Non-traded Goods Research Articles

The Impact of Credit Constraints on Tradable and Non-Tradable R&D Investments in Portugal

We develop a directed technical change model with two sectors, tradable and non-tradable, and dynamic firms’ decisions to invest in R&D in the presence of financial constraints. The model establishes a linkage between R&D decisions, product and process innovations, future productivity, profits, and credit constraints. The model is estimated using Portuguese firms’ data of the tradable and non-tradable sectors. We find that the previous R&D investments raises the innovating probabilities, the innovating probabilities are higher in the tradable sector, and the startup costs of innovation tend to be higher than the maintenance costs. The results also show complementary between the R&D benefits and the firm’s financial strength, diminishing marginal returns to capital on innovation benefits, and high heterogeneity of the innovation costs across industries. Finally, when the firms’ financial strength and the trade-off between tradable and non-tradable goods are considered, the R&D benefits in the non-tradable sector do not compensate its cost given the higher productivity and innovation probabilities of the tradable sector. As a result, the R&D investments in the tradable sector illustrates a misallocation of financial resources.

Příčiny odchylek nominálních kurzů od absolutní parity kupní síly v tranzitivních ekonomikách

This paper deals with the absolute version of purchasing power parity and its applicability in transition economies. The aim of the paper is to identify and quantify deviations between nominal exchange rates and rates based on purchasing power parity. The paper specifies and analyses the theoretical causes of those deviations and focuses on the impact of prices of non-tradable goods on purchasing power parity. Parity exchange rates based on prices of tradable-only goods are then calculated for 20 transition economies. Panel regression instruments are used to analyse the influence of selected macroeconomic and institutional variables on deviations between nominal exchange rates and rates based on purchasing power parity.

Perpetuating regional asymmetries through income transfers

ABSTRACT This paper studies the effect of income transfers on the distribution of economic activity through a modified FE model. The model incorporates some key features of the Dutch disease literature: sectorial mobility and non-tradable goods. If foreign competition is high (high trade openness), transfers could cause a Dutch disease in the short and long runs. For intermediate levels of foreign competition, Dutch disease appears only in the short run. And, for low levels, the recipient region always benefits from the income transfers. Additionally, when economies of scale are large, the transfers could perpetuate a core–periphery structure.

Structural changes and the real exchange rate dynamics

Since China joined the WTO in 2001, the Chinese economy has grown very rapidly, especially, the tradable goods sector. However, the Chinese real exchange rate did not exhibit a persistent and stable appreciation until 2005. This is a puzzling fact that is inconsistent with theories. This paper documents several stylized facts during the economic transition and argues that two features of Chinese economy may help explain the puzzling real exchange rate pattern for Chinese economy: (i) the faster total factor productivity (TFP) growth in export sector compared with the import sector; (ii) excess supply of unskilled labor. Our hypotheses are supported by cross-country evidence. Furthermore, we construct a small open economy model with an H-O trade structure and show that, due to heterogeneous skilled labor intensity in export and import sectors, the faster TFP growth in the export sector over that in the import sector will lead to the decline of return to capital and the rise of skilled wage. Therefore, the decrease of return to capital and the low unskilled wage, which is caused by the excess supply of unskilled labor, inhibit the rise in the relative price of non-tradable goods to tradable goods as well as the appreciation of real exchange rate. Finally, we show that a dynamic small open economy model with multiple tradable goods sectors does fairly well in explaining the Chinese real exchange rate and other stylized facts in the economic transition.

Tradable and nontradable directed technical change

ABSTRACT We wish to reconcile the major trends in wages and the terms of trade using a directed technical change approach in which: (i) tradable and nontradable goods can be substitutes or complements; and (ii) scale effects can be present or can be partially or totally removed. With a lower skilled labour ratio and a higher relative wage in the tradable sector, the price (real exchange rate or terms of trade) mechanism is crucial in determining sectoral productivity differences and thus wage inequality. Along the balanced growth path, the real exchange rate can be negatively related with the relative productivities in horizontal innovation (the Balassa-Samuelson effect) and with the relative labour level, depending on scale effects. The wage premium increases due to an increase in the relative labour level in the nontradable sector under substitutability with scale effects or under complementarity without scale effects. A calibrated version of the model indicates that the model closely replicates the data for Germany. Moreover, while the Balassa-Samuelson effect is quantified, an increase in the relative supply of labour in the tradable sector decreases both terms of trade and inequality.

The Global Financial Resource Curse

Since the late 1990s, the United States has received large capital flows from developing countries - a phenomenon known as the global saving glut - and experienced a productivity growth slowdown. Motivated by these facts, we provide a model connecting international financial integration and global productivity growth. The key feature is that the tradable sector is the engine of growth of the economy. Capital flows from developing countries to the United States boost demand for U.S. non-tradable goods, inducing a reallocation of U.S. economic activity from the tradable sector to the non-tradable one. In turn, lower profits in the tradable sector lead firms to cut back investment in innovation. Since innovation in the United States determines the evolution of the world technological frontier, the result is a drop in global productivity growth. This effect, which we dub the global financial resource curse, can help explain why the global saving glut has been accompanied by subdued investment and growth, in spite of low global interest rates.

Boom Goes the Price: Giant Resource Discoveries and Real Exchange Rate Appreciation

Abstract We estimate the effect of giant oil and gas discoveries on bilateral real exchange rates. A giant discovery with the value of 10% of a country’s GDP appreciates the real exchange rate by 1.5% within ten years following the discovery. The appreciation starts before production begins and the non-traded component of the real exchange rate drives the appreciation. Labour reallocates from the traded goods sector to the non-traded goods sector, leading to changes in labour productivity. These findings provide direct evidence on the channels central to the theories of the Dutch disease and the Balassa–Samuelson effect.

How Does Credit Supply Expansion Affect the Real Economy? The Productive Capacity and Household Demand Channels

ABSTRACTCredit supply expansion can affect an economy by increasing productive capacity or by boosting household demand. In this study, we develop a test to determine if the household demand channel is present, and we implement the test using both a natural experiment in the United States in the 1980s and an international panel of 56 countries over the last several decades. Consistent with the importance of the household demand channel, we find that credit supply expansion boosts nontradable sector employment and the price of nontradable goods, with limited effects on tradable sector employment. Such credit expansions amplify the business cycle and lead to more severe recessions.

Sources of current account fluctuations in Taiwan: 1989–2015

In this paper, we use a small open economy model with nontradable goods and time-varying interest rates to investigate the sources of fluctuations in Taiwan’s current account. The correlation coefficient between the implied path of the current account generated from our model and the actual current account data exceeds 0.9, while tests of the cross-equation restrictions also support the model-implied present value relationship between the current account and other macroeconomic variables. We find the consumption smoothing channel, based on the discounted sum of the expected future net output growth, is the main channel for current account adjustment in Taiwan. Expected changes in the real effective exchange rate also account for much of the variation in the current account.

Nontradable Goods and Fiscal Multipliers

We assess the role that nontradable goods play as a determinant of fiscal spending multipliers, making use of a two-sector model. While fiscal multipliers increase with the share of nontradable goods, an inverted U-shaped relationship exists between multiplier size and the import share. Employing an interacted panel VAR model for EU countries, we estimate the effect of the share of nontradable goods on fiscal spending multipliers. Our empirical results provide strong evidence for the predictions of the theoretical model. They imply that the drag of fiscal consolidations is on average smaller in countries with a low share of nontradable goods.

Non-Homothetic Sudden Stops

Financial crises preceded by nontradable consumption booms are characterized by sharper real exchange rate depreciation and deeper economic contractions. We show that a small open economy model of Sudden Stops under non-homothetic preferences can rationalize the danger of credit-fueled nontradable booms. Nontradable goods are more income-elastic than tradable goods. Thus, when a credit boom leads to a Sudden Stop, the demand for nontradable goods contracts violently and proportionately more than under homothetic preferences, causing a larger depreciation that further decreases the collateral value amplifying the current account reversal by 24%. The amplified pecuniary externality calls for 15% more aggressive debt taxes and increases the welfare gains from simple rules.

Sudden Stops and Optimal Foreign Exchange Intervention

This paper shows how foreign exchange intervention can be used to avoid a sudden stop in capital flows in a small open emerging market economy. The model is based around the concept of an under-borrowing equilibrium defined by Schmitt-Grohe and Uribe (2020). With a low elasticity of substitution between traded and non-traded goods, real exchange rate depreciation may generate a precipitous drop in aggregate demand and a tightening of borrowing constraints, leading to an equilibrium with an inefficiently low level of borrowing. The central bank can preempt this deleveraging cycle through foreign exchange intervention. Intervention is effective due to frictions in private international financial intermediation. Reserve accumulation has ex ante benefits by reducing the risk of a sudden stop, while intervention has ex-post benefits by limiting inefficient deleveraging. But intervention itself faces constraints. When the central bank's stock of reserves is low, even foreign exchange intervention cannot prevent a sudden stop.

The Slope of the Phillips Curve: Evidence from U.S. States

We estimate the slope of the Phillips curve in the cross section of U.S. states using newly constructed state-level price indexes for non-tradeable goods back to 1978. Our estimates indicate that the slope of the Phillips curve is small and was small even during the early 1980s. We estimate only a modest decline in the slope of the Phillips curve since the 1980s. We use a multi-region model to infer the slope of the aggregate Phillips curve from our regional estimates. Applying our estimates to recent unemployment dynamics yields essentially no missing disinflation or missing reinflation over the past few business cycles. Our results imply that the sharp drop in core inflation in the early 1980s was mostly due to shifting expectations about long-run monetary policy as opposed to a steep Phillips curve, and the greater stability of inflation since the 1990s is mostly due to long-run inflationary expectations becoming more firmly anchored. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

신용공급 변동이 경제성장 및 금융위기에 미치는 영향 (A Study on Credit Supply, Economic Growth and Financial Crisis)

신용공급 변동이 경제성장 및 금융위기에 미치는 영향 (A Study on Credit Supply, Economic Growth and Financial Crisis)

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Imperfect mobility of labor across sectors and fiscal transmission

Our paper investigates the sectoral effects of government spending shocks and highlights the role of labor mobility. Our VAR evidence for sixteen OECD countries reveals that a shock to government consumption by 1% of GDP increases non-traded value added by 0.7% of GDP and generates a decline in traded value added. The value added share of non-tradables rises by 0.35% of GDP, thus implying that the reallocation of resources accounts for 50% of the sectoral fiscal multiplier. Consistently, our estimates show that the non-traded sector is highly intensive in the government spending shock and experiences a labor inflow. The shift of hours worked toward the non-traded sector is, however, subject to mobility costs which vary across countries. When we explore quantitatively the sectoral effects of a shock to government consumption that is highly intensive in non-traded goods, we find that the model can replicate the magnitude of the rise in the share of non-tradables we document empirically once we allow for both labor mobility and capital installation costs. Financial openness also matters as it further biases the demand shock toward non-tradables. To account for the cross-country dispersion in the responses of sectoral shares we estimate empirically, we have to let the degree of labor mobility vary across countries.

Open Economy Dynamics Exchange Rates Theories

Exchange rate agreements are a nation’s set of rules that determine the international exchange value of the domestic currency and link a nation’s currency value to the currencies of other nations. Evolved out of the gold standard and the Bretton Woods pegged exchange rate system, today’s flexible exchange rates imply intervention by monetary authorities. Exchange rates are determined by the interaction of buyers and sellers, households, firms and financial institutions that buy and sell foreign currencies to make international payments in the foreign exchange market. If two parties agree to an exchange of bank deposits and execute the deal immediately, such exchange rates governing on the spot trading are called spot exchange rates. Covered interest parity (CIP) relates interest rates across countries and the rate of change between forward exchange rates and the spot exchange rate. Empirics and evidence show that the uncovered interest parity might not hold in actual markets. In contrast to uncovered interest parity, exchange rates tend to appreciate with a higher interest rate because of capital inflows. Carry trade and momentum trading tend to establish such a relationship. While the uncovered interest rate parity explains short run movements of exchange rates, the purchasing power parity (PPP) theory of the exchange rate determines long run market conditions. The purchasing power parity (PPP) appears as one of the most useful descriptions of the long-run exchange rate, when short-run relative price effects have worked themselves out or when inflationary forces dominate real changes. Tariffs, quotas and other restrictions on imports increase the relative profitability of traded goods and appreciate the equilibrium real exchange rate. A natural resource discovery increases the ratio of traded to non-traded goods and appreciates the real exchange rate. A faster rate of productivity growth in the traded goods sector relative to domestic non-traded goods and foreign traded goods appreciates the real exchange rate. Productivity growth differentials between tradable and non-tradable goods is important. A change in domestic consumer preferences towards traded goods depreciates the equilibrium. Home demand growth may be biased towards non-traded goods insofar as if the share of government spending in GDP increases and government spending is more biased to non-traded goods than is private spending, the equilibrium real exchange rate appreciates. If the home country accumulates net foreign assets, this allow it to enjoy interest income from the foreign country. The real exchange rate appreciates and the resulting payments deficit is financed by the interest income. Contrawise, an increase in net foreign indebtedness requires a payments’ surplus on goods account in order to service the foreign debt, which depreciates the exchange rate. A systematic divergence appears between a bilateral nominal and real exchange rates when comparing a developed country with a less developed country, which is known as the Balassa-Samuelson thesis. In addition to capital account transactions motivated by interest differentials, central bank intervention becomes important in keeping an exchange rate away from its PPP defined level. There is a linkage between foreign currency reserves and an extended Taylor-type optimal monetary policy rule for small open economies. Shrestha and Semmler (2011) therefore build a dynamic decision model with foreign currency reserves as a policy objective in the central bank’s loss function. By solving this model by the maximum principle and dynamic programming algorithm, Shrestha and Semmler (2011) show that the central bank could build up a buffer stock of foreign exchange reserves strategically useful to avoid speculative attacks on currency and possible financial crises, thereby enhancing the welfare of the economy.

Can Financial Development Mitigate the Impact of Remittances on Real Exchange Rate Appreciation?

Remittances have been blamed for causing real exchange rate appreciation by raising the relative prices of nontraded goods and services in the recipient countries. However, empirical studies seeking to support this claim are lacking in Asia, despite the huge amount of remittances received by the region. In view of that, this paper used a panel dataset from eighteen remittance-recipient Asian countries during the period of 1981 – 2010 and Pooled Mean Group (PMG) estimator to examine the effect of remittances and financial sector development on real exchange rate. The paper, specifically, questions if the real exchange rate appreciation caused by the inflow of remittances varies with the degree of financial sector development in these countries. The paper finds that inflow of remittances has significant long-run impact on the appreciation of the real exchange rates in the remittance-recipient Asian countries. However, such effect of appreciation declines in countries with enhanced financial sector development.

Employment Effects of Unconventional Monetary Policy: Evidence from QE

This paper investigates the effect of the Federal Reserve's unconventional monetary policy on employment via a bank lending channel. We find that banks with higher mortgage-backed securities holdings issued relatively more loans after the first and third rounds of quantitative easing (QE1 and QE3). While additional volume is concentrated in refinanced mortgages after QE1, increases are driven by newly originated home purchase mortgages and additional commercial and industrial lending after QE3. Using spatial variation, we show that regions with a high share of affected banks experienced stronger employment growth after both, QE1 and QE3. While the ability of households to refinance mortgages after QE1 spurred local demand, the resulting additional employment growth was relatively weak and confined to the non-tradable goods sector. In contrast, the increase in overall employment after QE3 is sizable and can be attributed to the supply of additional credit to firms. To s upport this finding, we use new confidential loan-level data to show that firms with stronger ties to affected banks increased employment and capital investment more after QE3. Altogether, our findings suggest that unconventional monetary policy can, similar to conventional monetary policy, affect real economic outcomes.

Employment effects of unconventional monetary policy: Evidence from QE

This paper investigates employment effects of the Federal Reserve’s quantitative easing policies (QE) via a bank lending channel. We find that banks with higher mortgage-backed securities holdings refinanced relatively more mortgages after the first round of QE, which increased local consumption and employment in the nontradable goods sector. In contrast, banks increased lending to firms and home purchase mortgage origination after the third round of QE, which led to a sizable increase in overall employment. Our findings are supported by new confidential loan-level data that show firms with stronger ties to affected banks increased employment and capital investment more during QE3.