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The timing of monetary policy shocks
A vast empirical literature has documented delayed and persistent effects of monetary policy shocks on output. We show that this finding results from the aggregation of output impulse responses that differ sharply depending on the timing of the shock: When the monetary policy shock takes place in the first two quarters of the year, the response of output is quick, sizable, and dies out at a relatively fast pace. In contrast, output responds very little when the shock takes place in the third or fourth quarter. We propose a potential explanation for the differential responses based on uneven staggering of wage contracts across quarters. Using a stylized dynamic general equilibrium model, we show that a very modest amount of uneven staggering can generate differences in output responses similar to those found in the data.
AUTHORS: Tenreyro, Silvana; Olivei, Giovanni P.
Economic effects of currency unions
This paper develops a new instrumental-variable (IV) approach to estimate the effects of different exchange rate regimes on bilateral outcomes. The basic idea is that the characteristics of the exchange rate regime between two countries (exchange rate variability, fixed or float, autonomous or common currencies) are partially related to the independent decisions of these countries to peg -explicitly or de facto- to a third currency, notably that of a main anchor. Our approach is to use this component of the exchange rate regime as an IV in regressions of bilateral outcomes. We illustrate the methodology with one specific application: the economic effects of currency unions. The likelihood that two countries independently adopt the currency of the same anchor country is used as an instrument for whether they share or not a common currency. Three findings stand out. First, sharing a common currency enhances trade, supporting previous work by Rose . Second, a common currency increases price co-movements; this finding is consistent with the observation that a large part of the variation in real exchange rates is caused by fluctuations in nominal exchange rates. Finally, a common currency decreases the co-movement of shocks to real GDP. This is consistent with the view that currency unions lead to greater specialization.
AUTHORS: Barro, Robert J.; Tenreyro, Silvana
On the trade impact of nominal exchange rate volatility
What is the effect of nominal exchange rate variability on trade? I argue that the methods conventionally used to answer this perennial question are plagued by a variety of sources of systematic bias. I propose a novel approach that simultaneously addresses all of these biases, and present new estimates from a broad sample of countries from 1970 to 1997. The answer to the question is: Not much.
AUTHORS: Tenreyro, Silvana
Wage setting patterns and monetary policy: international evidence
Systematic differences in the timing of wage setting decisions among industrialized countries provide an ideal framework to study the importance of wage rigidity in the transmission of monetary policy. The Japanese Shunto presents the best-known case of bunching in wage setting decisions: From February to May, most firms set wages that remain in place until the following year; wage rigidity, thus, is relatively higher immediately after the Shunto. Similarly, in the United States, a large fraction of firms adjust wages in the last quarter of the calendar year. In contrast, wage agreements in Germany are well spread within the year, implying a relatively uniform degree of rigidity. We exploit variation in the timing of wage setting decisions within the year in Japan, the United States, Germany, the United Kingdom, and France to investigate the effects of monetary policy under different degrees of effective wage rigidity. Our findings lend support to the long-held, though scarcely tested, view that wage rigidity plays a key role in the transmission of monetary policy.
AUTHORS: Tenreyro, Silvana; Olivei, Giovanni P.
Diversification and development
This paper explores the relationship between sectoral diversification and economic development. We develop a risk-based methodology to assess countries' extent of industrial diversification. The industrial structure of a country tends to be risky when the country i) has a high sectoral concentration, ii) specializes in highly risky sectors, and/or iii) specializes in sectors highly affected by country-specific fluctuations. We document the following regularities. First, sectoral concentration declines and then increases with development. Second, industry-specific risk declines with development. Hence, at early stages of development, the decline in concentration is accompanied by a parallel decrease in industry risk, whereas at higher levels of development sectoral concentration and industry risk move in opposite directions. Third, country-specific risk declines along the development path. Fourth, the covariance between industry and country risk increases with development. We also derive indicators of consumption risk that provide direct evidence on the welfare implications of risk. Finally, we compare the overall level of risk with that of the "optimal country portfolio."
AUTHORS: Tenreyro, Silvana; Koren, Miklos
Heteroskedasticity and the existence of zero values in bilateral-trade data lead to significant biases in standard estimations of the gravity equation. We propose a new estimation technique that addresses these problems, and provide novel estimates of the gravity equation. Three results stand out. First, contrary to general belief, income elasticities are significantly smaller than 1, suggesting modifications to standard trade models. Second, simple estimators of the gravity equation greatly exaggerate the roles of distance and colonial links. Finally, bilateral trade between countries that have signed a free-trade agreement is 30 percent larger than that between other countries, a magnitude remarkably different from that predicted by conventional methods (above 100 percent).
AUTHORS: Silva, J. M. C. Santos; Tenreyro, Silvana
Why is GDP so much more volatile in poor countries than in rich ones? To answer this question, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. As in endogenous growth models, technological progress increases the number of varieties, raising average productivity. The new insight is that an expansion in the number of varieties also lowers the volatility of output. This is because additional varieties provide diversification benefits against variety-specific shocks. In the model, technological complexity evolves endogenously in response to profit incentives. Complexity (and hence output stability) is positively related with the development of the country, the comparative advantage of the sector, and the sector?s skill and technology intensity. Using sector-level data for a broad sample of countries, we provide extensive empirical evidence confirming the cross-country and cross-sectoral predictions of the model.
AUTHORS: Tenreyro, Silvana; Koren, Miklos
Is Poland the next Spain?
The authors revisit Western Europe?s record with labor?productivity convergence and tentatively extrapolate its implications for the future path of Eastern Europe. The poorer Western European countries caught up with the richer ones through both higher rates of physical capital accumulation and greater total factor productivity (TFP) gains. These (relatively) high rates of capital accumulation and TFP growth reflect convergence along two margins. One margin (between industries) is a massive reallocation of labor from agriculture to manufacturing and services, which have higher capital intensity and use resources more efficiently. The other margin (within industries) reflects capital deepening and technology catch-up at the industry level. In Eastern Europe the employment share of agriculture is typically quite large, and agriculture is particularly unproductive. Hence, there are potential gains from sectoral reallocation. However, the between-industry component of the East?s income gap is quite small. Hence, the East seems to have only one real margin to exploit: the within-industry one. Coupled with the fact that within-industry productivity gaps are enormous, this suggests that convergence will take a long time. On the positive side, however, Eastern Europe already has levels of human capital similar to those of Western Europe. This is good news because human capital gaps have proved very persistent in Western Europe?s experience. Hence, Eastern Europe does start out without the handicap that is harder to overcome.
AUTHORS: Caselli, Francesco; Tenreyro, Silvana
Closed and open economy models of business cycles with marked-up and sticky prices
Shifts in the extent of competition, which affect markup ratios, are possible sources of aggregate business fluctuations. markups are countercyclical, and booms are times at which the economy operates more efficiently. We begin with a real model in which markup ratios correspond to the prices of differentiated intermediate inputs relative to the price of undifferentiated final product. If the nominal prices of the differentiated goods are relatively sticky, then unexpected inflation reduces the relative price of intermediates and, thereby, mimics the output effects from an increase in competition. In an open economy, domestic output is stimulated by reductions in the relative price of foreign intermediates and, therefore, by unexpected inflation abroad. The models tend to imply that relative output prices are more countercyclical the less competitive the sector. We find support for this hypothesis from price data of four-digit manufacturing industries.
AUTHORS: Tenreyro, Silvana; Barro, Robert J.
Economies at early stages of development are often shaken by abrupt changes in growth rates, whereas in advanced economies growth rates tend to be relatively stable. To explain this pattern, we propose a theory of technological diversification. Production makes use of different input varieties, which are subject to imperfectly correlated shocks. Technological progress takes the form of an increase in the number of varieties, raising average productivity. In addition, the expansion in the number of varieties in our model provides diversification benefits against variety-specific shocks and it can hence lower the volatility of output growth. Technological complexity evolves endogenously in response to profit incentives. The decline in volatility thus arises as a by-product of firms? incentives to increase profits and is hence a likely outcome of the development process. We quantitatively asses the predictions of the model in light of the empirical evidence and find that for reasonable parameter values, the model can generate a decline in volatility with the level of development comparable to that in the data.
AUTHORS: Koren, Miklos; Tenreyro, Silvana