Financial Market Imperfections, Real Exchange Rates, and Capital Flows

We explore the role of domestic financial market frictions in explaining sharp movements in real and nominal exchange rates, capital flows, and output for a small open economy. Financial intermediaries arise endogenously to insulate depositors from the consequences of liquidity shocks and stochastic investment project returns, and to provide intermediation for efficient capital accumulation in the presence of a costly state verification problem. An increase in the world interest rate may provoke an increase in the fraction of credit-rationed entrepreneurs, a decrease in the steady state capital stock, and - when the elasticity of substitution between labor and capital is low - a depreciation of the real exchange rate and an outflow of capital. Hence we can account qualitatively for the recent experience of several emerging market economies in a model where all prices, including exchange rates, are perfectly flexible.

Real exchange rate movements and the relative price of non-traded goods

We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980?2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.Trade

U.S. real exchange rate fluctuations and relative price fluctuations

This paper studies the relation between the United States? bilateral real exchange rate and the associated bilateral relative price of nontraded goods for five of its most important trade relationships. Traditional theory attributes fluctuations in real exchange rates to changes in the relative price of nontraded goods. We find that this relation depends crucially on the choice of price series used to measure relative prices and on the choice of trade partner. The relation is stronger when we measure relative prices using producer prices rather than consumer prices. The relation is stronger the more important is the trade relationship between the United States and a trade partner. Even in cases where there is a strong relation between the real exchange rate and the relative price of nontraded goods, however, a large fraction of real exchange rate fluctuations is due to deviations from the law of one price for traded goods.Foreign exchange rates ; Prices ; International trade ; International finance ; Monetary policy

Accounting for Japan's Lost Score

This paper develops a quantitative framework to evaluate the sectoral origins of economic growth. First, I decompose growth in aggregate growth accounting variables–GDP per working age person, a capital factor, an hours’ worked factor, and an implied total factor productivity factor–into sectoral contributions. I decompose the TFP factor growth contribution of a sector into 1) sector-share weighted, within-sector TFP factor growth, and 2) several residual allocative effects. Second, I interpret structurally the observed sectoral contributions by comparing them to those predicted by a multi-sector neoclassical growth model. Using the framework to account for Japan’s economic growth slowdown I find that, empirically, two factors quantitatively dominated Japan’s slowing GDP per working age person in the 1990s. First, a large decline in aggregate TFP growth relative to the 1980s, driven by 1) slower within-industrial sector TFP growth, and 2) negative residual effects due to faster value-added reallocation towards services which mediated a larger impact of the sector for aggregate capital deepening. Second, a large fall in hours worked per working age person, originating mainly in smaller industrial sector contributions. In the 2000s, continued GDP per working age person and aggregate TFP growth decay were due largely to slower within-service sector TFP growth. In the 2010s, anemic aggregate TFP factor growth equal to just 18 percent of its 1980s value was depressed by zero service sector TFP growth; a modest growth rate recovery in GDP per working age person originated in rapid increases in hours worked per working age person, via roughly equal increases in industrial and service sector contributions. A calibrated three-sector growth model absent frictions, featuring sectoral TFP time series as inputs, reproduces closely the time-series from 1980–2018 of a) hours shares of sectors, b) GDP per working age person, and c) the aggregate TFP factor. It captures quite well a) sample-average aggregate TFP growth, b) aggregate TFP growth rate changes across decades, c) the decomposition of aggregate TFP factor growth into total “within-sector” TFP and total residual contributions of sectors, and d) “within-sector” TFP growth contributions of agriculture, industry, and services. The model cannot replicate the sources of, or sectoral contributions to, observed–albeit small–TFP growth residual effects. More importantly, the model’s predicted hours factor (hours per working age person): 1) captures only 46 percent of the decline in industry’s contribution to the fall in aggregate hours factor growth in the 1990s; 2) declines in the 2000s, while hours factor growth is positive in the data; 3) captures only 47 percent of observed average hours factor growth in the 2010s; and 4) allocates too much of the 2010s increase in aggregate hours factor growth to industry. A higher intertemporal elasticity of substitution, a higher Frisch elasticity, and an aggregate labor (policy) wedge resolve some, but exacerbate other, model failures

How many (more) lost decades? The great productivity slowdown in Japan

I document that, relative to the period 1971 to 1990, Japan has suffered almost three complete “lost” decades of slower growth from 1991 through 2018. The average growth rate of output per working age person, and of labor productivity–measured by both output per hour worked and output per employed person–substantially declined in the 1990s and never returned to pre-1991 values. The average growth rate of output per working age person from 2011–2018 partially recovered, to just 56 percent of its 1980s value. I find this partial recovery was due solely to an increase in hours worked per working age person–labor input growth–which cannot support sustained growth in living standards. By contrast, labor productivity growth–which can support sustained growth in living standards–declined further in the 2010s and averaged just 20 percent of its 1980s value. Growth accounting shows that a large and persistent decline in total factor productivity (TFP) growth was the source of Japan’s slowing labor productivity growth in the 1990s and 2000s, while a falling capital output ratio forced further slowing in the 2010s. Assuming a global trend growth rate of 2 percent per year, the average growth rate of output per working age person in the 20th century United States–commonly viewed as the technology-frontier country, I show that Japan’s TFP collapsed relative to trend in 1992 and has deviated increasingly below it. By contrast, since 1991, US TFP has fallen relative to trend only since 2016. Among the twenty richest OECD countries, in the post-2000 era–widely argued to have witnessed a widespread advanced economy productivity growth slowdown–Japan’s TFP factor was one of only seven to fall more than 15 percent below trend. Japan’s TFP collapse in 1992, and that of several OECD countries after 2000, is due not to slower US-TFP trend growth but to domestic institutions, polices, and practices that have reduced the efficiency of frontier-technology use. Policy reforms that directly address productivity deficits are needed to support faster growth in living standards that is also sustainable

Real Exchange Rate Movements and the Relative Price of Non-traded Goods

We study the quarterly bilateral real exchange rate and the relative price of non-traded to traded goods for 1225 country pairs over 1980-2005. We show that the two variables are positively correlated, but that movements in the relative price measure are smaller than those in the real exchange rate. The relation between the two variables is stronger when there is an intense trade relationship between two countries and when the variance of the real exchange rate between them is small. The relation does not change for rich/poor country bilateral pairs or for high inflation/low inflation country pairs. We identify an anomaly: The relation between the real exchange rate and relative price of non-traded goods for US/EU bilateral trade partners is unusually weak.

Trade, Reform and Structural Change in South Korea

We develop a two country, three-sector model to quantify the effects of Korean trade policies for structural change from 1963 through 2000. The model features non-homothetic preferences, Armington trade, proportional import tariffs and export subsidies, and is calibrated to match sectoral value added data on Korean production and trade. Korea’s tariff liberalization increased imports and trade, especially agricultural imports, accelerating de-agriculturalization and intensifying industrialization. Korean subsidy liberalization lowered exports and trade, especially industrial exports, attenuating industrialization. Thus, while individually powerful agents for structural change, Korea’s tariff and subsidy reforms offset each other. Subsidy reform dominated quantitatively; lower trade, higher agricultural and lower industrial employment shares, and slower industrialization were observed than in a counterfactual economy with no post-1963 policy reform

The role of research in guiding treatment for women's health : a qualitative study of traditional Chinese medicine acupuncturists

Background: Surveys of acupuncture practitioners worldwide have shown an increase in the use of acupuncture to treat women’s health conditions over the last ten years. Published studies have explored the effectiveness of acupuncture for various conditions such as period pain, fertility, and labor induction. However, it is unclear what role, if any, peer-reviewed research plays in guiding practice. Methods: Acupuncturists with a significant women’s health caseload were interviewed online in three small groups to explore factors that contribute to acupuncturists’ clinical decision made around treatment approaches and research. Results: Eleven practitioners participated in the focus groups. The overarching theme that emerged was one of ‘Not mainstream but a stream.’ This captured two themes relating to acupuncture as a distinct practice: ‘working with what you’ve got’ as well as ‘finding the right lens’, illustrating practitioners’ perception of research needing to be more relevant to clinical practice. Conclusions: Acupuncture practitioners treating women’s health conditions reported a disconnect between their clinical practice and the design of clinical trials, predominantly due to what they perceived as a lack of individualization of treatment. Case histories were popular as a learning tool and could be used to support increasing research literacy

"Trade, Reform, And Structural Transformation in South Korea"

A two country, three sector hybrid model of structural change with distortionary government policies is used to quantify the impact of international trade and trade reform for industrialization. The model features Arming- ton motivated trade in agriculture and industry, and a novel representation of trade reform as a time sequence of import tariffs, export subsidies and lump sum government transfers of net tariff revenue. We calibrate our economy to data on South Korea and the OECD, inputting time series of country and sector specific labor productivity, tariffs and export subsidies which determine evolution of the effective pattern of comparative advantage. The model’s predicted reallocations of Korean labor from agriculture into industry and services from 1963 through 2000 are quantitatively similar to those in the data. Incorporating trade and measured Korean trade reform are both important for the accuracy of this predicted structural change, although interna- tional real income differences under non-homothetic preferences primarily determine trade and specialization patterns rather than comparative advantage. Counterfactually eliminating a) international trade b) interna- tional labor productivity differentials c) post 1967 Korean tariff reform and d) post 1967 industrial export subsidy reform increase the model’s SSE by 91 percent, 56 percent, 27 percent, and 62 percent respectively