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Working Paper
Firm Entry and Exit and Aggregate Growth
Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption ...
Report
Are shocks to the terms of trade shocks to productivity?
International trade is frequently thought of as a production technology in which the inputs are> exports and the outputs are imports. Exports are transformed into imports at the rate of the price> of exports relative to the price of imports: the reciprocal of the terms of trade. Cast this way, a> change in the terms of trade acts as a productivity shock. Or does it? In this paper, we show that> this line of reasoning cannot work in standard models. Starting with a simple model and then> generalizing, we show that changes in the terms of trade have no first-order effect on> productivity when ...
Report
Global imbalances and structural change in the United States
Since the early 1990s, as the United States has borrowed from the rest of the world, employment in U.S. goods-producing sectors has fallen. Using a dynamic general equilibrium model, we find that rapid productivity growth in goods production, not U.S. borrowing, has been the most important driver of the decline in goods-sector employment. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall. A sudden stop in foreign lending in 2015?2016 would cause a sharp trade balance reversal and painful reallocation across sectors, but ...
Report
Why have economic reforms in Mexico not generated growth?
Following its opening to trade and foreign investment in the mid-1980s, Mexico?s economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. ...
Report
The Opportunity Costs of Entrepreneurs in International Trade
We show that a trade model with an exogenous set of heterogeneous firms with fixed operating costs has the same aggregate outcomes as a span-of-control model. Fixed costs in the heterogeneous-firm model are entrepreneurs' forgone wage in the span-of-control model.
Working Paper
Offshore Profit Shifting and Domestic Productivity Measurement
Official statistics display a significant slowdown in U.S. aggregate productivity growth that begins in 2004. We show how offshore profit shifting by U.S. multinational enterprises affects GDP and, thus, productivity measurement. Under international statistical guidelines, profit shifting causes part of U.S. production generated by multinationals to be excluded from official measures of U.S. production. Profit shifting has increased significantly since the mid-1990s, resulting in lower measures of U.S. aggregate productivity growth. We construct an alternative measure of value added that ...
Working Paper
Firm Entry and Exit and Aggregate Growth
Applying the Foster, Haltiwanger, and Krizan (FHK) (2001) decomposition to plant-level manufacturing data from Chile and Korea, we find that the entry and exit of plants account for a larger fraction of aggregate productivity growth during periods of fast GDP growth. Studies of other countries confirm this empirical relationship. To analyze this relationship, we develop a simple model of firm entry and exit based on Hopenhayn (1992) in which there are analytical expressions for the FHK decomposition. When we introduce reforms that reduce entry costs or reduce barriers to technology adoption ...
Report
The Interaction and Sequencing of Policy Reforms
In what order should a developing country adopt policy reforms? Do some policies complement each other? Do others substitute for each other? To address these questions, we develop a two-country dynamic general equilibrium model with entry and exit of firms that are monopolistic competitors. Distortions in the model include barriers to entry of firms, barriers to international trade, and barriers to contract enforcement. We find that a reform that reduces one of these distortions has different effects depending on the other distortions present. In particular, reforms to trade barriers and ...
Journal Article
Modeling great depressions: the depression in Finland in the 1990s
This article is a primer on the great depressions methodology developed by Cole and Ohanian (1999, 2007) and Kehoe and Prescott (2002, 2007). We use growth accounting and simple dynamic general equilibrium models to study the depression that occurred in Finland in the early 1990s. We find that the sharp drop in real GDP over the period 1990?93 was driven by a combination of a drop in total factor productivity (TFP) during 1990?92 and of increases in taxes on labor and consumption and increases in government consumption during 1989?94, which drove down hours worked in Finland. We attempt to ...
Report
Sudden stops, sectoral reallocations, and the real exchange rate
A sudden stop of capital flows into a developing country tends to be followed by a rapid switch from trade deficits to surpluses, a depreciation of the real exchange rate, and decreases in output and total factor productivity. Substantial reallocation takes place from the nontraded sector to the traded sector. We construct a multisector growth model, calibrate it to the Mexican economy, and use it to analyze Mexico's 1994?95 crisis. When subjected to a sudden stop, the model accounts for the trade balance reversal and the real exchange rate depreciation, but it cannot account for the ...