Department of Economics International Trade and Finance Seminar (Econ 281)
International Monetary Policy Spillovers: A High Frequency Approach
by Chris Jauregui and Ganesh Viswanath Natraj
For a presentation of preliminary results, see this.
When the US sneezes, do other countries catch a cold? (Rey 2015) suggests that there is a global financial cycle in asset prices driven by US monetary policy as the center country, suggesting that small open economies with floating exchange rate regimes do not have true monetary independence. In this project, we investigate both financial and real spillovers of monetary policy, using high-frequency identification of monetary announcements from major central banks in advanced countries (Bernanke and Kuttner, 2005 and Gurkaynak et al, 2005). To identify real spillovers of monetary shocks to countries abroad, we use high-frequency “economic-news” tracking portfolios (ETPs), constructed using intraday asset returns and survey-based economic forecasts (Lamont, 2001). ETPs are linear combinations of financial asset returns that best mimic “news” about future real output, inflation, or unemployment, and so their responses to high frequency monetary shocks provide a good proxy for the real spillovers of monetary news across borders. We also test if international monetary policy spillovers were dampened by unconventional monetary policies following the financial crisis of 2007. In addition, we propose an equilibrium modeling framework to account for presence of financial spillovers; these financial linkages are due to the fact that the US dollar is used as a vehicle currency for raising debt and capital flows. The financial channel of a strengthening US dollar may cause a decline in the small open economy’s ability to source dollar denominated debt, and balance-sheet pressures leading to contractionary real effects for the small open economy (Gourinchas 2016 and Aoki, Benigno and Kiyotaki 2016).
Topics
Capital flows
Initiatives
Financial Globalization
Indian Demonetization & Real Effects
by Mauricio Ulate, Rupal Kamdar and Walker Ray
On November 8, 2016, India stopped accepting all 500 and 1,000 rupee (approximately 7 and 15 dollars) notes, its two largest bills, as legal tender. This removed about 86% of cash in circulation. New 500 and 2,000 rupee notes were eventually issued, but the process of printing them and getting them distributed to the states took longer than anticipated. Around 98% of transactions in India occur in cash, so demonetization had profound consequences, with long queues at banks, low daily limits on withdrawals of the new bills, and certain sectors of the economy slowing down significantly. The move was done for motives related to counterfeiting and money laundering and, as such, was unrelated to the state of the Indian macro-economy. This is why it could serve as a natural experiment to study the real effects of monetary shocks, price rigidities and relative substitution patterns following a liquidity crunch. This project intends to use disaggregated data on prices and quantities of different consumption categories across regions in India to study these interesting topics. Preliminary results on the prices of agricultural goods seem to indicate that prices respond strongly and somewhat persistently to demonetization.
Topics
Development, Capital flows
Initiatives
International Trade & Development, Financial Globalization
Measuring Imperfect Competition in Product and Labor Markets: An Empirical Analysis using Plant Level Production Data
by Roman Zarate & Dario Tortarolo
For a draft of the paper, see here.
In this paper, we develop a simple theoretical model that allows us to disentangle empirically the extent of imperfect competition in product and labor markets using plant-level production data.
The model assumes profit-maximizing producers that face upward-sloping labor supply and downward-sloping product demand curves. We derive a reduced-form formula for the ratio between markdowns and markups based on De Loecker and Warzynski (2012). We use production function estimation techniques to estimate output elasticities and construct a measure of combined market power at the firm level. We proceed to separate product and labor market power by estimating firm-level residual labor supply elasticities instrumenting wages with intermediate inputs. The exclusion restriction implies that shifts in the labor supply are not correlated with changes in the use of intermediate inputs. Our results suggest that both markets exhibit imperfect competition, but variation across industries is driven by the ease of firms to set prices above marginal costs rather than wages below the marginal revenue productivity of labor.
On average, manufacturing plants charge prices 78% higher than marginal costs and pay wages 11% less than the marginal revenue productivity of labor. We find a negative correlation between product and labor market power and more elastic labor supply curves for unskilled workers. Moreover, we obtain a positive correlation between firms’ product market power and productivity, size and exporter status, and a negative correlation of these measures with labor market power.
In the last part, we estimate the relative gains of eliminating market power dispersion on allocative efficiency using the model developed by Hsieh and Klenow (2009). We find that market power dispersion in product markets is more important on TFP than labor market power, and that the negative correlation between the two measures of market power corrects in 7% the economic distortion derived from market power dispersion.
Topics
Development
Initiatives
International Trade & Development
Geography & Supply Chain Organization
by Piyus Panigrahi
Liberalized mobility of goods and services across regions within a country gives rise to greater integration of markets for products. This results in these products being manufactured by more productive firms using a more efficient set of inputs, thereby increasing aggregate productivity of an economy. What role does geography play in the intra-national organization of supply chains? How can one quantify the micro-level implications of reduction in geographic barriers on firm-to-firm trade within and between regions? This project attempts to answer this question by developing a framework that incorporates the role of geographic barriers in the endogenous formation of supply chains and consequences thereof. In addition, such a framework for intra-national trade allows for rigorous analysis of both aggregate and micro-level implications of policy experiments. As a proof of concept, it will then be used to study the quantitative implications of region-based tax regime changes in a federal structure of government as is the case in India.
Topics
Development
Initiatives
International Trade & Development