International comparisons of the levels of unit labor costs in manufacturing
Comparing absolute levels of unit labor costs across countries entails translating labor compensation rates and productivity measured in national currencies into a common currency (e.g., U.S. dollars). Compensation rates are translated using market exchange rates and productivity is translated using relative output price levels. This paper focuses on the estimation of relative output price levels. Two approaches have been used, one based on relative unit values and the other on expenditure PPPs. We use primarily the latter approach and extend earlier work in this area by adjusting expenditure PPPs for biases introduced by indirect taxes, distribution margins, and trade prices. We compute for each of the G-7 industrial countries unit labor cost levels in U.S. dollars for total manufacturing and for various subsectors of manufacturing. Our estimates suggest that in 1995, U.S. unit labor costs were substantially below those in Japan and Germany, somewhat below those in France and the United Kingdom, and very similar to those in Canada and Italy. The cross-country differences we find are somewhat larger than--albeit qualitatively similar to--those obtained using the unit value approach.
AUTHORS: Vranlovich, Elizabeth; Hooper, Peter
The U.S. external deficit in the 1980s: an empirical analysis
This paper presents an empirical analysis of the factors that contributed to the unprecedented widening of the U.S. external deficit between 1980 and 1986. The paper presents an empirical model of the U.S. current account that is used to assess the relative importance of changes in U.S. price competitiveness and changes in U.S. and foreign growth as determinants of the deficit. We find that while both factors were significant, the decline in U.S. competitiveness associated with the appreciation of the dollar was the dominant factor. The analysis is also pursued at a more fundamental level, using the results of various multicountry model simulations. We find that shifts in U.S. and foreign fiscal policy could account for over half of the widening of the deficit, but only part of the rise in the dollar. Given the importance of the dollar's appreciation to the widening of the deficit, we ask, finally, why the deficit (particularly in real terms) has been so slow to respond to the dollar's decline since early 1985. Several possible explanations are considered and we conclude that the delay can be attributed largely to normal lags in the response of trade prices and volumes to exchange rate changes. Moreover, the real net export deficit would have widened substantially further in the absence of the depreciation.
AUTHORS: Hooper, Peter; Helkie, William L.
Forecasting U.S. export and import prices and volumes in a changing world economy
AUTHORS: Hooper, Peter
The U.S. external deficit: its causes and persistence
This paper presents an empirical analysis of the macroeconomic and microeconomic factors underlying the causes and persistence of the U.S. external deficit in the 1980s. The paper begins with a review of the extensive literature on this subject, and then outlines an analytical framework that synthesizes several different approaches taken in previous studies. The proximate causes of the deficit are assessed using a partial-equilibrium model of the U.S. current account. We find that the decline in U.S. price competitiveness associated with the appreciation of the dollar over the first half of the decade was the dominant factor, while the excess of U.S. growth over growth abroad also contributed significantly. At a more fundamental level, drawing on average policy multipliers from a group of international macro models, the rise in the dollar and the growth gap that led to the deficit can be explained by the combination of a relatively restrictive U.S. monetary policy and expansive U.S. fiscal policy, along with fiscal contraction abroad. While the initial widening of the deficit can be adequately explained by macroeconomic factors, the deficit has adjusted substantially more slowly (particularly in real terms) to the fall in the dollar since early 1985 than conventional macro trade equations would predict. Analysis of the pricing behavior of foreign exporters, both in the aggregate and for a number of narrowly defined commodities, suggests that foreign profit margins have been squeezed more in response to the fall in the dollar than previously. Moreover, some foreign producers have benefited from significant reductions in production costs. Finally, quantitative restraints on U.S. trade appear to have slowed the adjustment of the trade balance to the decline in the dollar.
AUTHORS: Hooper, Peter; Mann, Catherine L.
Impact of the dollar depreciation on the U.S. price level: an analytical survey of empirical estimates
AUTHORS: Lowrey, Barbara R.; Hooper, Peter
International financial markets and the U.S. external imbalance
This paper analyzes movements in the U.S. external imbalance over the 1980s from the perspective of the capital account. It considers the empirical evidence on two competing hypotheses about the causes of the large and persistent net capital inflow during the decade: one that the capital inflow was induced by a substantial increase in the expected rate of return on real fixed investment in the United States relative to other countries, and the other that strong U.S. fiscal stimulus and a declining private savings rate boosted demand for credit in the United States. ; The empirical evidence that we review on this score include the pattern and composition of capital inflows, trends in the components of U.S. domestic saving and investment, and movements in U.S. relative to foreign rates of return across different types of real and financial assets. The evidence strongly supports the view that the net capital inflow resulted from an increase in demand for credit, and not to any significant degree from an increase in the relative rate of return on real fixed investment in the United States. ; We also consider the sustainability of the U.S. external imbalance. Available empirical evidence on this score suggests that over the short to medium term at least, continued large U.S. external deficits could be absorbed manageably into foreign portfolios. Nevertheless, if those deficits continue to finance U.S. government and private consumption rather than the increased rate of domestic investment that would be needed eventually to service the associated external debt, they are not sustainable in the long run.
AUTHORS: Danker, Deborah J.; Hooper, Peter
Alternative approaches to general equilibrium modeling of exchange rates and capital flows: the MCM experience
AUTHORS: Hooper, Peter; Symansky, Steven A.; Haas, Richard D.; Stekler, Lois E.
Macroeconomic policies, competitiveness, and U.S. external adjustment
This paper presents an empirical analysis of the relationships among the U.S. external balance, exchange rates, macroeconomic policies, and longer-term trends in relative labor productivity. Movements in the U.S. external balance over the past two decades have been determined to a substantial degree by shifts in U.S. international price and cost competitiveness. Movements in price and cost competitiveness, in turn, have been dominated by swings in nominal exchange rates, which can be explained to a large extent by shifts in fiscal and monetary policies at home and abroad. A longer-term downward trend in the dollar may have been associated with secular decline in U.S. relative to foreign productivity in manufacturing. The downtrend in relative productivity has leveled off in recent years, however. The likelihood of a resumption of the downtrend in relative productivity may be reduced, at current level of exchange rates, by a shift in manufacturing investment towards.
AUTHORS: Hooper, Peter
Exchange rates and U.S. external adjustment in the short run and the long run
The objective of this paper attempts to reconcile PPP-based views are model-based views about prospects for V.S. external adjustment in the medium term. Projections based on conventional models of the current account do not fully capture ongoing adjustments to exchange rate changes that are implicit in long-run PPP theory. In particular, the model-based projections fail to capture longer-run shifts in relative output capacity in response to sustained cost differentials (or deviations from absolute purchasing power parity) across countries. Such supply-side adjustments appear to have been quantitatively important in the past. With V.S. labor costs in manufacturing now noticeably below those in some other major industrial countries, these supply-side adjustments are potentially important in the period ahead. Nevertheless, when the model extrapolations are revised to factor in such longer-run adjustments, the projected deficit remains sizable.
AUTHORS: Hooper, Peter
Domestic and cross-border consequences of U.S. macroeconomic policies
This paper reviews empirical evidence about the effects of changes in U.S. monetary policy and fiscal policy that has been accumulated during recent years in a series of collaborative research projects involving a variety of global macroeconometric models. The paper also considers, in particular, the consequences over the next five to six years for key U.S. and foreign economic variables of a significant U.S. fiscal contraction. The quantitative implications of both alternative fiscal spending and tax actions, and alternative treatments of expectations (adaptive versus rational) are analyzed. ; The results suggest that a phased-in fiscal contraction could reduce the level of output for up to several years, as well as the levels of interest rates, the dollar and the U.S. external deficit. The decline in the external deficit would be significantly smaller than the decline in the budget deficit, however. The negative effects on output would be mitigated to the extent that the phased-in contraction were anticipated (i.e., announced credibly in advance), to the extent that monetary policy were eased, or to the extent that the fiscal package emphasized spending cuts and personal taxes rather than corporate and excise taxes.
AUTHORS: Helliwell, John F.; Hooper, Peter; Bryant, Ralph C.