The law of two prices: trade costs and relative price variability

The paper investigates whether deviations from the law of one price can attributed to real factors, such as transportation and distribution costs. Even if trade is costly, the prices of a good at di.erent locations will be linked as long as the good is traded. Instead of the usual iceberg assumption, I model costly trade as a transportation sector that uses real resources with potentially different factor intensities than the production of the good. First I use a latent factor model to see if distance specific ("transportation") and location specific ("retailing") factors can explain deviations from the law of one price across U.S. cities. For many products, these two factors explain 10-20% of all the variation in prices. The estimated transportation factor tends to move together with oil prices. Next I derive the variance of relative prices at di.erent locations when the price of transportation is determined in general equilibrium. This variance is high if (i) the good is costly to transport and (ii) it is produced with different factor intensities than transportation. Preliminary empirical results suggest that goods similar to transportation in terms of factor intensity have indeed lower relative price variability. As these goods tend to be costly to ship, this helps resolve the puzzling finding of Engel and Rogers (2001) that less tradable goods have less volatile relative prices.

Volatility and Development

Why is GDP growth so much more volatile in poor countries than in rich ones? We identify four possible reasons: (i) poor countries specialize in more volatile sectors; (ii) poor countries specialize in fewer sectors; (iii) poor countries experience more frequent and more severe aggregate shocks (e.g. from macroeconomic policy); and (iv) poor countries' macroeconomic fluctuations are more highly correlated with the shocks of the sectors they specialize in. We show how to decompose volatility into these four sources, quantify their contribution to aggregate volatility, and study how they relate to the stage of development. We document the following regularities. First, as countries develop, their productive structure moves from more volatile to less volatile sectors. Second, the level of specialization declines with development at early stages, and slowly increases at later stages of development. Third, the volatility of country-specific macroeconomic shocks falls with development. Fourth, the covariance between sector-specific and country-specific shocks does not vary systematically with the level of development. We argue that many theories linking volatility and development are not consistent with these findings and suggest new directions for future theoretical work.volatility, specialization, diversification, development, economic fluctuations.

Machines and machinists: Capital-Skill Complementarity from an International Trade Perspective

We estimate the effect of imported machines on the wages of machine operators utilizing Hungarian linked employer-employee data. We infer exposure to imported machines from detailed trade statistics of the firm and the occupation description of the worker. We find that workers exposed to imported machines earn about 8 percent higher wages than other machine operators at the same firm. When we proxy for unobserved worker characteristics, we find a significant 3 percent wage premium, suggesting that the relationship is causal. The return to schooling is also higher on imported machines. We build a simple matching model consistent with these findings. Our findings suggest that machine imports can be an important channel through which skill-biased technical change reaches less developed and emerging economies.imported machinery, capital-skill complementarity, wages

Pricing Illiquid Assets

The present paper investigates the portfolio allocation decisions of an investor with infinite horizon when available financial assets differ in their degrees of liquidity. A model with risk neutral agents allows us to endogenously determine the liquidity premium. With risk averse agents, we develop a nontrivial portfolio allocation problem, which enables us to calculate the demand for an illiquid asset for any given yield premium. We calibrate and numerically simulate both models. Reasonable parameter values imply a liquidity premium of 1.7% for the risk neutral case. In the portfolio allocation problem we find that a reasonable amount of illiquidity can cause a substantial drop of demand for the asset. We are also able to calculate the price discount at which an agent would be indifferent between immediate sale and waiting for a buyer with a fundamentally justified price.

Economies of scale and the size of exporters

Exporters are few-less than one-fifth among U.S. manufacturing firms-and are larger than non-exporting firms-about 4-5 times more total sales per firm. These facts are often cited as support for models with economies of scale and firm heterogeneity as in Melitz (2003). The authors find that the basic Melitz model cannot simultaneously match the size and share of exporters given the observed distribution of total sales. Instead exporters are expected to be between 90 and 100 times larger than non-exporters. It is easy to reconcile the model with the data. However, a lot of variation independent of firm size is needed to do so. This suggests that economies of scale play only a minor role in determining a firm's export status. The authors show that the augmented model also has markedly different implications in the event of a trade liberalization. Most of the adjustment is through the intensive margin and productivity gains due to reallocation are halved.Exports ; Economies of scale

The law of two prices: trade costs and relative price variability

The paper investigates whether deviations from the law of one price can attributed to real factors, such as transportation and distribution costs. Even if trade is costly, the prices of a good at di.erent locations will be linked as long as the good is traded. Instead of the usual iceberg assumption, I model costly trade as a transportation sector that uses real resources with potentially different factor intensities than the production of the good. First I use a latent factor model to see if distance specific ("transportation") and location specific ("retailing") factors can explain deviations from the law of one price across U.S. cities. For many products, these two factors explain 10-20% of all the variation in prices. The estimated transportation factor tends to move together with oil prices. Next I derive the variance of relative prices at di.erent locations when the price of transportation is determined in general equilibrium. This variance is high if (i) the good is costly to transport and (ii) it is produced with different factor intensities than transportation. Preliminary empirical results suggest that goods similar to transportation in terms of factor intensity have indeed lower relative price variability. As these goods tend to be costly to ship, this helps resolve the puzzling finding of Engel and Rogers (2001) that less tradable goods have less volatile relative prices

Import and Productivity

What is the effect of imports on productivity? To answer this question, we estimate a structural model of producers using product-level import data for a panel of Hungarian manufacturing firms from 1992 to 2001. In our model with heterogenous firms, producers choose to import or purchase domestically varieties of intermediate inputs. Imports affect firm productivity through expanding variety as well as improved input quality. The model leads to a production function where the total factor productivity of a firm depends on the share of inputs imported. To estimate this import-augmented production function, we extend the Olley and Pakes (1996) procedure for a setting with an additional state variable, the number of input varieties imported. Our results suggest that the role of imports is both statistically and economically significant. Imports are responsible for 30% of the growth in aggregate total factor productivity in Hungary during the 1990s. About 50% of this effect is through imports advancing firm level productivity, while the remaining 50% comes from the reallocation of capital and labor to importers

Diversification through trade

A widely held view is that openness to international trade leads to higher GDP volatility, as trade increases specialization and hence exposure to sector-specific shocks. We revisit the common wisdom and argue that when country-wide shocks are important, openness to international trade can lower GDP volatility by reducing exposure to domestic shocks and allowing countries to diversify the sources of demand and supply across countries. Using a quantitative model of trade, we assess the importance of the two mechanisms (sectoral specialization and cross-country diversification) and provide a new answer to the question of whether and how international trade affects economic volatility

Q134R: Small Chemical Compound with NFAT Inhibitory Properties Improves Behavioral Performance and Synapse Function in Mouse Models of Amyloid Pathology

Inhibition of the protein phosphatase calcineurin (CN) ameliorates pathophysiologic and cognitive changes in aging rodents and mice with aging-related Alzheimer\u27s disease (AD)-like pathology. However, concerns over adverse effects have slowed the transition of common CN-inhibiting drugs to the clinic for the treatment of AD and AD-related disorders. Targeting substrates of CN, like the nuclear factor of activated T cells (NFATs), has been suggested as an alternative, safer approach to CN inhibitors. However, small chemical inhibitors of NFATs have only rarely been described. Here, we investigate a newly developed neuroprotective hydroxyquinoline derivative (Q134R) that suppresses NFAT signaling, without inhibiting CN activity. Q134R partially inhibited NFAT activity in primary rat astrocytes, but did not prevent CN-mediated dephosphorylation of a non-NFAT target, either in vivo, or in vitro. Acute (≤1 week) oral delivery of Q134R to APP/PS1 (12 months old) or wild-type mice (3–4 months old) infused with oligomeric Aβ peptides led to improved Y maze performance. Chronic (≥3 months) oral delivery of Q134R appeared to be safe, and, in fact, promoted survival in wild-type (WT) mice when given for many months beyond middle age. Finally, chronic delivery of Q134R to APP/PS1 mice during the early stages of amyloid pathology (i.e., between 6 and 9 months) tended to reduce signs of glial reactivity, prevented the upregulation of astrocytic NFAT4, and ameliorated deficits in synaptic strength and plasticity, without noticeably altering parenchymal Aβ plaque pathology. The results suggest that Q134R is a promising drug for treating AD and aging-related disorders