by the early institution building hypothesis that Acemoglu et al. argue for. I next repeat the analysis of Acemoglu et al. instrumenting for the historical mortality rate with its geographic projection. The instrumented mortality rate is a highly significant predictor of institutional quality. Moreover, this result is true when instrumenting for either the original data or the revised mortality series of Albouy. This result is also true when accounting for the population that the historical data was sampled from. Turning to the instrumental variable estimations, I show that also the relation between institutions and income is highly significant and that the associated importance of institutions for international income differences is substantial. Again this finding is true when using either of the two historical series and also when accounting for the population that the historical data was sampled from. I thus conclude that the empirical results presented in Acemoglu et al. indeed reflect their early institution building hypothesis rather than measurement error.Comparative Development, Growth, Institutions, Colonialism, Property Rights, Mortality

Export basket and the effects of exchange rates on exports–why Switzerland is special

Why has Swiss export performance been so strong during the past quarters despite the strong appreciation of the CHF? In this paper, we use historical data on exchange rates and trade at the sectoral level to document that a contributing factor behind the limited impact of the exchange rate is the unique composition of Swiss exports. In particular, we document that the Swiss export basket is heavily concentrated in price-insensitive goods such as machinery or pharmaceuticals, where prices and thus the exchange rate have relatively little importance for demand. This makes the aggregate volume of Swiss exports less responsive to exchange rate changes than exports of other OECD nations.International trade ; International economic relations

International liquidity provision during the financial crisis: a view from Switzerland

The authors document the provision of liquidity in Swiss francs (CHF) by the Swiss National Bank (SNB) to banks located outside Switzerland during the recent financial crisis. What makes the Swiss case special is the size of this liquidity provision—at times, 80 percent of all short-term CHF liquidity provided by the SNB—and the measures adopted to distribute this liquidity. In addition to making CHF available to other central banks via swap facilities, the SNB also allows banks outside Switzerland to directly participate in its repurchase agreement transactions. Although this policy was adopted for reasons predating the 2007-09 financial crisis, it proved tremendously helpful during the crisis by providing the European banking system direct access to the primary funding facility for CHF.Liquidity (Economics) ; Financial crises ; Switzerland

Exchange rate pass-through in a competitive model of pricing-to-market

This paper extends the Mussa and Rosen (1978) model of quality-pricing under perfect competition. Exporters sell goods of different qualities to consumers who have heterogeneous preferences for quality. Production is subject to decreasing returns to scale and, therefore, supply and the toughness of competition react to cost changes brought about by exchange rate fluctuations. First, we predict that exchange rate shocks are imperfectly passed through into prices. Second, prices of low quality goods are more sensitive to exchange rate shocks than prices of high quality goods. Third, in response to an exchange rate appreciation, the composition of exports shifts towards higher quality and more expensive goods.> ; We test these predictions using highly disaggregated price and quantity U.S. import data. We find evidence that in response to an exchange rate appreciation, the composition of exports shifts towards high unit price goods. Therefore, exchange rate passthrough rates that are measured using aggregate data will tend to overstate the actual extent of pass-through.Foreign exchange rates ; Econometric models ; International trade

The Colonial and Geographic Origins of Comparative Development

While the direct impact of geographic endowments on prosperity is present in all countries, in former colonies, geography has also affected colonization policies and, therefore, institutional outcomes. Using non-colonized countries as a control group, I develop an empirical strategy that disentangles the partial effects of institutions and of endowments on income. I find that institutions are the main determinant of development, but that endowments have a sizeable direct impact, as well. Last, I apply the empirical strategy to examine the theories put forward by La Porta et al. (1999) and by Acemoglu et al. (2001), finding support for both theories, but also evidence that the authors' estimates are biased since they mix up the effect of the historical determinants of institutions with the sizeable direct impact of access to trade and of disease environment