Fluctuations, Bilateral Trade and the Exchange Rate Regime

In a recent paper, Frankel and Rose (1998) documented endogenous effects of a monetary union, whereby costs and benefits of the union evolve after its implementation. This paper questions their findings on three grounds. First, their main result that trading partners display relatively more synchronized cycles is not robust to the presence of fixed effects, or variables omitted from their estimation liable to generate both intense trade and synchronized cycles. Second, the cost of giving up independent monetary policy is usually evaluated on the basis of the extent of co-fluctuations between business cycles. We bring into focus which measure of the cycle ought to be used for that purpose. In particular, such measure should in our opinion reflect how synchronized cycles would be in the absence of independent monetary policy. Third, documenting the assumption that fixed exchange rate regimes translate into more bilateral trade has proved elusive. We show that using a bilateral rather than cross-country approach brings little improvement on that front.trade; optimal currency area; international business cycle

Co-Fluctuations

This paper studies the determinants of the international synchronization of business cycles. Surprisingly, countries that trade more do not appear to have more synchronized cycles once other factors are accounted for. On the other hand, the extent of co-fluctuations increases quite robustly with the income level, so that two rich countries are unconditionally more synchronized. We develop a model where this happens because the world moves from an unstable steady state with full international specialization to a stable symmetric one. Similar countries produce similar goods and as a result experience sectoral shocks that are of equal importance. By contrast, different income levels reflect differences in production patterns, where the North produces manufactures and the South agricultural goods. Since there is no particular reason why stochastic developments in those two sectors should be correlated with one another, we should expect less cyclical comovement between a rich and a poor country. Finally, the model is consistent with the tendency for trade amongst developed countries to be mostly intra-industry.international business cycles; synchronization; sectoral shocks

Elasticity optimism

Estimates of the elasticity of substitution between domestic and foreign varieties are small in macroeconomic data, and substantially larger in disaggregated studies. This may be an artifact of heterogeneity. We use disaggregated multilateral trade data to structurally identify elasticities of substitution in US goods. We spell out a partial equilibrium model to aggregate them adequately at the country level. We compare aggregate elasticities that impose equality across sectors, to estimates allowing for heterogeneity. The former are similar in value to conventional macroeconomic estimates; but they are more than twice larger -up to 7- with heterogeneity. The parameter is central to calibrated models in most of international economics. We discuss the difference our corrected estimate makes in various areas of international economics, including the dynamics of external balances, the international transmission of shocks, international portfolio choice and optimal monetary policy.Trade Elasticities, Aggregation, Calibration, Global Imbalances, International Transmission, International Portfolio, Monetary Policy.

Technology, Growth and the Business Cycle

Using a partial equilibrium model that allows for factor hoarding, I construct series on input utilization rates for ten OECD countries. These series are used in growth accounting computations of total factor productivity which filter out cyclical variations in input utilization rates. The main findings are as follows: (i) adjusted Solow residuals grow consistently faster than standard measures, (ii) the variability of the adjusted Solow residual is in some cases smaller than the standard residual's, (iii) adjusted Solow residuals are less procyclical than standard residuals, and fare better at usual exogeneity tests, (iv) supply shocks are no more symetric between European countries than elsewhere, (v) observed increased output symmetry in Europe is due to demand factors.Solow residuals; factor hoarding; international business cycle

The dynamics of trade and competition

We present, extend and estimate a model of international trade with firm heterogeneity in the tradition of Melitz (2003) and Melitz and Ottaviano (2005). The model is constructed to yield testable implications for the dynamics of international prices, productivity levels and markups as functions of openness to trade at a sectoral level. The theory lends itself naturally to a difference in differences estimation, with international differences in trade openness at the sector level reflecting international differences in the competitive structure of markets. Predictions are derived for the effects of both domestic and foreign openness on each economy. Using disaggregated data for EU manufacturing over the period 1989-1999 we find evidence that trade openness exerts a competitive effect, with prices and markups falling and productivity rising. Consistent with theory however, these effects diminish and may even revert in the longer term as less competitive economies become attractive havens from which to export from. We provide evidence that this entry into less open economies induces pro-competitive effects overseas in response to domestic trade liberalization.Competition, Globalization, Markups, Openness, Prices, Productivity, Trade

Risk sharing, finance and institutions in international portfolios

We show that international consumption risk sharing is significantly improved by capital flows, especially portfolio investment. Concomitantly, we show that poor institutions hamper risk sharing, but to an extent that decreases with openness. In particular, risk sharing is prevalent even among economies with poor institutions, provided they are open to international markets. This is consistent with the view that the prospect of retaliation may deter expropriation of foreign capital, even in institutional environments where it is possible. This deterrent is anticipated by investors, who act to diversify risk. By contrast, capital flows headed for closed economies with poor institutions are designed and constrained so as to limit the cost incurred in case of expropriation, and thus achieve little risk sharing. Finally, we show this non-linearity continues to be present in the determinants of international capital flows themselves. Institutions are crucial in attracting capital for closed economies, but are barely relevant in open ones. JEL Classification: F21, F30, G15Bank Loans, Cross-Border Investment, diversification, financial integration, Foreign Direct Investment, Portfolio Choice, portfolio investment, Risk Sharing

The Synchronization Power of Atomic Bitwise Operations

In a distributed system, processes must reach a certain level of synchronization to solve a common problem. The strongest form of synchronization can be reached through consensus: all the processes must agree on a common value that has been proposed by one of them. Consensus is universal in shared memory systems: any type of shared object can be implemented using it. Unfortunately, consensus is impossible to solve using only shared registers when processes can crash. To circumvent this impossibility, one can use stronger objects, for example Test&Set or Compare&Swap. The synchronization power of these objects can be measured using the concept of Consensus Number: the maximum number of processes for which they can solve consensus in a crash-prone system. Bitwise AND, OR and XOR operations are very widely used, but have received little attention in the distributed setting. Because bitwise operations are available in most modern processors, they can constitute a valuable tool for synchronization in distributed systems. It is then natural to consider the level of synchronization that these operations can achieve. This paper introduces shared AND/OR and AND/OR/XOR registers. A shared AND/OR register consists of an array of x bits and offers three atomic operations: AND and OR operations, which take an array of x bits as parameter and change the state of the register by applying the corresponding bitwise operation, and a read operation which returns the content of the array. A shared AND/OR/XOR register additionally offers a XOR operation. We show that shared AND/OR registers of x bits have consensus number lfloor (x+1)/2 rfloor, by presenting an algorithm that solves consensus using these registers, and by proving that consensus cannot be solved for n processes using AND/OR registers that have strictly less than 2n-1 bits. We then show that shared AND/OR/XOR registers of x bits have consensus number x using a similar technique

The overhang hangover

The authors revisit the debt overhang question. They first use nonparametric techniques to isolate a panel of countries on the downward sloping section of a debt Laffer Curve. In particular, overhang countries are ones where a threshold level of debt is reached in sample, beyond which (initial) debt ends up lowering (subsequent) growth. On average, significantly negative coefficients appear when debt face value reaches 60 percent of GDP or 200 percent of exports, and when its present value reaches 40 percent of GDP or 140 percent of exports. Second, the authors depart from reduced form growth regressions and perform direct tests of the theory on the thus selected sample of overhang countries. In the spirit of event studies, they ask whether, as the overhang level of debt is reached: (1) investment falls precipitously as it should when it becomes optimal to default; (2) economic policy deteriorates observably, as it should when debt contracts become unable to elicit effort on the part of the debtor; and (3) the terms of borrowing worsen noticeably, as they should when it becomes optimal for creditors to preempt default and exact punitive interest rates. The authors find a systematic response of investment, particularly when property rights are weakly enforced, some worsening of the policy environment, and a fall in interest rates. This easing of borrowing conditions happens because lending by the private sector virtually disappears in overhang situations, and multilateral agencies step in with concessional rates. Thus, while debt relief is likely to improve economic policy (and especially investment) in overhang countries, it is doubtful that it would ease their terms of borrowing or the burden of debt.