Technological diffusion and dynamic gains from trade

We consider a technologically backward country and analyse the implications on competitiveness and long-run growth of the quality content of traded goods. We build an endogenous growth model where quality improvements stem from research activity taking place in the R&D sector, and where the relative quality content of goods matter for export and import demand functions. We show that the possibility of an optimal growth with a balanced current account and no adverse terms-of-trade effects is closely related to the evolution of the country’s technological distance with respect to the trade partner: with an unfavourable quality-dynamics the country cannot engage successfully in “non-price” competition. Thus, long-run growth is coupled with an adverse export to import ratio, and a balanced trade requires a continuous offsetting fall in relative prices, either through devaluations or wage deflations. We then allow for international knowledge spillovers that increase the productivity of labour resources devoted to research in a way which is proportional to the technological distance between the countries. We show that the greater the country’s ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings.Vertical innovation; Technological change and catching up; Economic growth of open economies

Technological catching up, quality of exports and competitiveness: a sectoral perspective

We analyze the relationship between Central and Eastern European countries (CEEC) industry-level competitiveness and technological catching up induced by economic integration with European Union (EU) economies. A theoretical dynamic setup is developed in which high-skill firms gain market share in 'quality dominated' markets, whereas low-skill firms face price competition for their exports. We run econometric estimations for bilateral trade between CEEC and EU economies over 2000-2007. We first test the assumption that the unit value ratio is a good proxy for quality in trade and then use the fitted unit value ratio to estimate the role of preference for quality in CEEC market share changes. Estimations support the results of the theoretical model

Technological diffusion and dynamic gains from trade

We consider a technologically backward country and analyse the implications on competitiveness and long-run growth of the quality content of traded goods. We build an endogenous growth model where quality improvements stem from research activity taking place in the R&D sector, and where the relative quality content of goods matter for export and import demand functions. We show that the possibility of an optimal growth with a balanced current account and no adverse terms-of-trade effects is closely related to the evolution of the country’s technological distance with respect to the trade partner: with an unfavourable quality-dynamics the country cannot engage successfully in “non-price” competition. Thus, long-run growth is coupled with an adverse export to import ratio, and a balanced trade requires a continuous offsetting fall in relative prices, either through devaluations or wage deflations. We then allow for international knowledge spillovers that increase the productivity of labour resources devoted to research in a way which is proportional to the technological distance between the countries. We show that the greater the country’s ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings

Technological catching up, competitiveness and growth

We build an endogenous growth model for a technologically laggard country and analyse the implications for competitiveness when trade occurs in quality-differentiated products. We find that the conditions for an optimal growth with a balanced current account and no adverse terms-of-trade effects depend on the country's ability to compete in 'quality dominated markets' thanks to a successful technological catching up. We argue that the greater the ability to absorb foreign knowledge and improve upon foreign technologies, the greater the gains in competitiveness, and the benefits to long-run growth. A numerical simulation confirms our findings.vertical innovation, technological change and catching up, economic growth of open economies,

The Macrodynamics of External Overborrowing and Systemic Instability in a Small Open Economy

The paper presents a monetary growth model for a small emerging economy with a currency board arrangement. The integration into global financial markets determines an acceleration of debt-creating capital inflows that boosts growth and the prospect of future profits, and leads to the building-up of large imbalances in the public and private sectors. Financial fragility undermines the state of confidence and determines an endogenous capital reversal. At this stage, the strong commitment to maintain the peg leaves no room for stabilization purposes and leads to systemic instability. We run a continuous-time estimation of the non-linear differential equations system of the model, with reference to Argentina during the years of the currency-board arrangement. We find two steady-state solutions, corresponding to a high-interest rate and a low-interest rate equilibrium, respectively. The local stability and sensitivity analysis show that both equilibria are unstable and that the system is intrinsically fragile. We show that even a tighter fiscal policy, according to the prescriptions of international institutions, results ineffective in improving stability

Financial Fragility and Currency Crisis: a Macrodynamical Revisitation of the Argentina’s Experience

WP del Dipartimento di Economia n.

The macrodynamics of financial fragility within a hard peg arrangement

The paper presents an open-economy macrodynamical growth model with the aim of giving an endogenous characterisation to the process that leads a small country with a currency-board arrangement to accumulate dangerously high levels of external debt and become vulnerable to macroeconomic instability. The macrodynamics of the model results from the combination of the commitment to maintain the peg - that makes liquidity closely dependent on the dynamics of foreign reserves - and the non-linear real and financial interactions that drives the pro-cyclical behaviour of the economy. Within this context, the external financing ease during an economic upswing leads to debt-supported growth and financial fragility; the consequent deterioration of profitability expectations brings about a capital reversal that, in the absence of monetary stabilisation tools, makes the currency arrangement unsustainable. A financial crisis may thus turn into a currency crisis. We run a continuous-time estimation of a non-linear differential equations system for Argentina during the years of the currency-board arrangement. We find that two steady-state solutions exist. The local stability and sensitivity analysis show that both equilibria are unstable and that the qualitative nature of the equilibria depends in particular on lenders' responsiveness to the degree of leverage. We also show that relaxing the assumption on the currency arrangement and allowing for an autonomous monetary policy makes both equilibria stable. (C) 2011 Elsevier B.V. All rights reserved