Most recent papers:

• International trade and the division of labor.
  Kwok Tong Soo.
  Review of International Economics. October 13, 2017
  This paper develops a model of international trade based on the division of labor under perfect competition. International trade, by eliminating the duplication of coordination costs, leads to a greater variety of tasks, each produced at a larger scale than in autarky. The greater variety of tasks implies greater division of labor and hence gains from trade. Extending the model to two factors of production yields the additional result that if the two countries are sufficiently similar in their relative endowments, then both factors of production can experience gains from trade.

  October 13, 2017   doi: 10.1111/roie.12333   open full text
• Help not needed? Optimal host country regulation of expatriate NGO workers.
  Amihai Glazer, Rune Jansen Hagen, Jørn Rattsø.
  Review of International Economics. October 03, 2017
  Motivated by interventions in poor countries to increase the use of local labor in foreign nongovernmental organizations (NGOs), we address the behavior of these organizations under host government regulation. We extend existing NGO models by distinguishing between local workers and expatriates. The model covers both NGO monopoly and competition in the market for donations. Assuming that NGOs maximize output, we show that regulations in the form of a quota on the number of expatriates or a work permit fee for foreigners reduces NGO output, but increases employment of locals. The optimal quota is more likely to bind in the market structure generating the highest total fundraising surplus. An optimal work permit fee is equivalent to an optimal quota in both the monopoly and duopoly cases. For both instruments, the optimal tightness of regulation is decreasing in the weight the government attaches to the public good relative to domestic incomes and in the importance of NGO output to the supply of the public good. Aggregate NGO output and the level of the public good produced could be higher with a monopoly NGO.

  October 03, 2017   doi: 10.1111/roie.12332   open full text
• Using imported intermediate goods: Selection and technology effects.
  Mark J. Gibson, Tim A. Graciano.
  Review of International Economics. September 26, 2017
  Producers that use imported intermediate goods tend to be much larger and more productive than others. Some of this is due to a selection effect: the most productive producers self‐select into importing because only they can overcome the fixed costs of developing trade relationships with foreign input suppliers. Some of this is due to a technology effect: any given producer would have higher variable profits from operating the technology using imported intermediate goods. To account for the roles of these theoretical mechanisms, we develop a simple model of a competitive small open economy in which heterogeneous firms endogenously decide whether to use imported intermediate goods. The technology that uses imported intermediate goods is superior but requires a higher fixed cost of operating. The calibrated model captures the large performance advantage of importers and quantifies the selection and technology effects.

  September 26, 2017   doi: 10.1111/roie.12325   open full text
• AI and the future of the brain power society: When the descendants of Athena and Prometheus work together.
  Masahisa Fujita.
  Review of International Economics. September 26, 2017
  Taking the great opportunity of visiting Crete, I have presented my freewheeling imagination about the future of the brain power society, bearing in mind the recent development of AI and robots. Based on Greek mythology, I consider that all brain‐power professionals in civil society are the descendants of Athena, whereas the rapidly developing AI and robots are the ultimate descendants of Prometheus. In this context, in order to foresee the possible future of economic research in the coming AI revolution, I introduced the recent attempt by Marcus Berliant and myself to develop a formal framework for modeling the operational process of economic research. Then, I have suggested that if real humans and AI work together through such a framework while amplifying mutual comparative advantages, creativity in economic research as a whole will be vastly enhanced.

  September 26, 2017   doi: 10.1111/roie.12310   open full text
• Multiproduct oligopoly and trade between asymmetric countries.
  Yi‐Ling Cheng, Takatoshi Tabuchi.
  Review of International Economics. September 26, 2017
  This paper develops a general equilibrium model of oligopolistic multiproduct firms conducting trade between asymmetric countries, in which heterogeneous entrants choose their product ranges and outputs. We show that there are fewer exporters in the larger country, and each produces a wider range of products but exports fewer varieties. We also show that while trade liberalization increases the total number of consumed varieties, it decreases the total number of firms and may reduce the product range of each firm.

  September 26, 2017   doi: 10.1111/roie.12311   open full text
• On the new economic geography of a multicone world.
  P. Commendatore, I. Kubin, P. Mossay.
  Review of International Economics. September 26, 2017
  We build a new economic geography model incorporating differences in productivity among sectors and countries, thus allowing for comparative advantage. We study the role that market size, absolute advantage, and comparative advantage have on the trade patterns and the long‐run spatial distribution of economic activity in a world with multicones of specialization. We briefly mention the possibility of long‐term fluctuations in the spatial distribution of industry by relying on a discrete‐time framework.

  September 26, 2017   doi: 10.1111/roie.12312   open full text
• Modeling agglomeration and dispersion in space: The role of labor migration, capital mobility and vertical linkages.
  Francesco Di Comite, d'Artis Kancs, Patrizio Lecca.
  Review of International Economics. September 26, 2017
  In this paper we investigate the role played by capital mobility, labor migration and input–output linkages in shaping the spatial distribution of economic activity in a spatial computable general equilibrium framework. We identify European Union core and periphery regions based on an accessibility index and simulate the impact of a homogeneous transport shock. Our results suggest that agglomeration patterns are magnified by labor and capital mobility, the latter exerting a stronger influence than the former. Results are more nuanced for vertical linkages, which are associated with more agglomeration in terms of GDP, but more dispersion in terms of number of firms and labor demand. These results shed additional light on location mechanisms in applied general equilibrium applications of the new economic geography (NEG) theory and complement the theoretical NEG literature based on analytically solvable models.

  September 26, 2017   doi: 10.1111/roie.12313   open full text
• The impact of trade costs on the European Regional Trade Network: An empirical and theoretical analysis.
  Roberto Basile, Pasquale Commendatore, Luca De Benedictis, Ingrid Kubin.
  Review of International Economics. September 26, 2017
  Using intra‐European interregional trade data, we analyze the topology of the E.U. regional trade network. A triad census analysis confirms the intuition that the interregional trade network (and, thus, the European economic integration) is far from being complete. The majority of the E.U. interregional trade patterns are characterized by simple, at best bilateral, configurations. Moreover, we analyze the effect of trade costs in shaping the topological structure of the network. It emerges that the relative presence of simple trade configurations increases with distance, while the relative presence of more complex trade configurations decreases with distance. Finally, we discuss the theoretical underpinnings of these empirical facts through a simple new economic geography model with three regions. In this model, we analyze how trade costs shape the pattern of the trade network. On the whole we find a correspondence between theoretic and empirical results. However, details differ and they suggest directions for further research.

  September 26, 2017   doi: 10.1111/roie.12314   open full text
• Is the wage equation spatial enough? Evidence from a novel regional trade dataset.
  Aurélien Fichet de Clairfontaine, Christoph Hammer.
  Review of International Economics. September 26, 2017
  This study focuses on the market accessibility of European regions and its relationship to income per capita, summarized in the new economic geography (NEG) “wage equation”. In a first step, we make use of a novel dataset of bilateral trade flows for 254 European nomenclature of territorial units for statistics (NUTS‐2) regions (for 26 European countries excluding Bulgaria and Romania) in order to estimate trade costs and ultimately construct a regional measure of access to markets. In a second step, we test the hypothesis that access to domestic as well as to foreign markets increases income per capita. We find that, in spite of its spatial formulation, the wage equation is not able to capture local spatial patterns of the distribution of European regional income per capita.

  September 26, 2017   doi: 10.1111/roie.12315   open full text
• Export diversification and economic development: A dynamic spatial data analysis.
  Roberto Basile, Aleksandra Parteka, Rosanna Pittiglio.
  Review of International Economics. September 26, 2017
  This paper contributes to the empirical literature on the relationship between “export variety” (export diversification) and economic development by relaxing the assumption of cross‐country independence and allowing for spatial diffusion of shocks in observed and unobserved factors. Export variety is measured for a balanced panel of 114 countries (1992–2012) using very detailed information on their exports (HS 6‐digit product level). The estimation results of a dynamic spatial panel data model confirm the relevance of spatial network effects in export diversification: indirect effects (spatial spillovers) strongly reinforce direct effects, while spatial proximity to large countries accelerates the diversification process. In about 10 years the whole space–time diffusion of the diversification shock is widely completed. We reveal that the long‐run spillover impact from European countries is much higher than from other countries such as the United States, Japan, or the BRICS (Brazil, Russia, India, China, and South Africa).

  September 26, 2017   doi: 10.1111/roie.12316   open full text
• Fiscal transfers and regional economic growth.
  H. Dawid, P. Harting, M. Neugart.
  Review of International Economics. September 26, 2017
  In the aftermath of the financial crisis, with periphery countries in the European Union falling even more behind the core countries economically, there have been quests for various kinds of fiscal policies in order to revert divergence. How these policies would unfold and perform comparatively is largely unknown. We analyze four such stylized policies in an agent‐based macroeconomic model and study the economic mechanisms behind their relative success. Our main findings are that the core country sharing the debt burden of the periphery country has almost no effect on the growth dynamics of that region, fiscal transfers have a positive short‐ and long‐run impact on per‐capita consumption in the target region, and that technology‐oriented firm subsidies have the strongest positive long‐run impact on competitiveness of the periphery country at which they are targeted. The positive effect of the technology‐oriented policy is reinforced if combined with household transfers.

  September 26, 2017   doi: 10.1111/roie.12317   open full text
• The dynamic effects of fiscal reforms and tax competition on tax compliance and migration.
  Fabio Lamantia, Mario Pezzino.
  Review of International Economics. September 26, 2017
  We study the dynamic effects of fiscal reforms on migration and tax evasion in an international context with two asymmetric countries. Given an initial international distribution of honest and dishonest taxpayers, the tax system (e.g., tax rates and degrees of progressivity) and the salary in each country, individuals decide where to reside and how much time to spend working. The model allows us to study in a dynamic setting how the distribution of honest and dishonest earners is geographically affected by fiscal reforms (e.g., variations in tax rates) and auditing efforts (e.g., probability of auditing and fines) of different countries. We show that various dynamic long term scenarios can be generated. The particular convergence of the model depends crucially on the initial geographic distribution of dishonest agents. This implies that tax reforms that have been successful in reducing tax evasion in one country may produce very different results in others, if initial conditions are significantly different. Chaotic cyclical behavior may also arise if individual propensity to migrate is sufficiently high.

  September 26, 2017   doi: 10.1111/roie.12318   open full text
• Stability and welfare effects of profit taxes within an evolutionary market interaction model.
  Noemi Schmitt, Jan Tuinstra, Frank Westerhoff.
  Review of International Economics. September 26, 2017
  We develop a partial equilibrium model in which firms can locate in two separate regions. A firm's decision where to locate in a given period depends on the regions' relative profitability. If firms react strongly to the regions' relative profitability, their market switching behavior generates unstable dynamics. If the goal of policy makers is to stabilize these dynamics they can do so by introducing profit taxes that reduce the regions' relative profitability. While stability can already be obtained by imposing profit taxes in one of the two regions, total welfare is maximized if policy makers coordinate their tax setting behavior across regions. However, policy makers only interested in welfare in their own region may have the incentive to decrease their profit tax below this level, thereby attracting more firms and increasing tax revenues, at the cost of instability in both regions.

  September 26, 2017   doi: 10.1111/roie.12319   open full text
• Strategic corporate social responsibility by a multinational firm.
  Constantine Manasakis, Evangelos Mitrokostas, Emmanuel Petrakis.
  Review of International Economics. September 26, 2017
  This paper investigates the determinants of a responsible multinational firm's decision to enter in a foreign country either through exports or through foreign direct investment (FDI), as well as the relevant market and societal outcomes. We find that coroporate social responsibility (CSR) investments are higher under FDI than under exports. The multinational firm's incentives to serve the foreign country through FDI are increasing in the average consumer's valuation for CSR and in the intensity of the foreign country's market competition, but only if the average consumer's valuation for CSR in this country is sufficiently high. These incentives are mitigated by the multinational firm's liability in this country under exports. We also find that there is misalignment of preferences between the stakeholders of the two countries over the multinational firm's mode of entry in the foreign country.

  September 26, 2017   doi: 10.1111/roie.12320   open full text
• Corporate governance drivers of firm innovation capacity.
  Alfredo M. Bobillo, J.A. Rodríguez‐Sanz, F. Tejerina‐Gaite.
  Review of International Economics. September 26, 2017
  We investigate the predictive factors of firm innovation capacity (FIC), proxied by intangible assets, as a means towards sustainable competitive advantage in a world of global change and innovation. The primary aim of this paper is to identify the key factors shaping a firm's innovation capacity management style. We use panel data for 1,942 firms (20,171 observations) in Germany, France, Italy, the United Kingdom, United States, and Spain, over the period 1999 to 2014. Our results show that capabilities driven by corporate governance mechanisms currently constitute the pivotal support for firms' innovation capacity (FIC). Our main findings are that corporate governance drivers such as executive incentives (E‐P) and the presence of independent nonexecutive directors (INEDs) have a bearing on FIC. Meanwhile, managerial performance (MP) and institutional shareholder activism (AI) emerge as basic motivational instruments and mechanisms of alignment between firm ownership and control. The influence of incentives and INEDs is found to be negative and that of institutional shareholder activism and MP to be positive. With respect to the business context, we find evidence of higher efficiency in firm disciplinary mechanisms in the Anglo‐American than in the Continental corporate governance model.

  September 26, 2017   doi: 10.1111/roie.12321   open full text
• Quality screening and trade intermediaries: Evidence from China.
  Sandra Poncet, Meina Xu.
  Review of International Economics. September 21, 2017
  We examine the quality‐screening role played by intermediaries in international trade, exploiting export data at the product level for Chinese exporters. We uncover substantial heterogeneity among intermediaries, and distinguish two types: generalized and specialized intermediaries. We find strong evidence of a quality‐verification role for specialized intermediaries: they are more prevalent in products with greater quality dispersion among local exporters, and export goods of higher quality than do generalized intermediaries. Our results suggest that specialized intermediaries have the capacity to reduce the incidence of quality problems.

  September 21, 2017   doi: 10.1111/roie.12324   open full text
• Financial frictions, interest rate dynamics, and international business cycle synchronization.
  Jean‐François Rouillard.
  Review of International Economics. September 19, 2017
  A two‐country real business cycle model with national endogenous borrowing constraints and working capital requirements can account for the high level of international co‐movements. The effects of technology shocks are transmitted internationally through the dynamics of the interest rate. Specifically, the borrowing mechanism brings about a wedge between the real interest rate and the expected marginal product of capital, such that interest rates fall following positive technology shocks. A lower interest rate induces more investment by Foreign firms, which in turn contribute to greater synchronization of economic activities across countries. Moreover, terms of trade amplify the effects of technology shocks.

  September 19, 2017   doi: 10.1111/roie.12326   open full text
• How deep is your love? A quantitative spatial analysis of the transatlantic trade partnership.
  Oliver Krebs, Michael Pflüger.
  Review of International Economics. September 15, 2017
  This paper explores the quantitative effects of trade liberalization envisioned in a transatlantic trade and investment partnership (TTIP) between the United States and the European Union. We use a quantitative trade model that, in contrast to other works, features consumptive and productive uses of land and we allow for labor mobility and a spatial equilibrium. Our calibration draws mainly on the world input–output database (WIOD). The eventual outcome of the negotiations is uncertain. Tariffs in E.U.–U.S. trade are already very low, however, so that an agreement will have a major impact only by eliminating nontariff barriers. These are extremely hard to quantify. We address these uncertainties by considering a corridor of trade‐liberalization paths and by providing numerous robustness checks. Even with ambitious liberalization, real income gains within a TTIP are in the range of up to 0.46 percent for most countries. The effect on outside countries is typically negative, yet even smaller. Taking land into account scales down the welfare effects strongly. Interestingly, we find that all German counties derive unambiguous welfare gains even though the model allows for negative terms‐of‐trade effects. Our analysis also implies that in order to arrive at the same welfare gains as under a TTIP, a multilateral liberalization would have to be much more ambitious for the U.S. than for the E.U.

  September 15, 2017   doi: 10.1111/roie.12323   open full text
• Employment gains from minimum‐wage hikes under perfect competition: A simple general‐equilibrium analysis.
  Richard A. Brecher, Till Gross.
  Review of International Economics. September 12, 2017
  Contrary to conventional wisdom, higher minimum wages may lead to greater levels of employment under perfect competition. We demonstrate this possibility in a simple general‐equilibrium model of involuntary unemployment, with two goods produced by two factors and consumed by two representative households. Within our model, hiking a minimum wage redistributes income between heterogeneous consumers. This redistribution may create an excess demand for the labor‐intensive good, and hence increase total employment to restore equilibrium, despite the fact that every firm becomes less labor intensive.

  September 12, 2017   doi: 10.1111/roie.12322   open full text
• External liabilities, domestic institutions and banking crises in developing economies.
  Nabila Boukef Jlassi, Helmi Hamdi, Joseph P. Joyce.
  Review of International Economics. September 07, 2017
  We investigate the impact of foreign equity and debt on the occurrence of banking crises in 61 lower income and middle income economies during the 1984 to 2010 period. We also focus on the effects of domestic institutions on banking crises and whether they mitigate or exacerbate the impact of the external liabilities. We find that FDI liabilities lower the probability of a crisis, while debt liabilities increase their incidence. However, institutions that lower financial or political risk partially offset the impact of debt liabilities, as does government stability. A decrease in investment risk directly reduces the incidence of banking crises.

  September 07, 2017   doi: 10.1111/roie.12305   open full text
• Technology and the dynamics of comparative advantage.
  Antonio Navas.
  Review of International Economics. August 28, 2017
  This paper explores how trade affects innovation in a two‐country, two‐good, two‐factor Heckscher–Ohlin model with heterogeneous firms. Trade openness induces an increase in process innovation in both industries. The increase is stronger in the comparative advantage industry. Trade openness boosts prospective entrants' profits in that industry, which leads to further increases in product innovation. Trade liberalization generates a different relative impact on innovation across industries, depending on trade costs. When they are high (low), it increases process innovation relatively more in the comparative advantage (disadvantage) industry, leading to TFP divergence (convergence) across industries.

  August 28, 2017   doi: 10.1111/roie.12309   open full text
• Identifying foreign suppliers in U.S. import data.
  Fariha Kamal, Ryan Monarch.
  Review of International Economics. August 21, 2017
  Relationships between firms and their foreign suppliers are the foundation of international trade, but data limitations and reliability concerns make studying such relationships challenging. We evaluate and enhance supplier information in U.S. import data and present new facts about importer–exporter relationships. Count of foreign exporters from U.S. import data tends to exceed those from source country data, especially from China. The pattern of U.S. imports from origin countries changes substantially by tracing trade back to the supplier's location instead. Related‐party relationships trade more, while larger countries have more relationships.

  August 21, 2017   doi: 10.1111/roie.12306   open full text
• Exporters in cross‐section: Direct versus intermediated trade.
  Qianqian Wang, Mark J. Gibson.
  Review of International Economics. August 03, 2017
  How do producers that export their goods directly differ from those that export through trade intermediaries? We take a standard model of trade with heterogeneous firms and add heterogeneity in quality to the usual heterogeneity in productivity. Modeling trade intermediaries as increasing marginal costs but decreasing fixed costs of exporting, we find that only firms with the highest quality‐adjusted productivity levels choose to export directly. Under certain parameter restrictions, the model shows that direct exporters tend to be larger and charge higher prices for their goods. In contrast to the literature, using Chinese customs data, we confirm that direct exporters do charge higher prices for their goods.

  August 03, 2017   doi: 10.1111/roie.12304   open full text
• Foreign direct investment as a signal.
  Onur A. Koska, Ngo Van Long, Frank Stähler.
  Review of International Economics. August 03, 2017
  This paper models oligopolistic competition among potential multinational firms in an environment of firm heterogeneity, incomplete information on costs, and strategic interactions. We show that foreign direct investment is more likely if it can serve as a signal of productivity in an environment of incomplete information as firms would like to avoid sending a low productivity signal. Our model shows that this effect is strong enough such that foreign direct investment can be an optimal foreign entry mode even if trade costs are zero.

  August 03, 2017   doi: 10.1111/roie.12303   open full text
• Does tax competition increase infrastructural disparity among jurisdictions?
  Yutao Han, Patrice Pieretti, Benteng Zou.
  Review of International Economics. July 13, 2017
  This paper investigates whether an economy that lags behind in infrastructure compared with other countries can make up its shortfall when it competes for foreign direct investments. The main message of the paper is that jurisdictional competition can enable the lagging country to reduce the infrastructural gap if capital mobility is sufficiently high and the gap is not too large. Further, we show that size asymmetry reinforces (weakens) the effect in reducing the infrastructural disparity resulting from interjurisdictional competition when the lagging economy is small (large).

  July 13, 2017   doi: 10.1111/roie.12301   open full text
• Good and useless FDI: The growth effects of greenfield investment and mergers and acquisitions.
  Philipp Harms, Pierre‐Guillaume Méon.
  Review of International Economics. July 13, 2017
  We explore the effect of foreign direct investment (FDI) on economic growth, distinguishing between mergers and acquisitions (M&As) and “greenfield” investment. A simple model underlines that, unlike greenfield investment, M&As partly represent a rent accruing to previous owners, and do not necessarily contribute to expanding the host country's capital stock. Greenfield FDI should therefore have a stronger impact on growth than M&A sales. This hypothesis is supported by our empirical results that are based on a panel of up to 127 industrialized, emerging, and developing countries over 1990 to 2010.

  July 13, 2017   doi: 10.1111/roie.12302   open full text
• Comparative advantage and strategic specialization.
  Minwook Kang.
  Review of International Economics. July 03, 2017
  This paper shows that a strong comparative advantage is necessary for free trade and specialization in a 2 × 2 symmetric Ricardian model to be achieved in a Nash equilibrium. Governments strategically control labor distribution across industries, and representative agents maximize Cobb–Douglas utilities. A Nash equilibrium with complete specialization is achieved if and only if relative productivity exceeds a key value of 3, which is considered a very large number based on previous empirical studies. This paper also introduces a two‐stage game where each government chooses labor distribution first and then tariffs. In this two‐stage game, complete specialization is never achieved for any relative productivity level. Finally, by generalizing the Cobb–Douglas model into constant elasticity of substitution (CES) preferences, I show that if immiserizing growth effects exist, complete specialization could not be achieved for any level of relative productivity.

  July 03, 2017   doi: 10.1111/roie.12300   open full text
• Inequality and public debt: A positive analysis.
  Ryo Arawatari, Tetsuo Ono.
  Review of International Economics. June 20, 2017
  This study extends the multi‐country, politico‐economic model of fiscal policy to incorporate wage inequality within each country. In this extended framework, we present conflict over fiscal policy within and across generations and show that a low‐inequality country realizes tight fiscal policy with low public debt accumulation, whereas a high‐inequality country experiences loose fiscal policy with high public debt. This model prediction is consistent with empirical evidence from OECD countries for the years 1980 to 2010.

  June 20, 2017   doi: 10.1111/roie.12299   open full text
• International intellectual property rights protection and economic growth with costly transfer.
  Kazuyoshi Ohki.
  Review of International Economics. June 01, 2017
  This paper develops a product‐cycle model with costly technology transfer, which requires resources from both the North and the South. In the basic model, we show that strengthening intellectual property rights (IPR) protection induces a large technology transfer and narrows the North–South wage gap. However, we obtain an ambiguous result regarding the effect on economic growth, which depends crucially on the size of the transfer cost. Although strengthening IPR protection induces a high growth rate when the transfer cost is small, it can induce a low growth rate when the transfer cost is large. In the extended model, in order to examine what factors determine the transfer cost, we consider the situation where the Southern firms may misbehave and the Northern firms incur a cost to monitor them. We show that the degree of investor protection and the degree of morality in developing countries influence the size of the transfer cost, which affects economic growth.

  June 01, 2017   doi: 10.1111/roie.12298   open full text
• Estimating the bilateral impact of nontariff measures on trade.
  Michael Bratt.
  Review of International Economics. May 11, 2017
  This paper seeks to estimate how the impact of nontariff measures (NTMs) on trade can vary across exporter–importer pairs. Covering data for the early 2000s, regressions are run at a disaggregate tariff line level and the estimated results are converted into ad valorem equivalents (AVEs). The results underline the importance of conditioning conclusions on trading partners and products and demonstrate that the same NTM can have different—even opposite—effects across exporting countries. One general pattern that emerges is that low‐income importers impose more restrictive NTMs, but that the capacity for exporting countries to address NTMs increases with GDP per capita.

  May 11, 2017   doi: 10.1111/roie.12297   open full text
• Transit migration.
  Slobodan Djajić.
  Review of International Economics. May 04, 2017
  Unauthorized international migration to the advanced countries has become increasingly more costly and indirect. The hazardous land and sea routes that pass through one or more transit countries offer liquidity‐constrained individuals an opportunity to economize on the pecuniary cost of migration as well as to work along the way to pay for the next leg of the journey. This paper analyzes the optimal behavior of transit migrants and examines its implications for the effectiveness of immigration control measures of the transit and final‐destination countries in deterring unauthorized migration. Strengthening of border controls at the final destination is shown to increase the relative effectiveness of internal enforcement measures of the transit countries, while tougher internal enforcement in the transit countries increases the relative effectiveness of border controls at the final destination.

  May 04, 2017   doi: 10.1111/roie.12294   open full text
• Thousands of BEERs: Take your pick.
  Konrad Adler, Christian Grisse.
  Review of International Economics. May 03, 2017
  This paper explores the robustness of behavioral equilibrium exchange rate (BEER) models. We highlight the importance of model uncertainty, and employ real exchange rates computed from price‐level data to explore robustness to the inclusion of country fixed effects. The estimated coefficients—and therefore also the implied equilibrium values—are sensitive to the combination of variables included in the model, and to the inclusion of fixed effects. We identify several variables that exhibit a robust link with real exchange rates across specifications. Our findings can help policymakers in understanding the uncertainty associated with estimates of equilibrium exchange rates.

  May 03, 2017   doi: 10.1111/roie.12296   open full text
• Government‐spending multipliers and the zero lower bound in an open economy.
  Charles Olivier Mao Takongmo.
  Review of International Economics. May 02, 2017
  This paper assesses the size of the government‐spending multiplier in an open economy when the zero lower bound (ZLB) on the nominal interest rate is binding. In a theoretical framework, in a closed economy, other authors have shown that when the nominal interest rate is binding the government‐spending multiplier can be very large (close to four). Their theory helps illuminate the government‐spending multiplier in the ZLB, but it is difficult to match that theory with the data. We argue that, in an open economy, another channel exists for the crowding‐out effect via the real exchange rate. For an open economy, the government‐spending multiplier is not large owing to the appreciation of the real exchange rate, induced by the appreciation of aggregate demand that follows the increases in government spending. To test the robustness of our open economic model, we conduct the same analysis in a corresponding closed economy model. The result from our closed economy model confirms the result obtained in the other work. Our theoretical results are consistent with the results obtained in the empirical literature, which uses the vector autoregressive method and the structural vector autoregressive approach to measure the impact of government‐spending shock on the real gross domestic product and revealed that the government‐spending multiplier tends to be lower in open economy.

  May 02, 2017   doi: 10.1111/roie.12295   open full text
• Surplus liquidity, central bank losses and the use of reserve requirements in emerging markets.
  Andreas Hoffmann, Axel Loeffler.
  Review of International Economics. April 18, 2017
  Since the turn of the millennium, stocks of foreign reserves held by central banks in many emerging markets and developing countries have exceeded currency in circulation. To steer money market rates, these central banks have been absorbing liquidity from, rather than providing it to, the banking sector in their regular monetary policy operations. When interest rates in countries with major reserve currencies are low, the yield on foreign reserves is low. A higher interest rate on liquidity‐absorbing operations may expose central banks to losses. Although a central bank is not a profit‐maximizing institution, central bank losses can undermine the independence of the central bank. Using data for a large panel of central banks, this paper provides some evidence that central banks tend to apply low‐remunerated reserve requirements when profitability is at stake.

  April 18, 2017   doi: 10.1111/roie.12292   open full text
• Terms of trade volatility, government spending cyclicality, and economic growth.
  Markus Brueckner, Francisco Carneiro.
  Review of International Economics. April 16, 2017
  This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.

  April 16, 2017   doi: 10.1111/roie.12291   open full text
• Trade liberalization, forward‐looking firms, and welfare.
  Kuo‐Feng Kao, Cheng‐Hau Peng.
  Review of International Economics. April 09, 2017
  We set up an oligopolistic model with two exporting firms selling to a third market to investigate the welfare implications of trade liberalization when the exporting firms are forward‐looking. The results show that with cost asymmetry trade liberalization encourages the exporting firms to engage in tacit collusion, which may not only be detrimental to the domestic welfare, but also to the consumer surplus of the importing country. Moreover, we find that tacit collusion is less sustainable if the government of the importing country imposes a lower (higher) tariff on the more (less) efficient exporting firm. If a nonforward‐looking or a forward‐looking cost‐efficient domestic firm exists in the importing country, then trade liberalization also encourages tacit collusion.

  April 09, 2017   doi: 10.1111/roie.12293   open full text
• Idiosyncratic and international transmission of shocks in the G7: Does EMU matter?
  Timo Bettendorf.
  Review of International Economics. March 31, 2017
  This paper analyzes the transmission of shocks across the Group of Seven industrialized countries (G7) before and after the introduction of the euro. We estimate global vector autoregressive (VAR) models for different periods to investigate changes in the domestic and international adjustment of macroeconomic variables following supply, demand, and nominal shocks. The shocks are identified with robust sign restrictions, which we derive from a small open economy dynamic stochastic general equilibrium (DSGE) model. Specifically, we analyze the adjustment of output, inflation, and the real effective exchange rate following those shocks. Our results indicate that changes in the adjustment are due to global convergence rather than to regional‐specific convergence.

  March 31, 2017   doi: 10.1111/roie.12287   open full text
• Trade networks and colonial trade spillovers.
  Antoine Berthou, Hélène Ehrhart.
  Review of International Economics. March 09, 2017
  This paper provides new empirical evidence regarding the formation of international trade networks. Established trade relations may open the gate to new trade opportunities, as they allow meeting new trade partners over time. We test this prediction and its implications for aggregate trade patterns by using the experience of ancient trade linkages between former colonies and their former colonizers (colonial trade linkages). We first show, using aggregate trade data, that former colonies have more trade with former colonizer's neighbors (colonial trade spillovers). We then show that the past export and import experience of former colonies with the colonizer have an impact on the propensity to trade similar products with third countries. In particular, the trade spillover effect is negatively related to geographical distance between third countries and the colonizer, and positively affected by their degree of economic integration.

  March 09, 2017   doi: 10.1111/roie.12288   open full text
• Sectoral determinants of foreign affiliate sales employing European data.
  Eddy Bekkers, Indre Macskasi.
  Review of International Economics. March 08, 2017
  We test theories on sectoral determinants of foreign affiliate sales employing European foreign affiliate sales statistics (FATS). On the one hand, we test hypotheses that foreign affiliate sales are less likely in sectors with complex tasks and more likely in sectors where communication with customers is important. On the other hand, we test the hypothesis that the force of gravity is stronger in more complex sectors. Employing Poisson and negative binomial estimators, we find support for the first hypotheses and contradict the second hypothesis. We show that the interaction effect between distance and complexity changes sign from negative to positive when complexity is included as a separate regressor. We propose an explanation to reconcile our findings with the basic assertion in the second hypothesis that the force of gravity is stronger in more complex sectors, based on a composition effect between horizontal and vertical affiliate sales.

  March 08, 2017   doi: 10.1111/roie.12286   open full text
• Exchange rate misalignments and the external balance under a pegged currency system.
  Blaise Gnimassoun.
  Review of International Economics. March 08, 2017
  This paper analyzes the link between the exchange rate misalignments and the external balance under a pegged currency system focusing on the former French colonies of Africa (the CFA zone). Having discussed and chosen an appropriate analytical framework, it addresses the issue of model uncertainty regarding the equilibrium exchange rate model before estimating currency misalignments. The results show that misalignments have a negative and asymmetric impact on the current account. While overvaluation of the CFA franc deteriorates the current account, undervaluation does not improve it. Finally, our results highlight that the export concentration tends to exacerbate the overall negative impact of currency misalignments.

  March 08, 2017   doi: 10.1111/roie.12290   open full text
• Safe‐haven currency: An empirical identification.
  Kang‐Soek Lee.
  Review of International Economics. February 28, 2017
  This paper attempts to empirically identify strong safe havens among six currencies: the Swiss franc, Japanese yen, British pound, euro, Canadian dollar and Norwegian krone. Using Markov regime‐switching vector autoregressive models, we test whether the currencies are negatively related to risky assets and whether the negative relation is stronger in times of crisis than in times of growth. We find that (1) the Swiss franc and Japanese yen qualify as strong safe havens, and (2) the other currencies qualify as “equity‐like” or risky currencies.

  February 28, 2017   doi: 10.1111/roie.12289   open full text
• Growth and convergence in South–South integration areas: An empirical analysis.
  Stefan Sperlich, Yvonne Sperlich.
  Review of International Economics. February 26, 2017
  Until recently, it has been argued in economic theory that regional integration and trade agreements among developing countries may achieve negative growth effects. This study tests empirically the effects of such South–South agreements on growth and convergence. All three world regions in question are considered: South America, Southeast Asia, and Sub‐Saharan Africa. A comprehensive panel data analysis is conducted that distinguishes between the problems of testing for stronger growth and accelerated convergence, respectively. The data indicate that the considered South–South agreements promote both.

  February 26, 2017   doi: 10.1111/roie.12285   open full text
• Regional effects of export tax rebate on exporting firms: Evidence from China.
  L. An, C. Hu, Yong Tan.
  Review of International Economics. February 16, 2017
  This paper extends a model from 2003 to separate the direct and indirect impact of an export tax rebate on the intensive margin of firm‐level export sales at the subnational level. The direct impact of the rebate is associated with a reduction of an exporting firm's variable costs, while the indirect impact manifests itself through higher regional wages as a result of increased demand for local labor. First, the empirical results imply that a 1 percent rise in the export tax rebate rate increases the export sales among continuing exporters by 0.2 percent through the direct channel. Second, through the indirect channel, a 1 percent difference in the regional rebate causes a 0.02 percent difference in exporters' sales growth. Both effects are statistically significant, and are consistent with the model's predictions.

  February 16, 2017   doi: 10.1111/roie.12284   open full text
• The migration of professionals within the EU: Any barriers left?
  Stella Capuano, Silvia Migali.
  Review of International Economics. February 08, 2017
  As shown by the intense legislative effort at the European Union level, the mutual recognition of professional qualifications represents an important step towards the completion of the single EU labor market. In this paper we provide the first empirical evidence on the link between intra‐EU mobility and mutual recognition of professional qualifications. Our results show that bilateral EU migration is positively affected by the destination country's rate of recognition of professional qualifications obtained in another EU member state.

  February 08, 2017   doi: 10.1111/roie.12283   open full text
• The welfare effect of a free trade agreement in the presence of foreign direct investment and rules of origin.
  Hiroshi Mukunoki.
  Review of International Economics. February 05, 2017
  This paper investigates the welfare effect of forming a free trade agreement (FTA). To receive tariff‐free treatment, firms must comply with the rules of origin (ROO). Outside firms could undertake either market‐oriented or export‐platform foreign direct investments (FDIs). ROO have the following effects: (i) An infeasible FTA may become feasible by deterring outside firms' FDIs, (ii) an FDI of a less efficient firm could replace that of an efficient firm, or (iii) FDIs made before the FTA is concluded might be eliminated. These potential effects complicate the welfare effect of the FTA and could decrease the consumer surplus.

  February 05, 2017   doi: 10.1111/roie.12282   open full text
• Nonlinearity and asymmetry in the exchange rate pass‐through: What role for nominal price stickiness?
  Tovonony Razafindrabe.
  Review of International Economics. January 31, 2017
  This paper examines the importance of nominal rigidity for nonlinearity and asymmetry of exchange rate pass‐through. For this purpose, we rely on company‐level data of French importing firms. We find that the well established fact that “prices rise faster than they fall,” which is characterized by the convex import price reaction function, lies primarily with the presence of nominal rigidity. Once price stickiness is controlled for, there is empirical evidence that the import price reaction function is rather concave if the linearity assumption can be rejected, indicating that firms aim primarily to protect their market share.

  January 31, 2017   doi: 10.1111/roie.12281   open full text
• Uncovered interest parity in Central and Eastern Europe: Expectations and structural breaks.
  Juan Carlos Cuestas, Fabio Filipozzi, Karsten Staehr.
  Review of International Economics. January 25, 2017
  This paper examines the empirical validity of the hypothesis of uncovered interest parity (UIP) using data from five Central and Eastern European countries with floating exchange rates for the period 2003 to 2014. The analysis includes forward‐looking as well as static expectations and allows for different types of structural break. The variable depicting the deviation from strict UIP is stationary when expectations are forward looking, suggesting that it is not possible to reject the UIP hypothesis with a constant risk premium. The deviation from strict UIP is however typically not stationary when expectations are static, even when structural breaks are incorporated, leading to the rejection of the UIP hypothesis with a constant risk premium. The results underscore the central role of expectations for the UIP hypothesis.

  January 25, 2017   doi: 10.1111/roie.12280   open full text
• Trade Liberalization, Rival Exporters and Reallocation of Production: An Analysis of Indian Manufacturing.
  Lawrence Edwards, Asha Sundaram.
  Review of International Economics. January 23, 2017
  Employing a difference‐in‐difference estimation technique on firm‐level data on Indian exporters, we show that the removal of US textile and apparel quotas was associated with a relative increase in sales of products where India was previously quota restricted, but a relative decrease in sales and the unit value of products where China was previously quota restricted. Our study hence highlights the importance of accounting for falling trade barriers for rival exporters in analyzing trade liberalization effects. Additionally, we find evidence indicating that quota rights were not allocated efficiently, suggesting potential gains from reallocation with the dismantling of the Indian quota licensing regime.

  January 23, 2017   doi: 10.1111/roie.12279   open full text
• A Solution to the Missing Globalization Puzzle by Non‐CES Preferences.
  Hakan Yilmazkuday.
  Review of International Economics. January 05, 2017
  One channel of welfare‐improving globalization is through the increasing integration of trade. Although this is attributed to decreasing effects of distance across countries, the workhorse models of gravity fail to capture it, the so‐called “missing globalization” or “distance puzzle.” This paper shows that this puzzle may be due to the restricting assumption of constant elasticity of substitution (CES) preferences working behind the gravity models. We test the validity of this assumption for different trade intervals and show that it is violated as a result of the distance elasticity of trade decreasing with the amount of trade. Accordingly, we consider a type of non‐CES utility function, namely constant absolute risk version (CARA), and analytically show that the negative relation between trade and distance elasticity of trade is captured by CARA preferences. We estimate the gravity equation implied by CARA preferences, empirically confirm the endogenous relation between trade and distance elasticity of trade, and show that the distance puzzle is solved under CARA preferences. According to the data set used, CARA preferences are also econometrically selected over CES preferences based on their goodness of fit.

  January 05, 2017   doi: 10.1111/roie.12278   open full text
• The Dilemma of Labor Unions: Local Objectives vs Global Bargaining.
  Carsten Eckel, Hartmut Egger.
  Review of International Economics. December 22, 2016
  It is a widespread concern that multinational enterprises improve their disagreement profits by setting up foreign production facilities, with adverse consequences for negotiated wages and union utilities. In this paper, we take a new angle on this issue and analyze whether unions can improve their situation by cooperating internationally. Our results show that cooperation is clearly beneficial for unions if their preferences regarding wages and employment are similar across countries. If these preferences differ, however, potential production reallocations by multinationals create winners and losers among unions, and this may impede cooperation of unions within the multinational production network.

  December 22, 2016   doi: 10.1111/roie.12273   open full text
• Relationship‐specific Investments and Intellectual Property Rights Enforcement with Heterogeneous Suppliers.
  Alireza Naghavi, Shin‐Kun Peng, Yingyi Tsai.
  Review of International Economics. December 20, 2016
  This paper examines the impact of intellectual property rights (IPR) enforcement on multinationals' choice of input suppliers and industry profits in a host economy. The framework consists of suppliers with heterogeneous capabilities who must engage in a relation‐specific investment to customize intermediate inputs upon a transfer payment by final producers. An outsourcing contract with better technologically endowed suppliers requires a lower transfer and generates a higher surplus. Stronger IPR enforcement leads firms to self‐select into better quality suppliers on average by reducing their outside option. Weak legal institutions instead make it possible for a larger range of suppliers, including the less capable ones, to form partnerships by granting them a larger outside option. A better IPR environment is more likely to harm lagging countries where the technology distribution is characterized by less capable suppliers.

  December 20, 2016   doi: 10.1111/roie.12277   open full text
• A Theory of Comparative Advantage with Specialized Subnational Regions.
  Baomin Dong, Siu‐kee Wong.
  Review of International Economics. December 12, 2016
  This paper investigates the effects of subnational regionalization on a country's terms of trade, trade patterns and its welfare. We show that a country can gain from dividing itself into two regions with different factor ratios (and preclude the cross‐region factor mobility). Allowing a region in a country to have a comparative advantage different from the country as a whole can generate a welfare‐improving terms‐of‐trade effect, which is reminiscent of immiserizing growth in reverse. Our simple model can provide a justification for “self‐sufficiency” programs or “special industry zone” policies in some developing countries. We also show that subnational regionalization can reduce the volume of trade and or even reverse countries' trade patterns. This finding could provide an alternative explanation for the missing trade problem and the paradox between trade patterns predicted by the standard Heckscher–Ohlin comparative advantage model and those found empirically.

  December 12, 2016   doi: 10.1111/roie.12274   open full text
• Policy Reform and Optimal Policy Mix in a Polluted Small Open Economy with Tourism.
  Akihiko Yanase.
  Review of International Economics. December 02, 2016
  Effects of trade and environmental policies on a small open economy, with pollution generated in a sector producing nontradable services consumed by foreign tourists, are examined. The nontradable good is exported via tourism and the induced tourism terms‐of‐trade (TOT) effect becomes an additional source of distortion. An increase in tariffs can cause a TOT improvement and an increase in pollution simultaneously, affecting the condition for a welfare‐enhancing tariff policy. In addition, the welfare effect of a pollution tax reform is strongly linked to whether the reform improves the tourism TOT. The interactions between tourists' spending and domestic welfare are also examined.

  December 02, 2016   doi: 10.1111/roie.12276   open full text
• International Menu Costs and Price Dynamics.
  Raphael Schoenle.
  Review of International Economics. November 28, 2016
  The pricing behavior of firms systematically differs across domestic and export markets. First, domestic producer prices change approximately twice as often, the probability of synchronized price adjustment across markets is 21% for upwards adjustments and 14% for downwards adjustments, the size of export price changes is substantially larger and there are strong seasonality effects. Second, economic fundamentals can only partially explain adjustment decisions and cross‐market synchronization. Third, I attribute the remaining unexplained part in adjustment decisions to differences in menu costs across countries. Model‐implied export menu costs are 1.5% of steady state revenues and three times domestic market menu costs.

  November 28, 2016   doi: 10.1111/roie.12275   open full text
• Asymmetric Monotone Comparative Statics for the Industry Compositions.
  Anders Rosenstand Laugesen.
  Review of International Economics. November 17, 2016
  Within a standard model of international trade with heterogenous firms and two asymmetric countries, we derive sufficient conditions for monotone comparative statics (MCS) for the industry composition. This model outcome is defined as first‐order stochastic dominance shifts in the equilibrium distributions of all activities across active firms. MCS for the industry composition occurs in a country that experiences a decline in its costs of serving the foreign market and meanwhile experiences an increase in its level of competition. In the other country, the industry‐level implications are exactly opposite. These clear industry‐level results hold while firms respond asymmetrically to the trade shock.

  November 17, 2016   doi: 10.1111/roie.12269   open full text
• Foreign Language Learning and Trade.
  Victor Ginsburgh, Jacques Melitz, Farid Toubal.
  Review of International Economics. November 10, 2016
  The paper is devoted to an econometric analysis of learning foreign languages in all parts of the world. Our sample covers 193 countries and 13 important languages. Four factors significantly explain learning: world population of speakers of home language, trade with speakers of foreign language, linguistic distance between home and foreign language and literacy. Trade may well deserve more emphasis than the other three factors, not only for its significance, but also because its direction can change faster and by a larger order of magnitude. Controlling for any of the 13 target languages, including English, is of no particular importance.

  November 10, 2016   doi: 10.1111/roie.12268   open full text
• Bilateral Tax Treaties and GDP Comovement.
  Nicholas Sly, Caroline Weber.
  Review of International Economics. November 08, 2016
  Using a 30‐year panel of quarterly gross domestic product (GDP) fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by half a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations' GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved‐components model in order to measure comovement between countries and then estimate the impact of tax treaties using generalized estimating equations.

  November 08, 2016   doi: 10.1111/roie.12267   open full text
• Effective Exchange Rates, Current Accounts and Global Imbalances.
  Joscha Beckmann, Robert Czudaj.
  Review of International Economics. November 08, 2016
  This study analyzes the dynamics between real effective exchange rates and current accounts from a novel perspective. We start by dissecting long‐run and time‐varying short‐run dynamics as well as causalities between both variables. Following this, we extend our framework by including short‐term interest rates. Finally, we examine common exchange rate and current account dynamics across countries based on common factors. Our results show that a real appreciation coincides with a worsening of the current account in most cases. The adjustment pattern is time varying but suggests that the causality mainly runs from effective exchange rates to current accounts. However, an extension of our framework based on monthly data shows that trade balance adjustment is observed less frequently, suggesting that valuation effects play an important role for the relationship between current accounts and exchange rates. From a global point of view, cross‐country trends that drive exchange rates and current accounts also share similar dynamics over the long run, which is an important finding in the context of global imbalances.

  November 08, 2016   doi: 10.1111/roie.12272   open full text
• Trade Elasticities.
  Jean Imbs, Isabelle Mejean.
  Review of International Economics. November 06, 2016
  Conventional aggregate trade elasticity estimates hardly vary across countries. We introduce an aggregate elasticity that is implied by theory: It is the value that equates the welfare gains from trade as implied by one‐ and multi‐sector versions of the model in Arkolakis et al. (American Economic Review, 102 (2012):94–130). These estimates are predicated on sector‐level values for trade elasticites, which we provide at three‐digit levels for 28 developed and developing countries. The values for this aggregate elasticity vary greatly across countries, and they do so because of countries' patterns of production and because a given sector‐level elasticity displays considerable cross‐country heterogeneity.

  November 06, 2016   doi: 10.1111/roie.12270   open full text
• Measuring the Impacts of Global Trade Reform with Optimal Aggregators of Distortions.
  David Laborde, Will Martin, Dominique van der Mensbrugghe.
  Review of International Economics. November 03, 2016
  Aggregation of trade distortion measures is essential in applied work, but traditional trade‐weighted average measures are egregiously flawed. This paper shows how appropriate tariff aggregation can overcome underestimation of both efficiency and terms‐of‐trade gains from reform. The improvement is shown to result from better measurement of a distortion effect that is most important in the early stages of reform and a weighting effect that becomes more important as protection is reduced. Applications confirm that the technique can be applied relatively easily, and—with elasticity estimates suggested by the available econometric evidence—point to close to a doubling of the global welfare gains from global trade reform, and dramatic changes in the measured welfare impacts in many individual cases. Sensitivity analysis suggests that, for global trade reform, the ease of substitution between tariff lines is much more important than that between varieties from different countries. We provide an online aggregation tool to allow replication of our analysis or investigation of alternative scenarios for global reform. We hope that this paper will contribute both to wider use of optimal aggregators and improved estimates of the key elasticity parameters.

  November 03, 2016   doi: 10.1111/roie.12271   open full text
• Revisiting the Olympic Effect.
  Rishav Bista.
  Review of International Economics. October 28, 2016
  By utilizing the log‐linear gravity model, other authors have found statistically robust, permanent and large effects of hosting mega‐events (e.g. Olympics) on international exports. Surprisingly, they found that the unsuccessful bidders to host the Olympics experienced a similar impact on exports. Utilizing alternate specification such as the Poisson pseudo‐maximum likelihood (PPML) estimation that allows for heteroskedasticity prevalent in trade data, the this paper fails to find a robust positive effect of hosting and bidding for a mega‐event on total aggregate exports. Under heteroskedasticity, the parameters of log‐linearized models estimated by ordinary least squares (OLS) lead to biased estimates of the true elasticities.

  October 28, 2016   doi: 10.1111/roie.12266   open full text
• Does Tariff Induce Intellectual Property Right Protection and Reduce Incidence of Piracy?
  Rajat Acharyya, Dyuti S. Banerjee.
  Review of International Economics. October 25, 2016
  We consider a model with North exporting a copyrighted product to South where there is IPR violation, and South exports a basic good to North. We examine the impact of North's imposition of import tariff on South's monitoring of IPR violation and the incidence of piracy. If South values IPR compliance “lowly”, then tariff imposition do not alter the pre‐tariff no monitoring equilibrium outcome but unambiguously raises the incidence of piracy. If IPR compliance is valued “highly” then tariff either switches the equilibrium outcome from not monitoring to monitoring or increases its rate. However, the incidence of piracy may increase.

  October 25, 2016   doi: 10.1111/roie.12263   open full text
• Bank Internationalization and Firm Exports: Evidence from Matched Firm–Bank Data.
  Raffaello Bronzini, Alessio D'Ignazio.
  Review of International Economics. October 20, 2016
  In this paper we investigate whether new exporter firms have a higher probability of starting to export to the countries where their financing banks have already established their branches. The underlying mechanism we hypothesize is based on the transmission of foreign market knowledge from banks to firms, so as to cut down information barriers to international trade. In those countries where such information is arguably more precious to the firm, we find a significant positive relationship between a firm's probability of beginning to export to one market and the presence in the same market of a branch of the firm's financing bank. Coherently with the mechanism hypothesized, we find a stronger effect for closer firm–bank relationships and when banks have established their branches abroad over a longer time period.

  October 20, 2016   doi: 10.1111/roie.12264   open full text
• Managing Capital Inflows Indirectly? On the Determinants of Monetary Sterilization with Reference to East Asia.
  Tony Cavoli.
  Review of International Economics. October 13, 2016
  This paper derives a time‐varying sterilization coefficient to examine those factors that determine the extent to which central banks might engage in monetary sterilization. There appear to be good reasons to do so: Sterilization neutralizes the monetary impact of reserve accumulation, which is an endogenous consequence of sustained capital inflows under some degree of management of exchange rates. A pooled sample of Asian economies incorporating Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand, for 1994–2012 is employed. We find that this method does help to directly uncover the determinants of sterilization, and while capital inflows do not appear to influence the sterilization directly, there is substantial evidence to suggest it does so indirectly—particularly through domestic interest rates.

  October 13, 2016   doi: 10.1111/roie.12265   open full text
• Trade and civil conflict: Revisiting the cross‐country evidence.
  Massimiliano Calì, Alen Mulabdic.
  Review of International Economics. October 02, 2016
  We revisit and expand the evidence on the impact of trade shocks on intra‐state conflict by using a large sample of developing countries in the 1960–2010 period. The results suggest that increases in the price of a country's exported commodities raise the country's risk of civil conflict and its duration. The effect on conflict risk is mainly driven by the price of point‐source commodities, in line with the rapacity effect theory of conflict. Intense trading with contiguous countries is associated with lower duration of conflict, consistent with the idea that such trade reduces the incentive of these countries to fuel conflict in their neighbor. Trading with neighbors is also associated with a lower risk of conflict when such trade occurs under trade agreements. On the other hand, we find no support for the opportunity cost theory via exported and imported commodities, nor via the economic cycle in export markets. We also identify a number of conditions under which the changes in the value of exported commodities cease to matter for conflict probability.

  October 02, 2016   doi: 10.1111/roie.12262   open full text
• Dissecting Exchange Rates and Fundamentals in the Modern Floating Era: The Role of Permanent and Transitory Shocks.
  Yu‐Hsi Chou.
  Review of International Economics. September 29, 2016
  In this paper, we apply a permanent–transitory decomposition method to analyze the link between nominal exchange rates and fundamentals in the modern floating era. The results suggest that transitory shocks dominate nominal exchange rate fluctuations, while permanent shocks dominate the variations in fundamentals. Therefore, the findings suggest that the nominal exchange rate should not be approximated by a pure random walk. Moreover, we find that unobserved fundamentals in the Taylor rule model can explain the transitory components in exchange rates.

  September 29, 2016   doi: 10.1111/roie.12261   open full text
• Distorted Trade Barriers: A Dissection of Trade Costs in a “Distorted Gravity” Model.
  Tibor Besedeš, Matthew T. Cole.
  Review of International Economics. September 20, 2016
  It is common in the trade literature to use iceberg transport costs to represent both tariffs and shipping costs alike. However, in models with monopolistic competition these are not identical trade restrictions. This difference is driven by how the two costs affect the extensive margin. We illustrate these differences in a gravity model. We show theoretically that trade flows are more elastic with respect to tariffs than transport costs and find a linear relationship between the elasticities with respect to tariffs, iceberg transport costs, and fixed market costs. We empirically validate these results using data on US product‐level imports.

  September 20, 2016   doi: 10.1111/roie.12260   open full text
• Exchange Rate Regimes and Welfare Losses from Foreign Crises: The Impact of the US Financial Crisis on Mexico.
  David M. Kemme, Kayhan Koleyni.
  Review of International Economics. September 12, 2016
  We modify the Gali and Monacelli small open economy dynamic stochastic general equilibrium (DSGE) model, calibrate to Mexican data and simulate the impact of the financial crisis on Mexico, under floating and counter factual fixed exchange rates. The floating exchange rate ameliorates welfare losses for Mexico. They are greater under fixed exchange rates because the return paths to equilibrium are more volatile (higher variance) and output, consumption and employment impulse response functions (IRFs) overshoot. Monetary policy, inflation targeting with floating exchange rates, clearly reduced the welfare costs vis‐à‐vis other counter factual policies including consumer price index‐based Taylor rule, domestic inflation Taylor rule and fixed exchange rates.

  September 12, 2016   doi: 10.1111/roie.12259   open full text
• Globalization, Worker Mobility and Wage Inequality.
  Damir Stijepic.
  Review of International Economics. August 31, 2016
  In the present paper, I integrate frictional labor markets with on‐the‐job search into an otherwise standard heterogeneous firm model of intra‐industry trade. Most importantly, I show that the returns to workers' inter‐firm mobility are higher in a trade equilibrium than in autarky. Intuitively, by favoring large and productive firms, international trade amplifies the disparities in profitability between small and large firms. Hence, the returns to labor reallocation across firms rise. In view of the empirically observed higher inter‐firm mobility among high‐skill workers, this suggests a skill‐biased impact of trade liberalization.

  August 31, 2016   doi: 10.1111/roie.12258   open full text
• Regulatory Entry Barriers, Rent Shifting and the Home Market Effect.
  Martín Tobal.
  Review of International Economics. August 31, 2016
  This paper introduces regulatory entry barriers in a model of the home market effect. The entry barriers generate local rents that have unexpected but significant implications. First, the home market effect is magnified. Second, when countries are sufficiently unequal in size and rents are sufficiently large, symmetric reductions in trade costs reduce welfare in the small country. Third, entry barriers increase the large country's market size and, surprisingly, can increase its welfare. Fourth, a unilateral increase in trade protection shifts foreign rents to the home country. This rent‐shifting effect amplifies the standard production relocation motive for trade policy intervention.

  August 31, 2016   doi: 10.1111/roie.12256   open full text
• Free Trade versus Autarky under Asymmetric Cournot Oligopoly.
  Rabah Amir, Jim Y. Jin, Michael Tröge.
  Review of International Economics. August 24, 2016
  The paper compares free trade with autarky in an asymmetric multi‐country world under Cournot competition with constant returns to scale and linear demand. We derive respective conditions under which free trade will hurt a country's consumers, benefit its firms, induce it to export, increase its output and raise its welfare. We show that these conditions are linked in a clear order, with one implying the next. We further demonstrate that free trade can reduce world total output and total consumer surplus as well as world welfare. Along the way, we correct several oversights in the literature.

  August 24, 2016   doi: 10.1111/roie.12257   open full text
• Closing the Small Open Economy Model: A Demographic Approach.
  David Oxborrow, Stephen J. Turnovsky.
  Review of International Economics. August 22, 2016
  Closing the small open economy model has been a stumbling block in studying the dynamic evolution of such models. The typical procedure of equating the after‐tax return on traded bonds to the rate of time preference involves imposing an arbitrary and constraining knife‐edge condition. This paper replaces the infinitely lived representative agent framework with a plausible demographic structure. This yields a well‐behaved macrodynamic equilibrium without imposing any knife‐edge conditions. The equilibrium dynamics generated by the Rectangular survival function, characteristic of the Samuelson–Diamond model, closely track those corresponding to an empirically estimated survival function. However, the Blanchard survival function tracks the data poorly in terms of absolute levels, while the closeness of its relative dynamics (following a structural change) depends on the source of the structural change.

  August 22, 2016   doi: 10.1111/roie.12255   open full text
• Trade Agreements in the Shadow of Lobbying.
  Kristy Buzard.
  Review of International Economics. August 14, 2016
  This paper presents a model of international trade agreements in which the executive branches of each government negotiate agreements while the legislative branches, subject to political pressure from firms, can disrupt them. Lobbying is in the style of Grossman and Helpman's ‘Protection for Sale’ model with a new feature: all actors face uncertainty arising from the complexity of the legislative process. I demonstrate that the higher the executives set tariffs in a trade agreement, the less effort lobbies put forth to prevent its ratification. Thus trade agreements act as a domestic political commitment device: executives set relatively high tariffs to discourage lobbying and increase the chance that the agreement will be ratified. The model sheds light on the empirical puzzle surrounding governments’ welfare weights in the Grossman and Helpman model and provides a new explanation for failures to ratify trade agreements.

  August 14, 2016   doi: 10.1111/roie.12254   open full text
• Strategic R&D Commitment and the Gains from Trade.
  Gerda Dewit, Dermot Leahy.
  Review of International Economics. August 14, 2016
  This paper examines how trade liberalization affects innovation, profits and welfare in a model of reciprocal markets when firms pre‐commit to research and development (R&D). We establish that the equilibrium is not always unique and show that, with trade, R&D commitment leads to higher levels of innovation, lower profits, higher consumer surplus and higher welfare than when R&D is chosen simultaneously to output levels. Furthermore, if the effectiveness of R&D is sufficiently high, trade always yields higher welfare than autarky, implying that R&D commitment may significantly enhance the welfare gains from trade liberalization.

  August 14, 2016   doi: 10.1111/roie.12250   open full text
• Exports and Job Training.
  Paulo Bastos, Joana Silva, Rafael Proença.
  Review of International Economics. August 03, 2016
  This paper examines whether export participation matters for job training, drawing on longitudinal worker–firm data for Brazilian manufacturing linked with detailed records on training activity from the main provider. Using industry‐specific exchange‐rate movements to generate exogenous variation in export status at the firm level, we find that export participation tends to increase the share of workers who receive technical upgrading. We also provide evidence that technical upgrading has positive returns to trainees within exporting firms. These results support the hypothesis that exporting requires skill upgrading, and suggest that this is partially achieved by training firms’ existing workforce.

  August 03, 2016   doi: 10.1111/roie.12236   open full text
• Aid for Trade and Global Growth.
  Takumi Naito.
  Review of International Economics. July 31, 2016
  Aid for trade increases a recipient's public services, which lower its import and export transport costs. Formulating a two‐country endogenous growth model, we obtain two main results. First, a permanent increase in the donor's aid/gross domestic product (GDP) ratio raises the steady‐state growth rate as well as both countries' long‐run fractions and cost shares of imported varieties if and only if it lowers the product of transport costs. Second, under a plausible condition, there exists a unique interior growth‐maximizing aid/GDP ratio. These results are robust to alternative specifications for congestion and stock‐flow nature of public goods.

  July 31, 2016   doi: 10.1111/roie.12253   open full text
• MFN vs Tariff Discrimination in the Presence of Cross Ownership.
  Hong‐Ren Din, Kuang‐Cheng Andy Wang, Wen‐Jung Liang.
  Review of International Economics. July 24, 2016
  We develop a three‐country two‐firm model to examine the superiority of most favored nation (MFN) vs tariff discrimination in global welfare by taking into account the cross ownership between exporters. We obtain several interesting results as follows. First, given cross ownership of financial interests and linear demand, the government of the importing country will impose a lower (higher) tariff on the low‐cost (high‐cost) firm and the global welfare under tariff discrimination will be higher than that under MFN, regardless of whether the mode of competition is Cournot or Bertrand competition, when the magnitude of cross ownership is relatively large compared with the cost difference. Second, given the cross ownership of corporate control and linear demand, the global welfare under tariff discrimination will be identical to that under MFN.

  July 24, 2016   doi: 10.1111/roie.12251   open full text
• The Geometry of the Distance Coefficient in Gravity Equations in International Trade.
  Ferdinand Rauch.
  Review of International Economics. July 20, 2016
  Gravity equations in trade imply that trade flows are proportional to the size of a country and inversely proportional to distance. This paper develops the analogy of gravity in physics with gravity in trade and provides geometric intuition for a large class of mathematical processes in two‐dimensional space for which these relationships would be expected. This model implies that distances between countries in empirical gravity estimations should be measured as weighted harmonic means of pairwise distances of local economic activity.

  July 20, 2016   doi: 10.1111/roie.12252   open full text
• Limited Consumer Attention in International Trade.
  Hartmut Egger, Josef Falkinger.
  Review of International Economics. July 19, 2016
  This paper introduces a model of limited consumer attention into an otherwise standard new trade theory model with love‐of‐variety preferences and heterogeneous firms. In this setting, we show that international integration needs not be welfare enhancing if the consumers' capacity to gather and process information is limited. Rather, it intensifies competition for scarce consumer attention, which causes mutual overbidding of producers in their advertising expenditures. The mutual overbidding renders advertising—which is informative in principle—wasteful and diverts purchases to imported goods at an inefficient scale. Wasteful advertising provides scope for policy intervention in the form of an advertising tax. However, if the tax instrument is not allowed to discriminate against foreign producers, it cannot eliminate inefficient diversion of consumer purchases to imports; hence it needs not be successful in securing gains from international integration in this framework.

  July 19, 2016   doi: 10.1111/roie.12249   open full text
• Individual Characteristics, Behavioral Biases, and Trade Policy Preferences: Evidence from a Survey in Japan.
  Eiichi Tomiura, Banri Ito, Hiroshi Mukunoki, Ryuhei Wakasugi.
  Review of International Economics. July 13, 2016
  Import liberalization is one of the most actively debated issues in trade policy. This paper examines how trade policy preferences are related to individual characteristics based on a survey in Japan. Among 10,000 surveyed individuals, people working in non‐agricultural sectors, those working in managerial occupations, or those above retirement age tend to favor freer imports. This paper also finds that people who are influenced by the status quo bias are likely to oppose import liberalization even after controlling for each individual's various characteristics, suggesting that neither income compensation nor insurance schemes are sufficient for expanding support for free trade.

  July 13, 2016   doi: 10.1111/roie.12248   open full text
• Price Adjustment to Exchange Rates and Forward‐looking Exporters: Evidence from USA–China Trade.
  Yao Amber Li, Chen Carol Zhao.
  Review of International Economics. July 07, 2016
  This paper shows that the pricing behavior of exporting firms exhibits a “forward‐looking” nature with sticky prices. As a result, the expectations of future exchange rates affect current prices at both the product level and firm level. We find evidence by employing both highly disaggregated Harmonized System (HS) 10‐digit product‐level import data of the USA and firm–product level customs data on China's exports to the USA. These findings provide evidence for a previously unexplored micro‐level forward‐looking nature of trade price adjustment as response to future exchange rates, and suggest a potentially important factor in helping explain incomplete exchange rate pass‐through.

  July 07, 2016   doi: 10.1111/roie.12246   open full text
• Liberalization Agreements in the GATT/WTO and the Terms‐of‐trade Externality Theory: Evidence from Three Developing Countries.
  Asrat Tesfayesus.
  Review of International Economics. July 07, 2016
  The terms‐of‐trade theory suggests that governments engage in trade negotiations with their trade partners in an effort to escape from a terms‐of‐trade prisoner's dilemma by mutually internalizing externalities that they impose on each other. In this paper, I use predictions of the terms‐of‐trade relationship to provide support for the theory based on the negotiating patterns of three developing countries during the Uruguay Round of the Generalized Agreements on Tariff and Trade. I use industry level import value as well as tariff schedules from these contracting party states that were graduated from the US Generalized System of Preferences list during the Uruguay Round. I exploit the rapid change in their tariff schedules from the best response to the optimal level within a single negotiation round to empirically test the terms‐of‐trade theory. I find that my estimates are consistent with the predictions of the theory as applied to these three developing countries that were compelled to negotiate for tariff concessions during the Uruguay Round.

  July 07, 2016   doi: 10.1111/roie.12245   open full text
• Growth, Real Exchange Rates and Trade Protectionism since the Financial Crisis.
  Georgios Georgiadis, Johannes Gräb.
  Review of International Economics. July 05, 2016
  Existing evidence suggests that protectionist activity since the financial crisis has been muted, raising the question whether the historically well‐documented relationship between growth, real exchange rates and trade protectionism has broken down. We use a novel and comprehensive dataset that stretches beyond the traditionally considered tariff and trade defense measures to study the responsiveness of trade policies to business cycles and price competitiveness in the time period since the financial crisis. We find that the specter of protectionism has not been banished. Countries continue to pursue more trade‐restrictive policies when they experience recessions and/or when their competitiveness deteriorates. Our results suggest that the global economy continues to be exposed to the risk of a creeping return of trade protectionism.

  July 05, 2016   doi: 10.1111/roie.12247   open full text
• (When) Should We Use Foreign Direct Investment Data to Measure the Activities of Multinational Corporations? Theory and Evidence.
  K. M. Wacker.
  Review of International Economics. July 03, 2016
  This paper reviews the different concepts of measuring activities of multinational corporations. It aims at working out the economic relationships that theoretically exist between these measures under general economic assumptions and then empirically investigates to which extent such relationships exist in the data. As a main conclusion, foreign direct investment (FDI) stock data is indeed a good proxy for measuring most real economic activities of multinational firms. Discrepancies between FDI stock and other data can to a large extent be given a reasonable economic meaning, but observed asset‐to‐employment patterns in multinational production also call for more thorough future research.

  July 03, 2016   doi: 10.1111/roie.12244   open full text
• Does a Regional Trade Agreement Lessen or Worsen Growth Volatility? An Empirical Investigation.
  Kangni Kpodar, Patrick Imam.
  Review of International Economics. June 30, 2016
  This paper assesses how regional trade agreements (RTAs) impact on growth volatility for a sample of 170 countries over the period 1978–2012. Notwithstanding concerns that trade openness through RTAs might heighten exposure to shocks, RTAs through enhanced policy credibility, improved policy coordination and reduced risk of conflicts can also ease growth volatility. Empirical estimations suggest the benefits outweigh the costs as RTAs are consistently associated with lower growth volatility. In addition, smaller economies benefit more from the reduced growth volatility associated with RTAs than larger ones. The nature of the RTA also matters as shallow agreements such as partial‐scope preferential trade agreements do not appear to have a significant effect on growth volatility, whereas free trade areas and customs unions do. Finally, in investigating the drivers of RTAs, the regression results confirm that countries that are more prone to shocks are more likely to join an RTA, in particular with countries with relatively less volatile growth.

  June 30, 2016   doi: 10.1111/roie.12243   open full text
• Quality Selection, Sectoral Heterogeneity and Chinese Exports.
  Richard Kneller, Zhihong Yu.
  Review of International Economics. June 27, 2016
  Recent models of international trade have identified product quality as an important determinant of bilateral trade flows. In this paper we examine the relationship between the characteristics of the export market and the aggregate quality of products using Chinese data. We find evidence that product unit values vary with standard gravity variables in a different manner across sectors of the Chinese economy and run contrary to earlier findings for the USA. These results are not compatible with existing heterogeneous firm trade models with constant mark‐up and the extension to include product quality. We construct a heterogeneous firm trade model with quality differences and spatial price discrimination, and show that the model provides plausible explanations for our empirical finds as well as other existing findings in the literature.

  June 27, 2016   doi: 10.1111/roie.12241   open full text
• Intra‐industry Trade in a Rapidly Globalizing Industry: The Case of Wine.
  Kym Anderson, Joseph Francois, Douglas Nelson, Glyn Wittwer.
  Review of International Economics. June 22, 2016
  This paper overviews the current structure and dynamics of international trade in wine with an emphasis on its intra‐industry features. Using network analytic methods, we illustrate developments in the world's wine markets since the mid‐1960s around a relatively stable core of countries. Those developments include both evolving demands for wine and, on the supply side, a rapidly emerging group of countries entering the core without displacing the original members. Not surprisingly, given that the analysis is based on bilateral trade in a single product, the developing patterns of intra‐industry trade are quite consistent with the patterns revealed in the network analysis.

  June 22, 2016   doi: 10.1111/roie.12239   open full text
• China's Gains from WTO Accession: Imports vs Exports.
  Ting‐Wei Lai, Raymond Riezman, Ping Wang.
  Review of International Economics. June 20, 2016
  We examine the gains from Chinese accession to the World Trade Organization (WTO). We provide a new quantitative welfare measure by dividing the manufacturing sector into import and export sub‐sectors. We then evaluate how the increased openness caused by China's accession to the WTO effects the importing and exporting sectors. We find surprisingly that the gains to the import sector are larger than the gains to the export sector. Moreover, the size and the dynamic pattern of such gains are different across sectors. Overall, sectors with larger intermediate input shares from import‐competing industries and with domestic demands less sensitive to changes in trade costs have higher welfare gains from trade liberalization.

  June 20, 2016   doi: 10.1111/roie.12240   open full text
• Domestic Effects of Offshoring High‐skilled Jobs: Complementarities in Knowledge Production.
  Laura Abramovsky, Rachel Griffith, Helen Miller.
  Review of International Economics. June 19, 2016
  We provide evidence on how changes in the use of high‐skilled workers (inventors) in a foreign location affect a firm's domestic use of the same type of worker. We exploit rich data that provide variation in the location of inventors within multinational firms across industries and countries to control for confounding firm–time and industry factors. We find that a 10% increase in the use of foreign inventors leads to a 1.9% increase in the use of domestic inventors. Our results suggest that foreign and domestic inventors are complementary in the production of knowledge.

  June 19, 2016   doi: 10.1111/roie.12242   open full text
• International Trade in General Oligopolistic Equilibrium.
  J. Peter Neary.
  Review of International Economics. June 17, 2016
  This paper presents a new model of oligopoly in general equilibrium and explores its implications for positive and normative aspects of international trade. Assuming “continuum–Pollak” preferences, the model allows for consistent aggregation over a continuum of sectors, in each of which a small number of home and foreign firms engage in Cournot competition. I show how competitive advantage interacts with comparative advantage to determine resource allocation and, specializing to continuum–quadratic preferences, I explore the model's implications for the gains from trade, for the distribution of income between wages and profits, and for production and trade patterns in a two‐country world.

  June 17, 2016   doi: 10.1111/roie.12233   open full text
• Testing the Core‐competency Model of Multi‐product Exporters.
  Carsten Eckel, Leonardo Iacovone, Beata Javorcik, J. Peter Neary.
  Review of International Economics. June 17, 2016
  We review the implications of the “core‐competence” model of multi‐product firms, including the “market‐size puzzle”: for most countries, the world market is much larger than the home market, while the costs of accessing foreign markets are relatively low; hence the model predicts that most domestic firms should export more of their core products than they sell domestically; yet, in practice, we do not observe this. Extending the model to allow for investment in export market penetration resolves the puzzle and Mexican data confirm its predictions: in particular, only the largest firms exhibit the dominance of exports over home sales.

  June 17, 2016   doi: 10.1111/roie.12234   open full text
• ICT and Exporting: The Effects of Broadband on the Extensive Margin of Business Service Exports.
  Richard Kneller, Jonathan Timmis.
  Review of International Economics. June 15, 2016
  Over the last three decades the global economy has witnessed rapid growth of international trade in services. This has been particularly true of service‐intensive countries such as the UK. Developments in information and communication technologies are an obvious explanation for this. We provide empirical evidence for the effects of broadband use on the firm‐extensive margin of UK service exports. To deal with the issue of causality we build a novel instrument that exploits exogenous variation in access to broadband technologies owing to the historic telephone network. We find evidence for a causal effect from the Internet on trade in business services, but no evidence for an effect on trade in services more generally.

  June 15, 2016   doi: 10.1111/roie.12237   open full text
• Availability of Business Services and Outward Investment: Evidence from French Firms.
  Holger Görg, Liza Jabbour.
  Review of International Economics. June 13, 2016
  This paper considers the link between the local availability of services in a home country and a firm's decision to become a multinational. This is a highly topical issue, given that many industrialized countries are increasingly becoming service economies and firms become increasingly more globalized. In an analysis of rich firm level data for France we find evidence that the availability of services in the home country indeed has a positive impact on firms’ decisions to become multinationals. This is robust to endogeneity concerns. The result can be interpreted in a simple set‐up where the local availability of business services improves firm efficiency and, hence, allows firms to overcome sunk costs of investing abroad more easily.

  June 13, 2016   doi: 10.1111/roie.12238   open full text
• Global Engagement, Complex Tasks and the Distribution of Occupational Employment.
  Carl Davidson, Fredrik Heyman, Steven Matusz, Fredrik Sjöholm, Susan Chun Zhu.
  Review of International Economics. June 09, 2016
  We construct a task‐based model of the firm's choice of occupational inputs to examine how that choice varies with greater global engagement. We assume that more complex tasks are more costly to complete. Within the structure of our model, firms skew employment toward occupations engaged in more complex tasks. Moreover, the distribution of employment is more skewed for more globalized firms, while it is less skewed for larger firms. These results are consistent with our previous empirical finding.

  June 09, 2016   doi: 10.1111/roie.12235   open full text
• Examining the Export Wage Premium in Developing Countries.
  Irene Brambilla, Nicolas Depetris Chauvin, Guido Porto.
  Review of International Economics. May 24, 2016
  There are arguably potential wage gains from exports in developing countries. Export markets bring about opportunities for firms and successful exporting firms translate some of the benefits of exports to workers via employment and wage premia. Using comparable data for 61 developing and low‐income countries, we document the prevalence of the export wage premia worldwide. With an extensive literature review, we identify four major drivers of the wage premia: exporting firms hire more skilled workers, utilize more sophisticated machines, buy higher quality material inputs and are more productive than non‐exporting firms. Our empirical analysis confirms the worldwide prevalence of these mechanisms and, furthermore, establishes a strong link to the estimated wage premia.

  May 24, 2016   doi: 10.1111/roie.12231   open full text
• Heckscher–Ohlin: Evidence from Virtual Trade in Value Added.
  Tadashi Ito, Lorenzo Rotunno, Pierre‐Louis Vézina.
  Review of International Economics. May 15, 2016
  The fragmentation of production chains across borders has been one of the most distinctive features of globalization since the 1980s. Nonetheless, our understanding of its implications for trade theory and policy is only in its infancy. We suggest that trade in value added should follow theories of comparative advantage more closely than gross trade, as value‐added flows capture where factors of production, e.g. skilled and unskilled labor, are used along the global value chain. We find empirical evidence that Heckscher–Ohlin theory does predict manufacturing trade in value‐added, and it does so better than for gross shipment flows. While countries export across a broad range of sectors, they contribute more value‐added in techniques using their abundant factor intensively.

  May 15, 2016   doi: 10.1111/roie.12230   open full text
• Wages and International Tax Competition.
  Sebastian Krautheim, Tim Schmidt‐Eisenlohr.
  Review of International Economics. May 05, 2016
  We introduce wage bargaining and private information into a model of profit shifting and tax competition between a large and a small country. Shifting profits to the small country not only reduces a firm's tax bill but also creates private information on profitability, altering the wage bargaining in favor of the firm. This additional shifting incentive makes the tax base of the large country more elastic and leads to higher outflows, lower wages, higher firm profits and lower equilibrium tax rates. Tax rates are no longer the only determinant of the direction and extent of profit shifting.

  May 05, 2016   doi: 10.1111/roie.12227   open full text
• Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks.
  Jen Baggs, Eugene Beaulieu, Loretta Fung, Beverly Lapham.
  Review of International Economics. April 26, 2016
  We use comprehensive firm‐level data to estimate the responses of heterogeneous Canadian retail firms to real exchange rate movements. Our analysis focuses on a period characterized by large fluctuations in the Canadian dollar, providing an opportunity to quantify both intensive and extensive margin responses in retail industries to real exchange rate shocks and to examine how those responses differ across firms, locations, and sub‐industries. Our results indicate that a real Canadian currency appreciation significantly reduces a retailer's sales, employment, and profits. The strength of this negative effect is decreasing in the distance of a retailer from the US‐Canada border. We do not find evidence of a strong relationship between real exchange rate movements and the number of operating firms nor the probability of firm survival. These findings are consistent with the view that a real Canadian dollar appreciation increases cross‐border shopping by Canadians, resulting in a negative demand shock for Canadian retailers, and the dominant response by firms to such a shock is through the intensive margin.

  April 26, 2016   doi: 10.1111/roie.12229   open full text
• Does Real Estate Defy Gravity? An Analysis of Foreign Real Estate Investment Flows.
  Pat McAllister, Anupam Nanda.
  Review of International Economics. April 25, 2016
  This paper investigates the scale and determinants of foreign investment flows between national real estate markets. Using data for over 100 countries over 2007–2012, the results indicate that, consistent with previous studies for trade, foreign direct and portfolio investment variables such as size and distance have significant effects on foreign real estate investment flows. Large positive size effects are consistent with a combination of scale economies and information externalities producing investment concentration across markets and in conjunction with direct and indirect transaction costs specific to real estate markets. Physical distance coefficients are relatively small compared to the studies of FDI.

  April 25, 2016   doi: 10.1111/roie.12228   open full text
• Domestic political competition and pro‐cyclical import protection.
  James Lake, Maia Linask.
  Review of International Economics. April 20, 2016
  Governments, especially in developing countries, routinely practice binding overhang (i.e. setting applied tariffs below binding WTO commitments) and frequently move applied tariffs for given products up and down over the business cycle. Moreover, applied tariffs are pro‐cyclical in developing countries. We explain this phenomenon using a dynamic theory of lobbying between domestic interest groups. Applied tariffs are pro‐cyclical when high‐tariff interests (e.g. import‐competing industries) capture the government: these groups concede lower tariffs to low‐tariff interest groups (e.g. exporting firms or firms using imported intermediate inputs) during recessions because recessions lower the opportunity cost of lobbying and thereby generate a stronger lobbying threat.

  April 20, 2016   doi: 10.1111/roie.12223   open full text
• Exchange Rate Flexibility in China: Measurement, Regime Shifts and Driving Forces of Change.
  Robert Dixon, Zhichao Zhang, Yang Dai.
  Review of International Economics. April 19, 2016
  With an emphasis on government intervention that hinders market forces in currency movements, this paper presents a nuanced investigation of the degree and dynamics of flexibility in China's exchange rate regime. A high‐frequency data model is developed to more accurately detect the extent to which the Chinese currency is market‐driven. This indicator is then utilized in a Markov switching model to examine shifts in RMB regime flexibility. The results suggest a moderate increase in exchange rate flexibility since the 2005 reform. Additionally, two switching states are captured, and possible driving factors are discussed.

  April 19, 2016   doi: 10.1111/roie.12226   open full text
• Shedding Light on Price‐ and Non‐price‐competitiveness Determinants of Foreign Trade in the Four Largest Euro‐area Countries.
  Claire Giordano, Francesco Zollino.
  Review of International Economics. April 07, 2016
  Since the mid‐2000s standard price‐competitiveness indicators for euro‐area countries have recently provided conflicting signals, particularly in Italy. The manufacturing unit labor cost (ULCM)‐based indicator reports a major competitiveness loss in Italy. Owing to the internationalization of production processes and to the fading representativeness of labor on overall costs we argue that price‐based measures are more appropriate than those based on ULCMs to assess external competitiveness and play a more important role in explaining export growth. Measuring non‐price competitiveness and considering global value chains are also crucial to correctly identify the determinants of trade flows in the four largest euro‐area countries.

  April 07, 2016   doi: 10.1111/roie.12225   open full text
• Ethnic Networks and Price Dispersion.
  M. A. Anderson, M. H. Davies, S. L. S. Smith.
  Review of International Economics. April 05, 2016
  We offer and test a model linking ethnic networks to global price dispersion which predicts lower price dispersion as shared ethnic populations between countries rise, effects that may reverse at higher levels as network discipline breaks down. Using Chinese, Indian and Japanese data, we find that country pairs linked by the Chinese network have significantly lower mean price dispersion. A one standard deviation increase in the size of the Chinese coethnic network lowers price dispersion by 6–33%, an effect that reverses as the network gets large. No such evidence exists for the Indian or Japanese networks.

  April 05, 2016   doi: 10.1111/roie.12221   open full text
• Technology Transfer and North–South.
  Martin Davies.
  Review of International Economics. April 04, 2016
  Costless technology transfer is a standard assumption in the international trade literature, however, by some estimates the average technology transfer cost is nearly 20% of total project costs. This analysis examines the conditions under which the advanced country gains when the transfer of technology from the advanced North to the less advanced South incurs resource costs. Results are derived for the effect on production, wages, prices and welfare of lower transmission and absorption costs, and productivity and population shocks. The framework is extended to examine the implications of an improvement in the enforcement of international intellectual property rights.

  April 04, 2016   doi: 10.1111/roie.12206   open full text
• Skills, Tasks and the Scarcity of Talent in a Global Economy.
  Michael Koch.
  Review of International Economics. April 03, 2016
  The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates the role of labor market imperfection in open economies for the usage of talent in the production process of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum of tasks that differ in complexity. Firms hire low‐skilled and high‐skilled workers to perform these tasks. How firms assign workers to tasks depends on factor prices for the two skill types and the productivity advantage of high‐skilled workers in the performance of complex tasks. I study the firms’ assignment problem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding minimum wage for low‐skilled workers. Since the minimum wage lowers the skill premium, it increases the range of tasks performed by high‐skilled workers, which enhances the stock of knowledge within firms to solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does not affect the firm‐internal assignment of workers to tasks. On the contrary, if low‐skilled wages are fixed by a minimum wage, trade renders high‐skilled workers a scarce resource and reduces the range of tasks performed by this skill type with negative consequences for the human capital stock within firms. In this case, trade leads to higher per‐capita income for both skill types and thus to higher welfare in the open than in the closed economy, whereas – somewhat counter‐intuitive – inequality between the two skill types decreases, as more low‐skilled workers find employment in the production process.

  April 03, 2016   doi: 10.1111/roie.12222   open full text
• Non‐residents’ Holdings, Market Volatility and Public Debt Sustainability. An Analysis with Data for Italy.
  Gianluca Cafiso.
  Review of International Economics. March 29, 2016
  Non‐residents’ holdings (NRH) of debt securities have been large in euro area countries, but during the euro area debt crisis some of those countries experienced a steep contraction of such holdings. The analysis aims to provide a data‐founded explanation of what is behind the decrease observed in 2011 by testing two alternative hypotheses. At the same time, we discuss how that decrease might have endangered the sustainability of public debt and study the empirical relevance of the most important of those processes. The topics presented refer to any advanced economy, but we check the hypotheses discussed by taking Italy as a case study because of data constraints. Italy is an interesting country to consider since it is a very large debt issuer. Our results point towards the importance of market volatility to explain variations of NRH, but those holdings do not seem to influence debt sustainability.

  March 29, 2016   doi: 10.1111/roie.12219   open full text
• Time Preference and Income Convergence in a Dynamic Heckscher–Ohlin Model.
  Taketo Kawagishi, Kazuo Mino.
  Review of International Economics. March 21, 2016
  This paper shows that income convergence in an open‐economy setting hinges upon how the time discount rate of the households is determined. As opposed to the case of constant time discount rate where cross‐country income divergence may emerge, the small open economy may catch up with the rest of the world if the time discount rate increases with consumption. In contrast, if the time discount rate decreases with consumption, then the small open economy fails to catch up with the rest of the world under free trade of commodities.

  March 21, 2016   doi: 10.1111/roie.12224   open full text
• An Incomplete Markets Explanation of the Uncovered Interest Rate Parity Puzzle.
  Katrin Rabitsch.
  Review of International Economics. March 03, 2016
  A large literature attributes failure of uncovered interest rate parity (UIP) to the existence of a time‐varying risk premium. This paper presents a mechanism in a simple two‐country two‐good endowment economy with incomplete markets that generates sizeable deviations from UIP. In a parameterization where international wealth effects are important, liquidity constraints on an internationally traded bond and agents’ strong resulting precautionary motives successfully generates a time‐varying risk premium: countries that have accumulated large outstanding external positions have, being closer to the constraints, stronger precautionary motives and their asset carries a risk premium.

  March 03, 2016   doi: 10.1111/roie.12220   open full text
• The Great Collapse in Value Added Trade.
  Arne J. Nagengast, Robert Stehrer.
  Review of International Economics. February 29, 2016
  This paper studies the great collapse in value added trade using a structural decomposition analysis. We show that changes in vertical specialization accounted for more than 40% of the great trade collapse. Second, we find that the drop in the overall level of demand accounted for roughly a quarter of the decline in value added exports while just under one third was due to compositional changes in final demand. Finally, we demonstrate that the dichotomy between services and manufacturing sectors observed in gross exports during the great trade collapse is not apparent in value added trade data.

  February 29, 2016   doi: 10.1111/roie.12218   open full text
• Renewable Resources, Pollution and Trade.
  Horatiu A. Rus.
  Review of International Economics. February 04, 2016
  Detrimental spillovers from industrial activity onto resource‐based productive sectors are very common, yet their effects remain understudied. While international trade often creates conditions for the over‐exploitation of open‐access renewable resources, it also provides opportunities for separating different productive sectors spatially. The existing literature suggests that a diversified exporter of the renewable resource good tends to lose from trade in both welfare and conservation terms as a result of over‐depletion, while the exporter of the non‐resource good gains. However, the resource stock externality of harvesting and the inter‐industry pollution externality often coexist in reality. In a small open economy framework, this paper shows that acknowledging their interaction changes the nature of the autarkic equilibrium and enriches the set of resource conservation and welfare outcomes from trade. Depending on the relative damage inflicted by the two industries on the environment, which in turn are functions of the pollution intensity and bioeconomic parameters, it is possible that the inter‐sectoral pollution externality persists and specialization in manufacturing is not optimal from a welfare perspective.

  February 04, 2016   doi: 10.1111/roie.12217   open full text
• Deconstructing the Gains from Trade: Selection of Industries vs Reallocation of Workers.
  Stefano Bolatto, Massimo Sbracia.
  Review of International Economics. February 02, 2016
  In a Ricardian model with general distributions of industry efficiencies, the welfare gains from trade can be decomposed into a selection and a reallocation effect. The former is the change in average efficiency as a result of the selection of industries that survive international competition. The latter is the rise in the weight of exporting industries in production, owing to the reallocation of workers from non‐exporting industries. This decomposition, which is hard to calculate in the general case, simplifies dramatically with Fréchet‐distributed efficiencies, providing easy‐to‐quantify model‐based measures of these two effects. Selection (reallocation) turns out to matter mostly when welfare gains are small (large).

  February 02, 2016   doi: 10.1111/roie.12216   open full text
• Big is Beautiful when Exporting.
  Rikard Forslid, Toshihiro Okubo.
  Review of International Economics. January 21, 2016
  This paper starts out from the observation that the export ratios of firms (export to sales ratios) vary greatly among firms and that they are systematically higher for larger exporters. We relate the difference in export ratios to firm‐level differences in transport costs. In accordance with the data, we assume that freight rates are a function of firm‐level export volumes. We test our model using Japanese manufacturing firm‐level data. We first estimate the elasticity of the freight rate with respect to firm‐level export volumes at the sector level. When feeding these estimates back into the model, it can explain more than 50% of the variation in firm‐level export ratios.

  January 21, 2016   doi: 10.1111/roie.12215   open full text
• Competitive and Harmonized R&D Policies for International R&D Alliances involving Asymmetric Firms.
  Rod Falvey, Khemarat Talerngsri Teerasuwannajak.
  Review of International Economics. January 21, 2016
  We examine R&D policies when a national firm forms an R&D alliance with a foreign competitor. Firms differ in R&D capabilities, select among three forms of R&D alliance and adopt a profit‐sharing rule if they coordinate their R&D decisions. When firms coordinate their R&D decisions and governments choose R&D policies independently, R&D taxes are chosen, but if governments harmonize their policies, they decide not to intervene. These policy outcomes affect the types of R&D alliance chosen. Agreements to share R&D information can outperform those with both coordination and sharing as a result of the R&D tax that coordination attracts.

  January 21, 2016   doi: 10.1111/roie.12214   open full text
• The Taylor Rule, Wealth Effects and the Exchange Rate.
  Rudan Wang, Bruce Morley, Javier Ordóñez.
  Review of International Economics. January 19, 2016
  In this study, we develop the Taylor rule and Taylor rule‐based exchange rate models that consider wealth effects as represented by both asset prices and asset wealth. Using data for Australia, Sweden, the UK and the USA, we find that effects of asset prices and wealth on the Taylor rule vary depending on the country and on the form that wealth takes. Out‐of‐sample forecasting capacities of the wealth‐augmented Taylor rule model and Taylor rule‐based exchange rate model outperform conventional models and random walk theories for these countries.

  January 19, 2016   doi: 10.1111/roie.12213   open full text
• Pane e Cioccolata: The Impact of Native Attitudes on Return Migration.
  Augustin de Coulon, Dragos Radu, Max Friedrich Steinhardt.
  Review of International Economics. January 14, 2016
  This paper addresses the link between native attitudes and return migration. We exploit the variation in xenophobia using information on media consumption by migrants in Italy. A widely documented crime provides a quasi‐experimental setting to identify the impact of Italian attitudes on migrants’ settlement intentions. Our results suggest a significant effect of anti‐immigrant attitudes on the intended duration of stay in the host country. The impact is more pronounced for low‐skilled migrants, which has consequences for how migration affects the long‐run convergence between sending and destination countries.

  January 14, 2016   doi: 10.1111/roie.12212   open full text
• Excess Returns, Average Returns and the Adjustment Mechanism of the External Position of a Country.
  Andrea Civelli.
  Review of International Economics. December 06, 2015
  I provide a new decomposition of the external constraint of a country in which, in addition to the trade and valuation channel, adjustments in the stochastic discount factor and the spread between average international returns and risk‐free rate can offset a current debt position. The importance of these channels is empirically assessed using US data. A primary contribution of the discount factor and secondary effects of excess and average returns are found in the non‐detrended analysis, confirming the theoretical characterization of the valuation effects in previous literature. By using detrended data instead, the role of excess returns would be spuriously overestimated.

  December 06, 2015   doi: 10.1111/roie.12211   open full text
• Austerity and Exports.
  Rishav Bista, Josh Ederington, Jenny Minier, Brandon J. Sheridan.
  Review of International Economics. December 06, 2015
  Recent papers have focused attention on the potential for expansionary austerity (i.e. that cutting budget deficits may increase growth in the short run). In this paper we investigate the impact of fiscal consolidation on trade using bilateral trade data. The use of bilateral trade data allows us to demonstrate three novel empirical results. First, while fiscal consolidation is associated with an increase in own‐country exports, it is also correlated to an equal extent with a decrease in foreign‐country exports (i.e. imports); indeed, simultaneous austerity has no statistically significant impact on bilateral trade. Second, the positive effect of austerity on exports disappears when trading partners share a common currency. Third, the increase in exports as a result of austerity is associated entirely with an increase in the range of goods exported (the extensive margin), at the expense of trade volume among existing trade relationships (the intensive margin).

  December 06, 2015   doi: 10.1111/roie.12210   open full text
• Legal Reform, Contract Enforcement and Firm Size in Mexico.
  Sean M. Dougherty.
  Review of International Economics. May 26, 2014
  The variation in legal system quality across states in Mexico is used to examine the relationship between judicial quality and firm size over the course of the 2000s, when systemic changes were taking place. Using economic census microdata and survey‐based measures of legal institutions, a robust effect of judicial quality is observed on the firm size distribution and efficiency, instrumenting for underlying historical determinants of institutions. Indicative evidence is found that the effect is strongest in more capital‐intensive industries. Market size and distance‐to‐market are also found to matter for firm size outcomes, consistent with the new trade literature.

  May 26, 2014   doi: 10.1111/roie.12136   open full text
• Race‐to‐the‐bottom Tariff Cutting.
  Pierre‐Louis Vézina.
  Review of International Economics. May 05, 2014
  Unilateral tariff liberalization accounts for the lion's share of trade liberalization since the 1980s and has accompanied the most successful trade‐led development model of the past 50 years, “Factory Asia”. Understanding what drove this liberalization is therefore crucial to our grasp of the process of economic development. This paper provides empirical evidence for seven Asian emerging economies from 1988 to 2006 consistent with a tariff race to the bottom driven by a competition for foreign direct investment (FDI). The identification is two‐pronged. First, it is shown that tariffs on parts and components, intermediates and capital goods, crucial locational determinants for assembly firms, are correlated in competitive space, i.e. across countries at a similar level of development, but not across all countries. Second, it is shown that the tariff correlation in competitive space is significantly higher for inputs than consumer goods.

  May 05, 2014   doi: 10.1111/roie.12135   open full text
• Who Exports Better Quality Products to Smaller or More Distant Markets?
  Unjung Whang.
  Review of International Economics. April 23, 2014
  The role of across‐firm differences in product quality and firms' competitiveness in determining the spatial patterns of within‐product export unit values across destinations is examined in this paper. Using product level export data, it is shown that the average export unit value of a product shipped from the USA or Korea increases with distance and decreases with destination market's size. However, within‐product average unit values for products exported from China and India decrease with distance and increase with market size. To interpret these different spatial patterns of unit values across exporting countries, model of quality heterogeneity is developed in which firms differ in their workers' skill level and higher‐skilled workers show greater productivity in performing tasks that improve product quality. The model predicts that in relatively skill‐abundant countries, exporting firms specialize in high‐quality products using relatively cheap skilled labor, whereas, in relatively skill‐scarce countries, firms that produce lower‐quality products are more competitive.

  April 23, 2014   doi: 10.1111/roie.12134   open full text
• Journey into the Unknown? Economic Consequences of Factor Market Integration under Increasing Returns to Scale.
  Andreas Schäfer, Thomas Steger.
  Review of International Economics. April 15, 2014
  What are the dynamic consequences of comprehensive integration shocks? The answer to this question appears all but trivial. A dynamic macroeconomic model is set up of a small open economy with capital mobility, migration and increasing returns to scale. The model features multiple equilibria as well as (local and global) indeterminacy. Despite its simplicity, the model creates a rich set of plausible implications. This paper clarifies the mechanics that may lead an integrating economy to the good or to the bad equilibrium by showing how fundamentals and expectations interact in the process of equilibrium selection. The model is applied to replicate two striking empirical characteristics of macroeconomic development in East Germany since 1990.

  April 15, 2014   doi: 10.1111/roie.12128   open full text
• Trade Liberalization and Firm Productivity: Evidence from Chinese Manufacturing Industries.
  Albert Guangzhou Hu, Zhengning Liu.
  Review of International Economics. April 09, 2014
  This paper examines the impact of tariff reduction following China's World Trade Organization (WTO) entry on the productivity of Chinese manufacturing firms using a firm‐level panel database that comprises all of China's manufacturing firms with an annual turnover above 5 million yuan and that spans the period of 2000–2006. An instrumental variable estimator is used to account for the endogeneity of the tariff reduction. The results indicate that China's trade liberalization in the five years following its WTO entry has led to a 0.94% annual increase in total factor productivity for Chinese manufacturing firms. However, the overall productivity gain from the tariff reduction is a net result of a productivity depressing effect of output tariff reduction and a productivity enhancing effect of input tariff reduction. Both effects have diminished in magnitude over the years after China joined the WTO. Firm heterogeneity and turnover plays an important role in generating gains from trade liberalization. The surviving firms have managed to cope with and take advantage of lower tariffs. The extent to which the tariff reduction affects Chinese firms' productivity is also dependent on the ownership structure of the firms with foreign‐invested firms being the clear winner.

  April 09, 2014   doi: 10.1111/roie.12127   open full text
• Dynamic Free Trade Networks: Some Numerical Results.
  Hiroshi Daisaka, Taiji Furusawa.
  Review of International Economics. April 08, 2014
  To help predict whether the proliferation of free trade agreements (FTAs) continues until global free trade is effectively attained, this paper investigates dynamic paths of FTAs, generated by numerical simulations of a model of an FTA network formation game with many countries. The characteristics of the final FTA network naturally depend on how the proposer of an FTA is chosen in each period. The paper finds that if the country that has the largest incentive to form an FTA is chosen as a proposer in each period, the network evolution always leads to a unique final FTA network, which may or may not be the complete network of FTAs. FTA networks often evolve to a partition of the world into a small number of groups of asymmetric size owing to the negative network externality caused by preference erosion.

  April 08, 2014   doi: 10.1111/roie.12126   open full text
• Learning to Export and the Timing of Entry to Export Markets.
  Nicholas Sheard.
  Review of International Economics. April 08, 2014
  Exporters normally enter their first foreign markets some time after beginning to sell locally, then enter subsequent markets progressively. Standard trade models are essentially static and do not explain these elementary facts about exporting, which can bias the estimation of trade patterns. This paper proposes a model that endogenously generates the timing of entry to new export markets. The timing results from a learning mechanism. More productive firms are less sensitive to the learning effect and therefore (1) enter markets more quickly and (2) enter larger markets earlier and smaller markets later. These predictions are confirmed using Swedish firm‐level data.

  April 08, 2014   doi: 10.1111/roie.12132   open full text
• Is Globalization Weakening the Inflation–Output Relationship?
  Antonia López‐Villavicencio, Sophie Saglio.
  Review of International Economics. April 03, 2014
  This paper investigates whether trade and financial openness has weakened the inflation–output trade‐off and caused a shift in the preferences of monetary authorities. Based on the backward‐looking Phillips curve and a Taylor‐type interest rate rule, our results for France, the UK and the USA for the 1970–2012 period do not provide support for the relevance of globalization in making inflation less responsive to output expansions. Moreover, the change of preferences of Central Banks towards growth‐oriented objectives is neither due to higher trade nor to financial globalization.

  April 03, 2014   doi: 10.1111/roie.12130   open full text
• Bilateral versus Multilateral Free Trade Agreements: A Welfare Analysis.
  Demet Yilmazkuday, Hakan Yilmazkuday.
  Review of International Economics. April 02, 2014
  Why is a proliferation of bilateral free trade agreements (FTAs) between certain types of countries observed instead of progress in attaining global free trade through a multilateral FTA? This paper answers this question by exploring the enforceability of different types of FTAs through comparing minimum discount factors that are necessary to sustain them in an infinitely repeated game framework. The authors search for the globally welfare maximizing trade agreements that are sustainable under different conditions. The results depict that transportation costs, differences in country sizes and comparative advantages are all obstacles for having a multilateral FTA. Accordingly, international development policies conducted for the removal of such obstacles should be the main goal toward achieving a multilateral FTA, which is shown to be the first‐best solution to the maximization problem of global welfare.

  April 02, 2014   doi: 10.1111/roie.12131   open full text
• Early Warning for Currency Crises: What Is the Role of Financial Openness?
  Jon Frost, Ayako Saiki.
  Review of International Economics. March 20, 2014
  The paper explores whether financial openness—capital account openness and gross capital inflows—makes countries vulnerable to currency crises. A quarterly dataset on 46 advanced and emerging market economies (AEs and EMEs) during 1975Q1–2011Q4 is used, with the period after Q2 2007 used for out‐of‐sample testing. The key findings are: (1) capital account openness is associated with lower probability of currency crises, but less so for EMEs; (2) surges in gross capital flows are associated with increased risk of currency crises; and (3) the model performs well out‐of‐sample, confirming that early warning models are helpful in judging relative vulnerability.

  March 20, 2014   doi: 10.1111/roie.12124   open full text
• The Devil you Know: Pegs vs Floats with Uncertain Outcomes.
  Menna Bizuneh, Neven Valev.
  Review of International Economics. March 19, 2014
  Theory predicts that a fixed exchange rate regime will be abandoned after a sizable economic shock as currency devaluation could stimulate exports and output. However, devaluation is risky as the new level of the exchange rate and the rate of inflation cannot be predicted. We show that this uncertainty creates resistance to devaluation. Policymakers prefer to maintain the fixed exchange rate and to undergo internal adjustment. We illustrate the point theoretically and provide supporting evidence from Bulgaria's currency board.

  March 19, 2014   doi: 10.1111/roie.12120   open full text
• Comparing Parametric and Non‐parametric Early Warning Systems for Currency Crises in Emerging Market Economies.
  Fabio Comelli.
  Review of International Economics. March 19, 2014
  This paper compares in‐sample and out‐of‐sample performances of parametric and non‐parametric early warning systems (EWS) for currency crises in emerging economies. The parametric EWS achieves superior out‐of‐sample results compared with the non‐parametric EWS. The policymaker faces a trade‐off when using EWS: greater cautiousness allows the policymaker to correctly call more crisis episodes, but this comes at the cost of issuing more false alarms. The benefit of correctly calling more currency crises needs to be traded off against the cost of issuing more false alarms and of implementing corrective policies prematurely.

  March 19, 2014   doi: 10.1111/roie.12121   open full text
• A Welfare Ranking of Multilateral Reductions in Real and Tariff Trade Barriers when Firms are Heterogenous.
  Philipp J. H. Schröder, Allan Sørensen.
  Review of International Economics. March 19, 2014
  Trade liberalization comes about through reductions in various types of trade barriers. This paper introduces, apart from the customary real trade costs (i.e. iceberg and fixed export costs), two revenue generating trade barriers (i.e. an ad valorem tariff and a trade license) into a standard heterogeneous‐firms‐trade model with Pareto distributed productivities. We derive analytical welfare rankings of all four liberalization channels for an equal effect on two openness measures, for any trade cost level and while all four barriers are simultaneously present, i.e. for any initial equilibrium. We show that when openness is measured at retail prices, not border prices, the welfare rankings are sensitive to the degree of efficiency in revenue redistribution, e.g. the share of tariff revenues wasted on rent‐seeking activities. As a result, multilateral tariff reductions can switch from the least to the most preferred mode of liberalization. Among the other three barriers we establish a universal welfare ranking for any strictly positive level of revenue redistribution and for either measure of openness.

  March 19, 2014   doi: 10.1111/roie.12122   open full text
• Endogenous Free Trade Agreements and Foreign Lobbying.
  Andrey Stoyanov.
  Review of International Economics. March 19, 2014
  This paper assesses the political viability of free trade agreements (FTAs) in the presence of lobbying by organized foreign interest groups. The assessment is based on a model in which external tariffs and the decision to form an FTA are endogenously determined. The findings demonstrate that, in the presence of an organized lobby group in a prospective partner country, an FTA may initiate an increase in the level of protection against imports from third countries and impede trade with non‐member countries. Further, this study finds that a foreign lobby may encourage the local government to enter a welfare‐reducing trade‐diverting FTA. Finally, this paper shows that an FTA increases the lobbying power of the organized lobby groups of the member countries, which can potentially obstruct the viability of welfare‐improving multilateral trade liberalization.

  March 19, 2014   doi: 10.1111/roie.12123   open full text
• The Impact of Visibility on Trade: Evidence from the World Cup.
  Omer Bayar, Georg Schaur.
  Review of International Economics. March 19, 2014
  Success in the FIFA World Cup provides countries with substantial international visibility. This paper uses this information shock associated with the World Cup to show that visibility has a significant impact on trade flows. In isolating the visibility effect, two identification problems are solved. Match outcomes in the World Cup are subject to significant uncertainty. This uncertainty, when combined with controls for economic development, makes World Cup success exogenous to exports. By contrast, hosting the World Cup is potentially endogenous owing to self‐selection issues. The paper exploits FIFA's host selection policy to construct exogenous instruments for hosting. The results show that success in the World Cup raises exports temporarily by around 5%.

  March 19, 2014   doi: 10.1111/roie.12125   open full text
• Interdependence and Contagion in Global Asset Markets.
  John Beirne, Jana Gieck.
  Review of International Economics. March 03, 2014
  We assess interdependence and contagion across three asset classes (bonds, stocks, and currencies) for over 60 economies over the period 1998–2011. Using a global VAR, we test for changes in the transmission mechanism—both within and cross‐market changes—during periods of global financial turbulence. Contagion effects within‐market are notable in Latin American and Emerging Asian equities. In addition, in times of financial crisis, we find that US equity shocks lead to risk aversion by investors in equities and currencies globally and in some emerging market bonds. Euro area shocks are significant mainly within the bond market.

  March 03, 2014   doi: 10.1111/roie.12116   open full text
• Corporate Social Responsibility and International Competition: A Welfare Analysis.
  Yang‐Ming Chang, Hung‐Yi Chen, Leonard F. S. Wang, Shih‐Jye Wu.
  Review of International Economics. February 27, 2014
  This paper examines the welfare implications of corporate social responsibility (CSR) in international markets under imperfect competition. Based on a stylized model of an import‐competing duopolistic market, we show the feasibility of moving toward tariff reductions when both domestic and foreign firms launch CSR initiatives in that their payoffs include not only individual profits, but also the benefits of consumers. For the case where the foreign exporter unilaterally adopts the consumer‐oriented CSR as a strategy, there is a rent‐shifting effect because the foreign firm's payoff increases whereas the domestic firm's profit decreases. In response, the importing country's government raises its tariff on the foreign product. If, instead, the domestic firm adopts the CSR strategy unilaterally, the rent‐shifting effect disappears and both the competing firms’ payoffs increase. We further identify the conditions under which the CSR initiatives of the firms constitute the dominant strategy, leading to a Pareto efficient outcome at which the firms’ payoffs, consumer surplus, and social welfare are at their maximum levels.

  February 27, 2014   doi: 10.1111/roie.12117   open full text
• Sudden Stops and Currency Crashes.
  Yanping Zhao, Jakob Haan, Bert Scholtens, Haizhen Yang.
  Review of International Economics. February 25, 2014
  This paper investigates which factors determine whether sudden stops in international capital flows are followed by a currency crash using data for 85 economies in the period 1980–2012. An event study approach is used for an 11‐year window around the crises for nine potential explanatory variables. In addition, the paper estimates discrete‐choice panel models. The results suggest that low trade openness, shallow financial markets, and current account imbalances increase the likelihood that a sudden stop will be followed by a currency crash. Moreover, it is established that the impact of these factors differs across different exchange rate regimes.

  February 25, 2014   doi: 10.1111/roie.12119   open full text
• Spillovers from Foreign Direct Investment in Spanish Manufacturing Firms.
  Pedro Sánchez‐Sellero, Jorge Rosell‐Martínez, José Manuel García‐Vázquez.
  Review of International Economics. February 24, 2014
  This paper examines the effect of participation by foreign capital and the spillovers from a foreign presence on the technical progress of Spanish manufacturing firms. The results show that foreign direct investment (FDI) creates positive spillover effects for local firms, and when the presence of foreign capital and the absorptive capacity of spillovers from FDI are large, more technical progress ensues. Also, local companies in capital‐ and research and development (R&D)‐intensive industries experience larger positive FDI spillovers. For these reasons, government policies should aim to attract FDI, especially in the aforementioned industries.

  February 24, 2014   doi: 10.1111/roie.12115   open full text
• Capital Tax Competition and Cooperation with Endogenous Capital Formation.
  Akira Yakita.
  Review of International Economics. February 24, 2014
  Incorporating consumption–savings choices under a general concave utility function and hence an endogenous capital supply into a model of capital tax competition, we re‐investigate Nash equilibrium and compare it with the optimum under cooperative tax policy. In contrast to the case of fixed capital supply, it is shown that if savings sufficiently increase with the interest rate, a Nash equilibrium may be more efficient than a cooperative tax policy. Therefore, the distortionary effects of capital supply are important to issues of tax policy coordination.

  February 24, 2014   doi: 10.1111/roie.12118   open full text
• Comparative Trade Policy.
  Magnus Wiberg.
  Review of International Economics. February 17, 2014
  Current research has found ambiguous theoretical and empirical results with respect to the effects of the type of electoral regime on trade policy. The present paper aims to reconcile the different views within a theoretical model. It is shown that the equilibrium level of trade protection can be relatively higher, as well as lower, under a majoritarian electoral rule compared with proportional representation. Trade policy is more (less) protectionist under proportional electoral regimes, as compared with majoritarian institutions, if swing districts are populated by relatively more (less) factor owners with stakes in the exporting sector. It is also shown that politicians optimally apply a lower (higher) level of rent seeking under the majoritarian electoral rule if there are relatively more factor owners in the swing districts with stakes in the exporting (import‐competing) sector.

  February 17, 2014   doi: 10.1111/roie.12088   open full text
• Market Access, Export Performance and Survival: Evidence from Peruvian Firms.
  Marco Fugazza, Alain McLaren.
  Review of International Economics. February 17, 2014
  This paper explores the effect of market access on firms' export performance and their survival in foreign markets. The data used covers all Peruvian exporting firms between 2002 and 2008, a period during which Peru was active in joining the global economy. This is done using two indices, one that summarizes the tariffs faced by exporters, the other that measures the preferential margin at the bilateral level. Results show that more than market access conditions per se, it is market access conditions relative to those faced by competitors that significantly influences export performance and survival. About a fifth of the increase of exports directed to Mercosur countries is due to improvement in preference margins.

  February 17, 2014   doi: 10.1111/roie.12114   open full text
• Structural Operations and Net Migration Across European Union Member Countries.
  Peter Egger, Wolfgang Eggert, Mario Larch.
  Review of International Economics. January 15, 2014
  This paper analyzes the effects of international transfers to finance infrastructure on net migration flows among countries within the EU. A new economic geography model is employed with common pool financed infrastructure investments to derive a set of empirically testable hypotheses about the effects of transfer payments to finance infrastructure investments on migration. A significant effect of structural fund expenditures is identified on the bilateral net migration of workers among the EU member countries. On average, a one percentage point increase in the expenditures on structural funds (in per cent of gross domestic product (GDP)) leads to a reduction in the measure of bilateral net migration by about 0.4–0.8%.

  January 15, 2014   doi: 10.1111/roie.12112   open full text
• International Trade and Unemployment—the Worker‐selection Effect.
  Marco Pinto, Jochen Michaelis.
  Review of International Economics. January 08, 2014
  This paper investigates the labor market effects of trade liberalization. We incorporate trade unions and heterogeneous workers into the Melitz framework. Workers differ with respect to their abilities. Our main findings are: (i) trade liberalization harms low‐ability workers, they lose their job and switch to long‐term unemployment (worker‐selection effect); (ii) high‐ability workers are better off in terms of both higher wages and higher employment; (iii) if a country is endowed with a large fraction of low‐ability workers, trade liberalization leads to a rise in aggregate unemployment—in this case, trade liberalization may harm a country's welfare; (iv) the overall employment and welfare effect crucially hinges on the characteristics of the wage bargain.

  January 08, 2014   doi: 10.1111/roie.12111   open full text
• International Reserves and the Composition of Foreign Equity Investment.
  Xingwang Qian, Andreas Steiner.
  Review of International Economics. January 03, 2014
  This paper studies the effect of central banks' international reserve hoardings on the composition of foreign equity investment. Specifically, it examines whether reserves affect the share of foreign portfolio equity investment (PEI) in total foreign equity investment, which includes both PEI and foreign direct investment (FDI). Foreign investors' decisions regarding the location and the type of equity capital investment might be influenced by a country's level of international reserves. In a simple theoretical model, it is shown that higher reserves, thanks to their ability to lower exchange rate risk, reduce the risk premium of PEI. Hence, higher reserves are expected to increase the inflow of PEI relative to FDI. This hypothesis is tested for a sample of 76 developing countries during the period 1980–2010 using different estimation methods, model specifications and data samples. The results suggest that higher levels of reserves are associated with a larger share of PEI relative to FDI. This result points to a collateral benefit of reserves that has been neglected so far. Reserves may contribute to develop domestic financial markets and facilitate domestic firms' access to foreign portfolio equity financing. In addition, this paper finds a strong negative effect of the global financial crisis beginning in 2008 on the share of PEI, which confirms the hypothesis that PEI is more crisis‐dependent than FDI.

  January 03, 2014   doi: 10.1111/roie.12113   open full text
• Transportation Costs and US Manufacturing FDI.
  Joseph P. Daniels, Marc Ruhr.
  Review of International Economics. December 17, 2013
  In empirical models of foreign direct investment (FDI), distance is most often used to proxy for transportation costs and other pure‐trade costs. Given that distance is time invariant but transportation costs are not, this approach is less than satisfactory when actual transportation costs rise and fall over time.The contribution of this work is to explicitly control for transportation costs and thereby better understand their impact on FDI. We explore the impact of shipping costs on total US FDI stocks abroad, manufacturing stocks and service stocks using measures of sea‐shipping and air‐shipping costs in a Hausman–Taylor model that controls for endogeneity and allows for time‐invariant variables such as distance. We find that transportation costs have a positive and statistically significant relationship with US total and manufacturing FDI, suggesting a substitute relationship between FDI and trade flows consistent with horizontal MNE activity. As one would expect, these costs are insignificant for service stocks.

  December 17, 2013   doi: 10.1111/roie.12110   open full text
• A Simple Theory of Trade, Finance and Firm Dynamics.
  Gabriel Felbermayr, Gilbert Spiegel.
  Review of International Economics. December 17, 2013
  A stylized monopolistic competition model of international trade is proposed where firms differ with respect to the expected economic lifetime of their innovations. Upon entry, they receive a commonly observed signal which is updated over time. Jointly with partial irreversibility of investment, this generates heterogeneity in effective discount rates and, thus, in the cost of finance. In line with evidence, the model predicts a negative correlation between firms' financing costs and their age. Over a firm's life cycle, per period net profits and the export participation probability grow. Exporters are less likely to exit than purely domestic firms. Belief updating entails excessive financing of incumbents relative to entrants and too much exporting. Asymptotically, trade liberalization reduces overall general equilibrium exit rates, but it does not necessarily increase welfare. With multiple asymmetric export markets, firms gradually expand their market coverage and total sales. A confidence crisis modeled by belief reversion causes an over‐proportional decrease in exports, thereby offering a novel interpretation of the trade slump in 2008/09.

  December 17, 2013   doi: 10.1111/roie.12108   open full text
• The Location of US States' Overseas Offices.
  Andrew J. Cassey.
  Review of International Economics. December 13, 2013
  Forty US states operated an overseas office in 2002. Treating overseas offices as sales offices, the model assumes offices facilitate exports by reducing the transaction cost of selling abroad. From theory, states operate an office if aggregate savings outweigh operating costs. Exploiting the differences in where states locate offices in the data, and controlling for aggregate characteristics, the paper estimates the impact of exports on the probability of an office existing. In addition, the average state savings from an office is 0.04–0.10% of exports, with a cut‐off threshold of US$850 million.

  December 13, 2013   doi: 10.1111/roie.12109   open full text
• Bilateral Exchange Rates and Jobs.
  Eddy Bekkers, Joseph Francois.
  Review of International Economics. December 13, 2013
  We study the labor market effects of realignment in fixed bilateral exchange rates, such as China's peg to the US dollar. We employ the open economy model by de Melo and Robinson to identify the core parameters of the real, trade side of the economy driving the unemployment effects of bilateral exchange rate realignment. A small open economy version of the model is explored analytically and a large multicountry version numerically. Analytics in the small open economy model show that unemployment effects of adjusting of a bilateral peg hinge on the fraction exported to and imported from the trading partner. A larger fraction exported to and a smaller fraction imported from the trading partner make it more likely that revaluation of a trading partner's currency has beneficial effects. Numerics in the large economy model show that Chinese revaluation can generate both positive and negative unemployment effects depending upon underlying parameter values. Adverse unemployment effects can go along with an improving trade balance.

  December 13, 2013   doi: 10.1111/roie.12107   open full text
• Location for Foreign Direct Investment in Vertically Related Markets.
  Chrysovalantou Milliou.
  Review of International Economics. December 02, 2013
  This paper studies a multinational enterprise's (MNE's) location decision in a vertically related market with endogenous vertical technology transfer (VTT). We show that, even though VTT is more costly in a less developed country, an MNE can transfer more technology there than in a developed country (DC). When the opposite occurs, the MNE sometimes locates in a DC where, although it faces stronger competition, it obtains the input at better terms. Therefore, by arguing that the MNE's decision can be crucially affected by the upstream market's outcomes, an alternative explanation is provided for the commonly observed foreign direct investment (FDI) in DCs.

  December 02, 2013   doi: 10.1111/roie.12106   open full text
• Trade and the Environment: The Role of Firm Heterogeneity.
  Udo Kreickemeier, Philipp M. Richter.
  Review of International Economics. December 02, 2013
  In this paper, we derive a new effect of trade liberalization on the quality of the environment. We show that in the presence of heterogeneous firms, the aggregate volume of emissions is influenced by a reallocation effect resulting from an increase in the relative size of more productive firms. The relative importance of this reallocation effect and the scale effect well‐known from the literature is affected by the emission intensity at the firm level. Domestic emissions decrease as a result of a unilateral tariff reduction if and only if firm‐specific emission intensity decreases strongly with increasing firm productivity. As a result of the induced change in foreign emissions, domestic pollution can increase even if domestic emissions decrease.

  December 02, 2013   doi: 10.1111/roie.12092   open full text
• Productivity Performance of Export Market Entry and Exit: Evidence from Indian Firms.
  Sushanta Mallick, Yong Yang.
  Review of International Economics. August 15, 2013
  This paper contributes to the literature on exporting and firm productivity, focusing on export entry (efficiency), learning (post‐entry growth) and exit (inefficiency) by Indian firms. Drawing on 7000 firms during 1989–2009, our main objective is to examine the effect of exporting on firm productivity, correcting for selection bias using propensity‐score matching, which allows a “like‐for‐like” comparison between new exporters and nonexporters. Robust to different matching estimators, we find evidence of learning‐by‐exporting that new exporters acquire rapid productivity growth after entry, relative to nonexporters. We also find that (1) exporters are more productive than nonexporters; (2) productive firms tend to self‐select in entering the exporting market, and (3) least productive exporters are found to exit the export market as they experience adverse productivity effect prior to the year of exit. Our robust result on learning‐by‐exporting suggests that entering export market does appear to be a channel explaining the Indian recent growth miracle.

  August 15, 2013   doi: 10.1111/roie.12072   open full text
• The Interaction Between Technology Adoption and Trade When Firms are Heterogeneous.
  Bulent Unel.
  Review of International Economics. August 15, 2013
  This paper develops a monopolistic competition model with heterogeneous firms to study the interaction between technology adoption and trade in a world of two countries facing different technology adoption costs. It shows that a reduction in the technology adoption cost in one country increases productivity, induces more firms to adopt advanced technology, and improves welfare in this country, while decreasing productivity, inducing more firms to switch back to old technology, and reducing welfare in the other country. Furthermore, although a reduction in transport costs always makes the country with the lower adoption cost better off, it can hurt the other country.

  August 15, 2013   doi: 10.1111/roie.12071   open full text
• Technology Transfer, Quality Standards, and North–South Trade.
  Munirul H. Nabin, Xuan Nguyen, Pasquale M. Sgro.
  Review of International Economics. August 15, 2013
  This paper examines the economic consequences of technology transfer through licensing in a North–South model of vertical product differentiation, based on a product‐line pricing framework. With its limited technological expertise, the southern firm cannot export to the northern market without purchasing the northern firm's “clean” and low‐cost technology. With North–South cost‐asymmetry, we conclude that the transfer of technology through licensing promotes trade, product variety and improves global welfare. However, without government intervention, the private levels of product quality chosen by firms tend to be lower than the socially optimal levels. This finding helps to explain why developed countries often set quality standards for imported foreign products.

  August 15, 2013   doi: 10.1111/roie.12070   open full text
• Does it Matter Who You Sign With? Comparing the Impacts of North–South and South–South Trade Agreements on Bilateral Trade.
  Alberto Behar, Laia Cirera‐i‐Crivillé.
  Review of International Economics. August 15, 2013
  Free trade agreements (FTAs) lead to a rise in bilateral trade regardless of whether the signatories are developed or developing countries. Furthermore, the percentage increase in bilateral trade is higher for South–South agreements than for North–South agreements. The results are robust across a number of gravity model specifications in which we control for the endogeneity of FTAs (with bilateral fixed effects) and also take account of multilateral resistance in both estimation (with country‐time fixed effects) and comparative statics (analytically). Our analytical model shows that multilateral resistance dampens the impact of FTAs on trade by less in South–South agreements than in North–South agreements, which accentuates the difference implied by our gravity model coefficients, and that this difference becomes larger as the number of signatories rises. For example, allowing for lags and multilateral resistance, a four‐country North–South agreement raises bilateral trade by 53% while the analogous South–South impact is 107%.

  August 15, 2013   doi: 10.1111/roie.12069   open full text
• Regulatory Protection When Firms Decide First on Technical Collaboration and R&D.
  Huw Edwards, Joanna Poyago‐Theotoky.
  Review of International Economics. August 15, 2013
  We investigate the imposition of a horizontal technical barrier to trade (HTBT) in a symmetric, cross‐hauling duopoly. Tariffs and subsidies are ruled out, but, in the absence of a mutual recognition agreement, governments can impose HTBTs, so long as firms operate different technologies. With firms being first movers, this possibility may induce them to avoid technical collaboration, in order to tempt governments into creating national monopolies, unless spillovers in R&D are high. This exacerbates the costs of regulatory protection, compared to standard models without R&D or spillovers.

  August 15, 2013   doi: 10.1111/roie.12068   open full text
• Democracy and Economic Growth in an Interdependent World.
  Claude Diebolt, Tapas Mishra, Bazoumana Ouattara, Mamata Parhi.
  Review of International Economics. August 15, 2013
  We model dynamic interdependence in cross‐country economic growth processes by allowing it to vary according to democratic distance among economies. Stochastic distributional dynamics and temporal effects of democracy on economic growth are studied, and spatial variation in economic growth is explored. Among important results, democratic poverty trap is found to exist indicating the possibility of persistence of (un)stable democratic equilibria at different levels of democracy. Our cross‐sectional regression evinces that democracy has exerted significant growth‐enhancing effect and that the democratic distribution has steadily shifted locus from low‐level to high‐level equilibrium. Our spatial analysis of democracy‐economic growth nexus provide evidence of significant dynamic spatial autocorrelation and complementarity among countries' growth processes. Finally, it is demonstrated that the relevance of geographical proximity in facilitating interdependence in economic growth is overshadowed by relational proximity.

  August 15, 2013   doi: 10.1111/roie.12067   open full text
• Political, Institutional, and Economic Factors Underlying Deficit Volatility.
  Luca Agnello, Ricardo M. Sousa.
  Review of International Economics. August 15, 2013
  It is well known that fiscal policy can counter‐cyclically smooth out the effect of unexpected shocks and public deficit volatility may reflect the (optimal) policy response to them. However, the welfare losses associated to fiscal instability are also an important challenge for many countries, as it typically implies an inefficient allocation of resources, higher sovereign risk premium and an inadequate provision of public services. In this paper, we empirically analyze the political, institutional, and economic sources of public deficit volatility. Using the system‐generalized method‐of‐moments (GMM) estimator for linear dynamic panel data models and a sample of 125 countries analyzed from 1980 to 2006, we show that higher public deficit volatility is typically associated with higher levels of political instability and less democracy. In addition, public deficit volatility tends to be magnified for small countries, in the outcome of hyper‐inflation episodes and for countries with a high degree of openness.

  August 15, 2013   doi: 10.1111/roie.12066   open full text
• International Environmental Agreements, Fiscal Federalism, and Constitutional Design.
  Wolfgang Buchholz, Alexander Haupt, Wolfgang Peters.
  Review of International Economics. August 15, 2013
  In this paper, we analyze how the prospect of international negotiations over trans‐boundary pollution shapes intracountry transfer schemes when the governments of the countries' polluting regions are in charge of environmental policy and negotiations. Federal governments can implement compensation payments between domestic regions and matching grants prior to the international negotiations between the polluting regions. The subgame‐perfect transfer schemes fail to fully internalize the environmental externality, leading to an inefficient international environmental agreement. As the international spillover increases, the intracountry compensation rates increase while the matching rates decline, distorting the incentives for the regional governments in opposing directions. We also show that decentralization of environmental decision making arises endogenously.

  August 15, 2013   doi: 10.1111/roie.12065   open full text
• Capital Accumulation and Convergence in a Small Open Economy.
  Partha Sen.
  Review of International Economics. August 15, 2013
  Outward‐oriented economies seem to grow faster than inward‐looking ones. Does the literature on convergence have anything to say on this? In the dynamic Heckscher–Ohlin–Samuelson model, with factor‐price equalization, there is no convergence of incomes. This is because with identical preferences and return to capital, irrespective of initial levels, the growth rates of consumption are the same. In the specific factors' model, there is factor‐price equalization in the long run, but incomes depend on endowments of non‐accumulable factors. Different specifications for the intersectorally mobile factors have different implications for development (as well as convergence).

  August 15, 2013   doi: 10.1111/roie.12064   open full text
• Volatility and Spillover Effects of Yen Interventions.
  Georgios Chortareas, Ying Jiang, John C. Nankervis.
  Review of International Economics. August 15, 2013
  We consider the effects of interventions by the Bank of Japan's (BoJ) on the intraday volatility of the US dollar/Japanese yen (USD/JPY) exchange rates and their spillovers to volatility of the euro/JPY exchange rates. We use 15‐minute data during the period 2000–2004 and employ multivariate generalized autoregressive conditional heteroskedasticity (GARCH) modeling and quartile plots of intraday volatility to analyze the intraday effects of the BoJ interventions on exchange rate volatility. The results indicate that the BoJ interventions decrease daily volatility of the USD/JPY exchange rate but increase the volatility of the euro/JPY series. On intervention days, the intraday volatility has different patterns to those on non‐intervention days.

  August 15, 2013   doi: 10.1111/roie.12063   open full text
• Nonlinear Exchange Rate Adjustment and the Monetary Model.
  Joscha Beckmann.
  Review of International Economics. August 15, 2013
  Although the empirical literature has delivered evidence in favor of nonlinearities in nominal and real exchange rate adjustment, the corresponding mechanisms with respect to the relationship between nominal exchange rates and fundamentals in general have rarely been put under any close scrutiny. This paper extends the work of other authors, who estimate exponential smooth transition autoregressive models to deviations of the exchange rate from monetary fundamentals. Using monthly data from 1976:01 to 2010:12 for the USA, UK, and Japan, this paper first adopts a cointegrated vector autoregression (VAR) framework to test for the multivariate validity of the monetary model by applying restrictions on the long‐run relationships. Then, nonlinear vector error correction models are estimated to tackle the question of whether the adjustment of the nominal exchange rate with respect to those relationships follows a nonlinear path.

  August 15, 2013   doi: 10.1111/roie.12062   open full text
• Managing Financial Integration and Capital Mobility—Policy Lessons from the Past Two Decades.
  Joshua Aizenman, Brian Pinto.
  Review of International Economics. August 15, 2013
  Emerging market experience over the past two decades has revealed the tenuous links between external financial integration and faster growth, and the proclivity of such integration to fuel costly crises. Emerging markets learned, converging to the middle ground of the macroeconomic trilemma. Following their crises of 1997–2001, emerging markets added financial stability as a goal, self‐insured by building up international reserves, and adopted a public finance approach to financial integration. The global crisis of 2008–09 illustrated that the advanced economies “overshot” the optimal degree of financial deregulation, while the resilience of the emerging markets validated their public finance approach to financial integration.

  August 15, 2013   doi: 10.1111/roie.12061   open full text
• Export Subsidies and Exchange Rate Pass‐through.
  Hakan Orbay, Benan Zeki Orbay.
  Review of International Economics. August 15, 2013
  This paper investigates effects of exchange rate on optimal trade policies and market prices within a standard export subsidy model. Shifts in exchange rate change relative efficiencies of firms in different countries. We show that depreciation of own currency increases subsidy levels when marginal cost is constant. Import dependency weakens this relationship, decreasing sensitivity of subsidy levels to depreciation. In general, subsidies reduce exchange rate pass‐through. Additionally, perverse exchange rate pass‐through effect arises with sufficiently intensive subsidies.

  August 15, 2013   doi: 10.1111/roie.12060   open full text
• The US Trade Deficit and the Rate of Interest.
  Ravi Batra, Hamid Beladi.
  Review of International Economics. August 15, 2013
  It is well known that nations with high trade deficits normally have higher interest rates than those with surplus or balanced trade. However, such has not been the case with the USA, which has seen a relentless trade deficit since 1982. Its interest rates have been lower than those prevailing in many trade‐surplus nations. Furthermore, these rates fell even as the trade shortfall shot up, generating an interest‐rate paradox. This paper demonstrates that, unlike for other nations, the rising trade deficit itself became the cause of lower US interest rates, and this happened because of the world's strong interest in maintaining a high value of the dollar.

  August 15, 2013   doi: 10.1111/roie.12059   open full text
• Housing Market and Current Account Imbalances in the International Economy.
  Maria Teresa Punzi.
  Review of International Economics. August 15, 2013
  This paper presents a two‐sector, two‐country model showing that inflation in the housing market, a low personal savings rate, and a construction investment boom can contribute to a large current account deficit. In the model, demand by a group of households in the domestic country is constrained by the availability of collateral. This implies more procyclical debt capacity because constrained households can borrow against the increase in the value of their houses during an expansion. A higher degree of financial liberalization and development helps constrained households reach higher loan‐to‐value ratios, thus relaxing their borrowing constraints. The resulting higher net worth and lower need for savings imply a worsening current account.

  August 15, 2013   doi: 10.1111/roie.12058   open full text
• International Organization of Production with Heterogeneous Firms.
  Erasmus K. Kersting.
  Review of International Economics. July 14, 2013
  This paper presents a North–South model with differentiated goods being produced in the North. Each differentiated final good requires both management and manufacturing services as inputs, and firms are heterogeneous with regard to their productivity levels in providing these inputs. Two scenarios of relocating manufacturing to the South, which are interpreted to correspond to vertical foreign direct investment (FDI) and offshoring, are investigated. In both cases there is a minimum level of management productivity required for firms to benefit from relocation of manufacturing to the South. In the case of offshoring, productivity and profit gains are relatively larger for firms with low initial manufacturing productivity. Firms with high initial productivity in both aspects choose not to offshore owing to the presence of fixed costs. The model is subsequently used to examine the implications of global economic integration on the type of firm that exits an industry, changes production location or keeps manufacturing domestically.

  July 14, 2013   doi: 10.1111/roie.12057   open full text
• US Ethanol Trade Policy: Pollution Reduction or Domestic Protection.
  Stephen Devadoss, Jude Bayham.
  Review of International Economics. July 14, 2013
  To mitigate dependence on fossil fuel and reduce pollution, the US government has undertaken several policies—an import tariff, tax credit, and mandate—to augment domestic ethanol production and increase ethanol in the fuel supply. This study uses a general equilibrium model to analyze the effects of the US ethanol import tariff on welfare by internalizing the externality and incorporating US fuel and ethanol policies and to determine the optimal tariff. The results show that because of the environmental benefits of imported ethanol, the adverse effects of domestic ethanol on the environment, the need for the imported ethanol to boost the blended gasoline production, and the economy‐wide interactions of various markets, the optimal trade policy may call for subsidizing rather than taxing ethanol imports.

  July 14, 2013   doi: 10.1111/roie.12056   open full text
• Supermodularity and Global Supply Chains without the South.
  Wanida Ngienthi, Yan Ma, Fumio Dei.
  Review of International Economics. July 14, 2013
  We investigate why the South is hardly involved in the global supply chain for the Boeing 787. We demonstrate that if the production process is supermodular, the South is excluded from global supply chains.

  July 14, 2013   doi: 10.1111/roie.12055   open full text
• Modes of Foreign Direct Investment and Intellectual Property Rights Protection: Wholly‐owned or Joint Venture? Firm‐level Evidence from Taiwanese Multinational Manufacturing Enterprises.
  Po‐Lu Chen.
  Review of International Economics. July 14, 2013
  This paper finds evidence from Taiwanese manufacturing multinational enterprises (MNEs) for the period 2003–2005 to show that Taiwanese manufacturing MNEs are more likely to choose joint ventures (JVs) if intellectual property rights (IPRs) protection in the foreign direct investment (FDI) host country is strong. The estimation results suggest that if a country with an IPR strength similar to the level of Chile increases its IPR protection to the strength of Taiwan, the probability of forming JVs in that country will increase by 13.8%. One policy implication of this study is that developing countries can stimulate local participation by IPR reform.

  July 14, 2013   doi: 10.1111/roie.12054   open full text
• Barriers to Global Free Trade through Bilateral Agreements.
  Fumi Kiyotaki, Toshiji Miyakawa.
  Review of International Economics. July 14, 2013
  This paper examines the formation of bilateral free trade agreements (FTAs) in the context of a dynamic noncooperative bargaining game with a random proposer. We show that global free trade (a grand coalition) does not necessarily occur unless transfer payments among countries are allowed. When transfer payments are possible, bilateral FTAs always achieve global free trade, but the ex‐ante and ex‐post inequalities of social welfare among countries are larger than those when all countries are independent because of the strategic bargaining behavior.

  July 14, 2013   doi: 10.1111/roie.12053   open full text
• On the Joint Test of the Uncovered Interest Parity and the Ex‐ante Purchasing Power Parity.
  Corrado Macchiarelli.
  Review of International Economics. July 14, 2013
  This study revisits the relation between the uncovered interest parity (UIP), the ex‐ante purchasing power parity (EXPPP) and the real interest parity (RIP) for the UK and Japanese vs US data. The original contribution is on developing some joint coefficient‐based tests, obtained by rewriting the UIP, the EXPPP and the RIP as a set of cross‐equation restrictions in a vector autoregression (VAR) framework. Test results point to a “forward premium” bias in both the UIP and the EXPPP. The latter result is novel in the literature and stems from testing the PPP in expectational terms. Moreover, the results suggest a currency‐dependent pattern for the UIP, contrarily to the EXPPP equation. Finally, it is shown that conditioning the VAR on M3 growth differential has important explanatory power in resolving the aforementioned biases in both the UIP and EXPPP equations for the UK vs US data. At the same time, variables having a strong forward‐looking component (i.e. share prices) help recover a unitary coefficient in the UIP equation.

  July 14, 2013   doi: 10.1111/roie.12052   open full text
• Technical Progress and Real Wages Once again.
  Ravi Batra, Hamid Beladi, Reza Oladi.
  Review of International Economics. July 14, 2013
  We construct a general equilibrium model of trade and show that an economy can experience technological progress and declining real wages provided that it is open to trade and import demand is sufficiently inelastic in both countries. This is a puzzling outcome so far as marginal productivity paradigm is concerned. In this context we demonstrate that new technology works differently in a closed vs an open economy. In an open economy, technical improvements may generate a fall in labor real earnings, but not in a closed economy. In addition, technical progress in manufacturing must increase manufacturing–service wage gap according to marginal productivity doctrine. We show that the opposite outcome can occur theoretically in an open economy—yet another seemingly puzzling labor market outcome.

  July 14, 2013   doi: 10.1111/roie.12051   open full text
• The Interactions between the Credit Default Swap and the Bond Markets in Financial Turmoil.
  Virginie Coudert, Mathieu Gex.
  Review of International Economics. July 14, 2013
  We analyse the links between credit default swap (CDS) and bond spreads in order to determine which one is the leading market in the price discovery process. To do that, we construct a sample of CDS premia and bond spreads on a generic 5‐year bond for 17 financials and 18 sovereigns. First, we run panel vector error correction model estimations, showing that the CDS market has a lead over the bond market for financial institutions. This also holds for high‐yield sovereigns, whereas the reverse is found for low‐yield sovereigns in the core of the euro area. We interpret these results according to the relative liquidity of both markets for different types of entities. Second, we check for nonlinearities in the adjustment process. Results show that the CDS market's lead is amplified when default risk increases, during crisis periods, as well as continuously when CDS premia increase.

  July 14, 2013   doi: 10.1111/roie.12050   open full text
• An Economic Evaluation of Model Risk in Long‐term Asset Allocations.
  Christophe Boucher, Gregory Jannin, Patrick Kouontchou, Bertrand Maillet.
  Review of International Economics. July 14, 2013
  Following the recent crisis and the revealed weakness of risk management practices, regulators of developed markets have recommended that financial institutions assess model risk. Standard risk measures, such as the value‐at‐risk (VaR), emerged during the 1990s as the industry standard for risk management and become today a key tool for asset allocation. This paper illustrates and estimates model risk, and focuses on the evaluation of its impact on optimal portfolios at various time horizons. Based on a long sample of US data, the paper finds a non‐linear relation between VaR model errors and the horizon that impacts optimal asset allocations.

  July 14, 2013   doi: 10.1111/roie.12049   open full text
• The Effects of Future Capital Investment and R&D Expenditures on Firms' Liquidity.
  Christopher F. Baum, Mustafa Caglayan, Oleksandr Talavera.
  Review of International Economics. July 14, 2013
  The paper explores factors that lead to accumulation or decumulation of firms' cash reserves. In particular, the paper empirically examines whether additional future fixed capital and R&D investment expenditures induce firms to change their liquidity ratio while considering the role of market imperfections. Implementing a dynamic framework on a panel of US, UK, and German firms, it is found that firms in all three countries make larger adjustments to cash holdings when they plan additional future R&D rather than fixed capital investment expenditures. This behavior is particularly prevalent among financially constrained firms.

  July 14, 2013   doi: 10.1111/roie.12048   open full text
• The “Impossible Trinity” Hypothesis in an Era of Global Imbalances: Measurement and Testing.
  Joshua Aizenman, Menzie David Chinn, Hiro Ito.
  Review of International Economics. July 14, 2013
  We outline new metrics for measuring the trilemma aspects: exchange rate flexibility, monetary independence, and capital account openness, taking into account substantial international reserve accumulation that has taken place since the 2000s. Since 1990, the trilemma variables in emerging markets have converged towards intermediate levels, characterizing by managed flexibility, using sizable international reserves as a buffer while retaining some degree of monetary autonomy. We test the linearity of the trilemma, and find that the weighted sum of the three trilemma variables adds up to a constant. Thus, a rise in one trilemma variable should be traded‐off with a drop of the weighted sum of the other two.

  July 14, 2013   doi: 10.1111/roie.12047   open full text
• Privatization and Strategic Mergers across Borders.
  Hamid Beladi, Avik Chakrabarti, Sugata Marjit.
  Review of International Economics. July 14, 2013
  We present a theoretical model to capture the role of privatization in the incentives for and implications of cross‐border horizontal mergers. Absent any merger incentives in an autarkic equilibrium, we show that a decrease in the degree of privatization will lower the incentives for diversification of international production. The incentives for diversification for any given degree of privatization will fall when the private and public firms are allowed to move sequentially rather than simultaneously. The presence of the public firm also introduces a new source of asymmetry in the incentives for cross‐border mergers: a reduction in the degree of privatization at home will dampen the potential gains from a take‐over of a home firm by a foreign firm but magnify the potential gains from a take‐over of a foreign firm by a home firm.

  July 14, 2013   doi: 10.1111/roie.12046   open full text
• Trade, Skill Biased Technical Change and Wage Inequality in South Africa.
  Jørn Rattsø, Hildegunn E. Stokke.
  Review of International Economics. July 14, 2013
  Trade openness influences the wage structure via technology adoption in middle income countries. Given the econometric challenges of handling endogenous trade and technology interaction, we offer an alternative quantification based on calibration of a general equilibrium model. We expand the standard open economy Ramsey model to include comparative advantage, technology adoption and skill bias influenced by investment decisions. The calibration constructs a reference path for South Africa and allows counterfactual analysis of trade openness. The quantitative results imply that trade effects via technology adoption and skill bias can be an important determinant of wage inequality in middle income countries.

  July 14, 2013   doi: 10.1111/roie.12045   open full text
• Endowment Differences and the Composition of Intra‐Industry Trade.
  Manuel Cabral, Rod Falvey, Chris Milner.
  Review of International Economics. July 14, 2013
  The empirical relationship between differences in endowments and different types of trade is investigated in this paper. Although net trade (NT) and vertical intra‐industry trade (IIT) are both broadly viewed as reflecting endowment differences, we suggest that there will be systematic differences in the way their shares of trade adjust as endowment differences become larger. Empirical evidence for European Union trade with its 52 major trading partners confirms this. The share of horizontal IIT (net trade) decreases (increases) for all increases in absolute endowment differences, but the share of vertical IIT can both increase and decrease with increases in endowment differences.

  July 14, 2013   doi: 10.1111/roie.12044   open full text
• “Womb for Rent”: International Service Trade Employing Assisted Reproduction Technologies (ARTs).
  Joseph Pelzman.
  Review of International Economics. July 14, 2013
  Infertility affects approximately 2–3 million married couples in the USA and a larger cohort of unmarried men and women. For those not inclined to adopt, science has provided another option, one based on assisted reproduction through artificial insemination, commonly known as in vitro fertilization (IVF). Under this framework a woman, designated as a “surrogate”, bears a baby on behalf of the intended parents with the objective of relinquishing her rights to the child after birth. The subcontract for the services of a “surrogate” or more specifically for the use of her “womb” can be viewed as part of the literature on outsourcing of production by a vertically integrated family. The lack of universal enforcement of “surrogacy” contracts in the USA creates a demand for outsourcing of surrogacy services. One beneficiary of this uncertainty in enforcement is India which provides gestational services to intended international parents.

  July 14, 2013   doi: 10.1111/roie.12043   open full text