Rich nations tend to specialise in manufacturing high-quality products – an achievement that many emerging markets are eager to imitate. But high-quality specialisation could stem either from proximity to high-income consumers, or proximity to high-skill labour. This column discusses research that quantifies the contributions of these two mechanisms by looking at quality-specialisation across US cities. Plant-level data shows that proximity to consumers matters at least as much as differences in plants’ workforces.
The impact of low-skilled migration on US wages is high on the US economic and political agenda. This column discusses new evidence on the migration-wages link that is based on a natural experiment – the unexpectedly large inflow of Mexican immigrants to the US following the 1995 peso crisis. States that received large inflows of Mexican immigrants saw low-skilled wages decrease significantly in the short run. These local shocks spread rapidly across the US due to interstate labour reallocation.
Macroeconomic volatility is the weighted sum of sectoral volatility. Business cycle co-movement of sectors must therefore stem from a mixture of common shocks and input-output linkages. My job market paper presents an empirical framework that re-estimates the importance of these two sources. Exploiting previously unused data on industries’ price and input usage patterns, I find that events at individual industries are important – accounting for roughly three-fifths of aggregate business cycle variation.
Policymakers often use local corporate tax and other policies to induce businesses to locate in their jurisdictions. This column describes new evidence on the effect of state tax cuts on business location and provides a new framework for evaluating the welfare effects of these policies. Contrary to the conventional view of many policymakers and economists, the results suggest that firm owners bear a substantial portion of the incidence of state corporate tax changes.
International financial contagion has a destabilising effect on the growth path of many emerging markets. But what are the forces driving international financial contagion? This column argues that institutional investors play an important role in propagating shocks. Changes in economic conditions in advanced countries generate global waves of portfolio fund inflows/outflows that massively effect emerging markets' funding.
Management quality varies enormously across nations and these differences are associated with important outcomes such as firm-size distribution and aggregate productivity. Such facts, however, cannot be understood using existing trade theory. This JMP Vox column describes a new general equilibrium framework linking management technology, firms’ hierarchy choices, and international trade. Heightened import competition induces firms to flatten their hierarchies and rely more on incentive-based pay. Better management is also complementary with trade liberalisation, since nations with superior management technology experience larger gains from trade.
About 80% of the $1.7 billion raised in the 2012 US presidential race consisted of individual contributions. However, little is known about the factors that drive individual campaign contributions. This column argues that social incentives are an important determinant of individuals’ contribution behaviour. It presents evidence from a field experiment that shows that an individual contributes more when the proportion of neighbours that support the same party increases. These results are important for understanding the geography of political polarisation.
The housing market is a key link between the financial economy and the real economy. Since the onset of the Great Recession, there has been renewed interest in understanding the role of the housing market in the financial crisis. This column shows that transaction taxes introduced in the UK in 2008 had a strong effect on prices and demand in the housing market. Transaction tax cuts were enormously successful at stimulating the housing market during the recession. The effects on real expenditure per dollar of foregone tax revenue were significantly larger than for typical fiscal stimulus policies such as income tax rebates.
The Global Crisis saw a sudden and synchronised fall in exports worldwide. One quirk in this Great Trade Collapse was the surprisingly robust performance of service exports. This column investigates the differences using Belgian firm-level data, finding that most of the differences stem from business-service exports. These services fell less mainly due to demand-side factors as their demand reacted to the macro fluctuations more like consumables than durables.
The effects of Medicaid on health are still unclear even though the programme is 50 years old. This column presents new evidence that quantifies the effect of the programme at the time of its implementation on children’s health. By the end of the 1970s, Medicaid had saved about 25,000 lives among nonwhite children, reducing their mortality rates by 8%, and narrowing the racial mortality gap. The tremendous benefits of Medicaid on lives of children from disadvantages groups should be taken into account in the policy debates about curtailing the programme.
Information is critical for the efficient functioning of markets, yet is in reality often limited. Since researchers usually cannot observe the information that market participants have, little is known about how information frictions distort trade flows and price patterns. This column discusses research that quantifies the effects of information frictions by looking at an historical episode – the transatlantic telegraph connection of 1866. Information frictions decreased average trade flows and the volatility of trade, leading to substantial welfare losses.
The dramatic fall in consumption during the Great Recession was accompanied by an equally dramatic increase in household debt in the years preceding it. This column examines the relationship between household debt and consumption behaviour, and the channels through which this link operates. The column concludes that the relationship is driven almost entirely by the presence of financial constraints, such as liquidity or borrowing limits.
José-Antonio Espín-Sánchez, Javier Donna, 02 February 2014
Fresh water is becoming increasingly scarce. Policymakers worldwide are advocating water markets as a solution to this scarcity problem, but there remains considerable controversy about the efficacy of water markets. This column studies a water market that was in place for over 700 years in southern Spain and was replaced by a system of fixed quotas in 1966. The market was terminated because a system of quotas outperformed the market due to the presence of liquidity constraints. The findings imply that we should be cautious when advocating water markets in developing countries where liquidity constraints are important.
Banking union is a vital project for the future of the Eurozone. Under the current proposal, bank supervision will be centralised but national authorities will remain responsible for recapitalising troubled banks. This leaves the system susceptible to domestic political economy constraints. This column argues that such a system can fail to be welfare improving. The inefficiencies can be mitigated, however, if the banking union is accompanied by greater electoral accountability and fiscal rules that constrain debt accumulation by national governments.
Switching costs impede competition by making it costly for consumers to switch among products. This column studies the Chilean retirement investment market in order to identify the different causes of switching costs. The results indicate that most of consumer inertia is explained by the cost of analysing product information. This suggests that policymakers concerned about switching costs should focus their efforts on improving consumers’ access to information in order to minimise price distortions and increase consumer welfare.
The secular stagnation hypothesis is back. Several prominent economists claim that the US may have entered a prolonged period of anaemic economic growth caused by weak aggregate demand. This column argues that the build-up of trade deficits caused by the appreciation of the dollar can explain most of the decline in manufacturing employment, output and investment in the US. Aggressive monetary policy targeted at increasing inflation could help by effectively taxing the inflow of foreign reserves, thereby leading to a depreciation of the dollar.