21-40 of 43 Results  for:

  • International Economics x
Clear all

Article

Yanshuo Chen and Galina Hale

International capital flows have challenged economists’ models for decades. They exhibit a number of patterns that standard economic theories have struggled to explain. Over time, global capital flows go through boom and bust cycles, sudden stops, and unprecedented bonanzas. Determinants of capital flows include “pull factors,” recipient countries’ economic and structural characteristics, and “push factors” or “global factors,” which mostly depend on the global financial cycle and U.S. monetary policy. The relative importance of global factors has increased since the early 2000s. The rise in international capital flows that has accompanied the wave of globalization in the early 21st century has helped to deliver crucial capital resources that facilitated development of many economies and helped transmit technologies across borders. On the flip side, international capital flows also increased transmission of financial shocks and policy changes across countries, most prominently experienced during the global financial crisis of 2008–2009. On balance, is it beneficial for small open economies to allow for free capital flows? Mainstream economists’ and policymakers’ answer to this question has evolved from an unequivocal “yes” to a much more nuanced view.

Article

Exchange rates often display sudden and large changes. There is considerable interest in examining how these changes affect prices, especially import and consumer prices. Exchange rate pass-through measures the responsiveness of the price of a basket of goods to changes in the exchange rate and is defined as the elasticity of the price of the basket (expressed in home currency) with respect to the exchange rate (defined as the price of foreign currency). The pass-through estimates vary across product groups, countries, and time periods, but a general finding is that pass-through tends to be significantly less than one, which implies that prices do not fully respond to a foreign currency appreciation. Pass-through to export prices tends to be smaller than pass-through to import prices. Pass-through to consumer prices is lower than both import and export price pass-through and is generally very small. One explanation of pass-through evidence focuses on the role of nominal rigidities (infrequent changes in prices set in home or foreign currency). Another explanation emphasizes the importance of markup variation in response to exchange rate changes. In models with nominal rigidities, one important issue is whether exporting firms set prices in their country’s currency (producer’s currency) or importing country’s currency (consumer’s currency). If prices are sticky in producer’s currency, flexible exchange rates are preferable as they allow for desirable relative price adjustment. On the other hand, if prices are sticky in consumer’s currency, exchange rate flexibility is not as helpful in adjusting prices and fixed exchange rates are superior. The standard model where markup is constant and all firms (at home and abroad) use either producer or consumer currency pricing is not consistent with typical estimates of pass-through to import and export prices. To explain this evidence, the standard model needs to be modified to allow for variable markup and/or a hybrid model of currency choice where some firms set prices in producer’s and others in consumer’s currency. In the case of the hybrid model, the welfare difference between fixed and flexible exchange rates is not as stark as in the pure cases of currency choice and is likely to be small. Another issue of much interest is whether inflationary environment can affect pass-through, especially to consumer prices. Inflationary environment can influence pass-through to import and consumer prices through several channels, such as persistence of costs and frequency of price change. Empirical evidence shows that pass-through to consumer prices is related to the level and variability of inflation across countries and time periods and is lower in an environment with low and stable inflation. This evidence suggests that a monetary policy regime that targets low inflation will produce a low pass-through environment, which would dampen the price effects of exchange rate changes.

Article

Considerable progress has been made in understanding the relationship between international trade and the environment since Gene Grossman and Alan Krueger published their now seminal working paper examining the potential environmental effects of the North American Free Trade Agreement in 1991. Their work articulated a simple framework through which international trade and economic growth could affect the environment by impacting: the scale of economic activity (the scale effect), the composition of production across industries (the composition effect), or the emission intensity of individual industries (the technique effect). GK provided preliminary evidence of the relative magnitudes of the scale, composition and technique effects, and reached a striking conclusion: international trade would not necessarily harm the environment. Much of the subsequent literature examining the effects of international trade and the environment has adopted Grossman and Krueger’s simple framework and builds directly from their initial foray into the area. We now have better empirical evidence of the relationship between economic growth and environmental quality, of how environmental regulations affect international trade and investment flows, and of the relative magnitudes of the scale, composition and technique effects. Yet, the need for further progress remains along three key fronts. First, despite significant advances in our understanding of how economic growth affects environmental quality, evidence of the interaction between international trade, economic growth, and environmental outcomes remains scarce. Second, while a growing body of evidence suggests that environmental regulations significantly alter trade flows, it is still unclear if these policies have a larger or smaller effect than traditional determinants of comparative advantage. Third, although it is clear the technique effect is the primary driver of changes in pollution, evidence as to how trade has contributed to the technique effect is limited. Addressing these Three Remaining Challenges is necessary for assessing whether Grossman and Krueger’s conclusion that international trade need not necessarily harm the environment still holds today.

Article

Traditional trade theory has focused on the allocation of resources between various sectors of the economy and how it changes in response to trade liberalization while maintaining the assumption of free mobility of resources across sectors within an economy. This simplifying assumption is at odds with empirical evidence which shows considerable frictions in the movement of resources between sectors, at least in the short to medium run. Workers who lose their jobs in the import competing sector may find it hard to find a job immediately in the export sector. This has given rise to a growing literature that incorporates frictions in the mobility of factors of production in general, and labor in particular, in trade models. This article surveys the literature on trade and unemployment where unemployment is caused by search frictions or wage rigidity of some kind such as minimum wage, efficiency wage, or implicit contracts. While the focus is on unemployment, any model studying the impact of trade on labor markets features wage effects, too, and a brief discussion of wage effects is also provided. Trade affects unemployment in these multi-sector models through two main channels: sectoral unemployment rates and intersectoral reallocation of resources. In newer trade models with heterogeneous firms, trade can change unemployment by affecting the allocation of resources within a sector. While the theoretical models in this literature identify various channels through which trade liberalization affects unemployment, many of these channels have opposing implications for unemployment, rendering the net effect of trade liberalization on unemployment ambiguous in many settings. This has also given rise to an empirical literature studying the implications of trade liberalization on unemployment.

Article

Alessandra Bonfiglioli, Rosario Crinò, and Gino Gancia

International trade is dominated by a small number of very large firms. Models of trade with heterogeneous firms have been developed to study the causes and consequences of this observation. The canonical model of trade with heterogeneous firms shows that trade leads to between-firm reallocations and selection: It shifts employment toward firms with the best attributes and forces marginal firms to exit. The model also illustrates the role of heterogeneity, and its various sources, in explaining the volume of trade and the firm-level margins of adjustment. Consistent with the model, the empirical literature has documented that exporting is a rare activity, that exporting firms are larger and more productive than other firms, and that trade liberalization reallocates market shares toward the best-performing firms in various countries. Studies using transaction-level data have unveiled additional salient features of trade flows. First, sales by foreign firms are very heterogeneous and highly concentrated. Second, both the extensive margin (number of exporting firms) and the intensive margin (average export per firm) are important in explaining the level of exports and its changes over time. More heterogeneity in sales across firms is associated with a higher volume of trade along both margins. Third, increased foreign competition reallocates market shares toward top firms and hence can increase concentration from any country of origin. Numerous extensions of the benchmark model have been proposed to study other important aspects, such as the relevance of multi-product and multinational firms, the import behavior of firms, and the extent to which heterogeneity is endogenous to firms’ choices, but some open challenges still remain.

Article

The links of international reserves, exchange rates, and monetary policy can be understood through the lens of a modern incarnation of the “impossible trinity” (aka the “trilemma”), based on Mundell and Fleming’s hypothesis that a country may simultaneously choose any two, but not all, of the following three policy goals: monetary independence, exchange rate stability, and financial integration. The original economic trilemma was framed in the 1960s, during the Bretton Woods regime, as a binary choice of two out of the possible three policy goals. However, in the 1990s and 2000s, emerging markets and developing countries found that deeper financial integration comes with growing exposure to financial instability and the increased risk of “sudden stop” of capital inflows and capital flight crises. These crises have been characterized by exchange rate instability triggered by countries’ balance sheet exposure to external hard currency debt—exposures that have propagated banking instabilities and crises. Such events have frequently morphed into deep internal and external debt crises, ending with bailouts of systemic banks and powerful macro players. The resultant domestic debt overhang led to fiscal dominance and a reduction of the scope of monetary policy. With varying lags, these crises induced economic and political changes, in which a growing share of emerging markets and developing countries converged to “in-between” regimes in the trilemma middle range—that is, managed exchange rate flexibility, controlled financial integration, and limited but viable monetary autonomy. Emerging research has validated a modern version of the trilemma: that is, countries face a continuous trilemma trade-off in which a higher trilemma policy goal is “traded off” with a drop in the weighted average of the other two trilemma policy goals. The concerns associated with exposure to financial instability have been addressed by varying configurations of managing public buffers (international reserves, sovereign wealth funds), as well as growing application of macro-prudential measures aimed at inducing systemic players to internalize the impact of their balance sheet exposure on a country’s financial stability. Consequently, the original trilemma has morphed into a quadrilemma, wherein financial stability has been added to the trilemma’s original policy goals. Size does matter, and there is no way for smaller countries to insulate themselves fully from exposure to global cycles and shocks. Yet successful navigation of the open-economy quadrilemma helps in reducing the transmission of external shock to the domestic economy, as well as the costs of domestic shocks. These observations explain the relative resilience of emerging markets—especially in countries with more mature institutions—as they have been buffered by deeper precautionary management of reserves, and greater fiscal and monetary space. We close the discussion noting that the global financial crisis, and the subsequent Eurozone crisis, have shown that no country is immune from exposure to financial instability and from the modern quadrilemma. However, countries with mature institutions, deeper fiscal capabilities, and more fiscal space may substitute the reliance on costly precautionary buffers with bilateral swap lines coordinated among their central banks. While the benefits of such arrangements are clear, they may hinge on the presence and credibility of their fiscal backstop mechanisms, and on curbing the resultant moral hazard. Time will test this credibility, and the degree to which risk-pooling arrangements can be extended to cover the growing share of emerging markets and developing countries.

Article

This article explores knowledge spillovers, positive externalities that augment the information set of an economic agent, and reviews the evidence on such spillovers in the context of international economic transactions. The entry discusses trade channels of knowledge transfer associated with purchases from abroad (imports) and sales to abroad (exports). Another focus is on the foreign direct investment (FDI) channel through purchases from abroad (inward FDI) and sales to abroad (outward FDI). The entry also distinguishes knowledge flows from foreign to domestic agents and from domestic to foreign agents. The entry underlines the importance of empirical methodology and data characteristics that determine the quality of econometric identification. Even though spillovers are by their very nature—as externalities—difficult to identify, over recent decades a number of advances have produced robust evidence that both trade and foreign direct investment lead to sizable knowledge spillovers. These advances have been both conceptual as well as in the areas of empirical methodology and new data.

Article

While economists overwhelmingly favor free trade, even unilateral free trade, because of the gains realizable from specialization and the exploitation of comparative advantage, in fact international trading relations are structured by a complex body of multilateral and preferential trade agreements. The article outlines the case for multilateral trade agreements and the non-discrimination principle that they embody, in the form of both the Most Favored Nation principle and the National Treatment principle, where non-discrimination has been widely advocated as supporting both geopolitical goals (reducing economic factionalism) and economic goals (ensuring the full play of theories of comparative advantage undistorted by discriminatory trade treatment). Despite the virtues of multilateral trade agreements, preferential trade agreements (PTAs), authorized from the outset under GATT, have proliferated in recent years, even though they are inherently discriminatory between members and non-members, provoking vigorous debates as to whether (a) PTAs are trade-creating or trade-diverting; (b) whether they increase transaction costs in international trade; and (c) whether they undermine the future course of multilateral trade liberalization. A further and similarly contentious derogation from the principle of non-discrimination under the multilateral system is Special and Differential Treatment for developing countries, where since the mid-1950s developing countries have been given much greater latitude than developed countries to engage in trade protectionism on the import side in order to promote infant industries, and since the mid-1960s on the export side have benefited from non-reciprocal trade concessions by developed countries on products of actual or potential export interest to developing countries. Beyond debates over the strengths and weaknesses of multilateral trade agreements and the two major derogations therefrom, further debates surround the appropriate scope of trade agreements, and in particular the expansion of their scope in recent decades to address divergences or incompatibilities across a wide range of domestic regulatory and related policies that arguably create frictions in cross-border trade and investment and hence constitute an impediment to it. The article goes on to consider contemporary fair trade versus free trade debates, including concerns over trade deficits, currency manipulation, export subsidies, misappropriation of intellectual property rights, and lax labor or environmental standards. The article concludes with a consideration of the case for a larger scope for plurilateral trade agreements internationally, and for a larger scope for active labor market policies domestically to mitigate transition costs from trade.

Article

While the role of lobbying in trade policy determination has been studied in a formal way since the early 1980s, it was the pathbreaking 1994 work by Grossman and Helpman in the following decade that led many scholars, using that framework (often with some modifications), to study many interesting political economy issues in the trade policy arena. Importantly, Grossman and Helpman were also the first to provide microfoundations to lobbying within a multisectoral, specific-factors framework. Moreover, the industry-level protection they derive is an empirically estimable function of measurable industry characteristics and other political and economic factors. With everything else held constant, organized sectors are able to obtain higher protection than unorganized sectors, with organized-sector protection inversely related to import penetration and import demand elasticity. Grossman and Helpman’s work gave an impetus to theory-driven empirical work in the political economy of trade policy, including the empirical investigation of the Grossman–Helpman model itself and its many extensions. There is now also a fairly large literature trying to explain the unrealistically high empirical estimates of the model’s parameters (representing the proportion of population politically organized and the weight the government attaches to aggregate welfare relative to political contributions). Extensions for empirical investigation that include bringing in competition between upstream and downstream lobbies, imperfect capturing of nontariff barrier (NTB) rents by the government, foreign lobbies, the possibility of misclassfication of sectors into organized and unorganized, and so forth partially correct the unrealistic parameter estimates. In addition, there are extensions that have been applied toward explaining policy changes and puzzles. Those extensions deal with lobby formation, trade agreements, unilateralism versus reciprocity in trade policy, lobbying for protection in declining industries, firm-level lobbying, the choice of policy instruments, and so forth. Despite so much work already done on lobbying and trade policy, the existing literature is deficient in the study of the choice of instruments, the antitrade bias in trade policy, and informational lobbying.

Article

While it is a long-standing idea in international macroeconomic theory that flexible nominal exchange rates have the potential to facilitate adjustment in international relative prices, a monetary union necessarily forgoes this mechanism for facilitating macroeconomic adjustment among its regions. Twenty years of experience in the eurozone monetary union, including the eurozone crisis, have spurred new macroeconomic research on the costs of giving up nominal exchange rates as a tool of adjustment, and the possibility of alternative policies to promote macroeconomic adjustment. Empirical evidence paints a mixed picture regarding the usefulness of nominal exchange rate flexibility: In many historical settings, flexible nominal exchanges rates tend to create more relative price distortions than they have helped resolve; yet, in some contexts exchange rate devaluations can serve as a useful correction to severe relative price misalignments. Theoretical advances in studying open economy models either support the usefulness of exchange rate movements or find them irrelevant, depending on the specific characteristics of the model economy, including the particular specification of nominal rigidities, international openness in goods markets, and international financial integration. Yet in models that embody certain key aspects of the countries suffering the brunt of the eurozone crisis, such as over-borrowing and persistently high wages, it is found that nominal devaluation can be useful to prevent the type of excessive rise in unemployment observed. This theoretical research also raises alternative polices and mechanisms to substitute for nominal exchange rate adjustment. These policies include the standard fiscal tools of optimal currency area theory but also extend to a broader set of tools including import tariffs, export subsidies, and prudential taxes on capital flows. Certain combinations of these policies, labeled a “fiscal devaluation,” have been found in theory to replicate the effects of a currency devaluation in the context of a monetary union such as the eurozone. These theoretical developments are helpful for understanding the history of experiences in the eurozone, such as the eurozone crisis. They are also helpful for thinking about options for preventing such crises in the future.

Article

Martin D. D. Evans and Dagfinn Rime

An overview of research on the microstructure of foreign exchange (FX) markets is presented. We begin by summarizing the institutional features of FX trading and describe how they have evolved since the 1980s. We then explain how these features are represented in microstructure models of FX trading. Next, we describe the links between microstructure and traditional macro exchange-rate models and summarize how these links have been explored in recent empirical research. Finally, we provide a microstructure perspective on two recent areas of interest in exchange-rate economics: the behavior of returns on currency portfolios, and questions of competition and regulation.

Article

Ching-mu Chen and Shin-Kun Peng

For research attempting to investigate why economic activities are distributed unevenly across geographic space, new economic geography (NEG) provides a general equilibrium-based and microfounded approach to modeling a spatial economy characterized by a large variety of economic agglomerations. NEG emphasizes how agglomeration (centripetal) and dispersion (centrifugal) forces interact to generate observed spatial configurations and uneven distributions of economic activity. However, numerous economic geographers prefer to refer to the term new economic geographies as vigorous and diversified academic outputs that are inspired by the institutional-cultural turn of economic geography. Accordingly, the term geographical economics has been suggested as an alternative to NEG. Approaches for modeling a spatial economy through the use of a general equilibrium framework have not only rendered existing concepts amenable to empirical scrutiny and policy analysis but also drawn economic geography and location theories from the periphery to the center of mainstream economic theory. Reduced-form empirical studies have attempted to test certain implications of NEG. However, due to NEG’s simplified geographic settings, the developed NEG models cannot be easily applied to observed data. The recent development of quantitative spatial models based on the mechanisms formalized by previous NEG theories has been a breakthrough in building an empirically relevant framework for implementing counterfactual policy exercises. If quantitative spatial models can connect with observed data in an empirically meaningful manner, they can enable the decomposition of key theoretical mechanisms and afford specificity in the evaluation of the general equilibrium effects of policy interventions in particular settings. Several decades since its proposal, NEG has been criticized for its parsimonious assumptions about the economy across space and time. Therefore, existing challenges still require theoretical and quantitative models on new microfoundations pertaining to the interactions between economic agents across geographical space and the relationship between geography and economic development.

Article

The political economy of protection is a field within economics, but it has significant overlap with its sister discipline, political science. For a political economy of protection, one needs at a minimum two types of economic agents: political decision makers who provide protection, and economic agents who are protected or even actively seek protection. The typical political economy scenario leads to an economic outcome that is not Pareto-optimal: From a general welfare perspective, the political interaction is not desirable. An important task of political economy research is to explain why and how political interaction takes place. For the first part of the question, it appears clear that if protection is actively sought, the protection seeker intends to benefit from his activities. However, if the policymakers were truly interested in Pareto optimality and welfare maximization, they would refuse to protect. Hence a crucial assumption in the political economy literature is that the politicians’ objective function differs from the general welfare function. For the second part of the question, theoretical political economy models consider either the election campaign phase when politicians are eager to win a majority of votes (preelection models) or the phase when the politicians have been elected and may benefit from the spoils associated with holding office (postelection models). Whereas in the election phase, politicians have an incentive to cater to the interests of that part of the electorate that is considered pivotal for the election outcome, in the postelection phase they may be open to, for example, special interest group (SIG) influences from which they derive utility. A first wave of theoretical political economy models originates from the 1980s. Building on these early advances, more elaborate models have been proposed. The most prominent one is the Grossman–Helpman protection for sale (PfS) model. It delivers a postelection general equilibrium framework of trade policy determination. In this common agency model, industry interest groups act as principals and offer the government a menu of contracts of campaign contributions in exchange for trade policy. The PfS model predicts that industries that lobby for protection will obtain trade protection in equilibrium, whereas nonlobbying industries will face import subsidies. Numerous papers have evaluated the PfS model empirically and found that the implied weight on contributions in the governmental welfare function and the implied share of the population represented by lobbies are both very high. Remedies for this surprising result exist, but it has also been argued that the found empirical regularities may be spurious. At the beginning of the 21st century, the majority of political economy literature is still theoretical, but better data availability increasingly offers the opportunity to empirically test theoretical results. A number of challenges remain for the political economy literature, however. In particular, more work is required to better understand policymaker interests. Moreover, an incorporation of political economy aspects into the new trade theory models that allow for intra-industry trade and firm diversity appears to be a promising avenue for future research.

Article

In recent decades, there has been a dramatic proliferation of preferential trade agreements (PTAs) between countries that, while legal, contradict the non-discrimination principle of the world trade system. This raises various issues, both theoretical and empirical, regarding the evolution of trade policy within the world trade system and the welfare implications for PTA members and non-members. The survey starts with the Kemp-Wan-Ohyama and Panagariya-Krishna analyses in the literature that theoretically show PTAs can always be constructed so that they (weakly) increase the welfare of members and non-members. Considerable attention is then devoted to recent developments on the interaction between PTAs and multilateral trade liberalization, focusing on two key incentives: an “exclusion incentive” of PTA members and a “free riding incentive” of PTA non-members. While the baseline presumption one should have in mind is that these incentives lead PTAs to inhibit the ultimate degree of global trade liberalization, this presumption can be overturned when dynamic considerations are taken into account or when countries can negotiate the degree of multilateral liberalization rather than facing a binary choice over global free trade. Promising areas for pushing this theoretical literature forward include the growing use of quantitative trade models, incorporating rules of origin and global value chains, modeling the issues surrounding “mega-regional” agreements, and modelling the possibility of exit from PTAs. Empirical evidence in the literature is mixed regarding whether PTAs lead to trade diversion or trade creation, whether PTAs have significant adverse effects on non-member terms-of-trade, whether PTAs lead members to lower external tariffs on non-members, and the role of PTAs in facilitating deep integration among members.

Article

The idea that prices and exchange rates adjust so as to equalize the common-currency price of identical bundles of goods—purchasing power parity (PPP)—is a topic of central importance in international finance. If PPP holds continuously, then nominal exchange rate changes do not influence trade flows. If PPP does not hold in the short run, but does in the long run, then monetary factors can affect the real exchange rate only temporarily. Substantial evidence has accumulated—with the advent of new statistical tests, alternative data sets, and longer spans of data—that purchasing power parity does not typically hold in the short run. One reason why PPP doesn’t hold in the short run might be due to sticky prices, in combination with other factors, such as trade barriers. The evidence is mixed for the longer run. Variations in the real exchange rate in the longer run can also be driven by shocks to demand, arising from changes in government spending, the terms of trade, as well as wealth and debt stocks. At time horizon of decades, trend movements in the real exchange rate—that is, systematically trending deviations in PPP—could be due to the presence of nontraded goods, combined with real factors such as differentials in productivity growth. The well-known positive association between the price level and income levels—also known as the “Penn Effect”—is consistent with this channel. Whether PPP holds then depends on the time period, the time horizon, and the currencies examined.

Article

Vivian Zhanwei Yue and Bin Wei

This article reviews the literature on sovereign debt, that is, debt issued by a national government. The defining characteristic of sovereign debt is the limited mechanisms for enforcement. Because a sovereign government does not face legal consequences of default, the reasons why it makes repayment are to avoid default penalties related to reputation loss or economic cost. Theoretical and quantitative studies on sovereign debt have investigated the cause and impact of sovereign default and produced analysis of policy relevance. This article reviews the theories that quantitatively account for key empirical facts about sovereign debt. These studies enable researchers and policy makers to better understand sovereign debt crises.

Article

Johannes Brumm, Christopher Krause, Andreas Schaab, and Simon Scheidegger

Solving dynamic economic models that capture salient real-world heterogeneity and nonlinearity requires the approximation of high-dimensional functions. As their dimensionality increases, compute time and storage requirements grow exponentially. Sparse grids alleviate this curse of dimensionality by substantially reducing the number of interpolation nodes, that is, grid points needed to achieve a desired level of accuracy. The construction principle of sparse grids is to extend univariate interpolation formulae to the multivariate case by choosing linear combinations of tensor products in a way that reduces the number of grid points by orders of magnitude relative to a full tensor-product grid and doing so without substantially increasing interpolation errors. The most popular versions of sparse grids used in economics are (dimension-adaptive) Smolyak sparse grids that use global polynomial basis functions, and (spatially adaptive) sparse grids with local basis functions. The former can economize on the number of interpolation nodes for sufficiently smooth functions, while the latter can also handle non-smooth functions with locally distinct behavior such as kinks. In economics, sparse grids are particularly useful for interpolating the policy and value functions of dynamic models with state spaces between two and several dozen dimensions, depending on the application. In discrete-time models, sparse grid interpolation can be embedded in standard time iteration or value function iteration algorithms. In continuous-time models, sparse grids can be embedded in finite-difference methods for solving partial differential equations like Hamilton-Jacobi-Bellman equations. In both cases, local adaptivity, as well as spatial adaptivity, can add a second layer of sparsity to the fundamental sparse-grid construction. Beyond these salient use-cases in economics, sparse grids can also accelerate other computational tasks that arise in high-dimensional settings, including regression, classification, density estimation, quadrature, and uncertainty quantification.

Article

A recent body of literature on quantitative general equilibrium models links the creation and diffusion of knowledge and technology to openness to international trade and to the activity of multinational firms. The unifying theme of this literature is methodological: productivities are Fréchet random variables and arise from Poisson innovation and diffusion processes for ideas. The main advantage of this modeling strategy is that it delivers closed-form solutions for key endogenous variables that have a direct counterpart in the data (e.g., prices, trade flows). This tractability makes the connection between theory and data transparent, helps clarify the determinants of the gains from openness, and facilitates the calculation of counterfactual equilibria.

Article

The key question for the economics of international migration is whether observed real wage differentials across countries for workers with identical intrinsic productivity represent an economic inefficiency sustained by legal barriers to labor mobility between geographies. A simple comparison of the real wages of workers with the same level of formal schooling or performing similar occupations across countries shows massive gaps between rich and poorer countries. These gaps persist after adjusting for observed and unobserved human capital characteristics, suggesting a “place premium”—or space-specific wage differentials that are not due to intrinsic worker productivity but rather are due to a misallocation of labor. If wage gaps are not due to intrinsic worker productivity, then the incentive for workers to move to richer countries is high. The idea of a place premium is corroborated by macroeconomic evidence. National accounts data show large cross-country output per worker differences, driven by the divergence of total factor productivity. The lack of convergence in total factor productivity and corresponding spatial productivity differentials create differences in the marginal product of factors, and hence persistent gaps in the wages of equal productivity workers. These differentials can equalize with factor flows; however their persistence and large magnitude in the case of labor, suggest legal barriers to migration restricting labor flows are in fact constraining significant return on human capital, and leaving billions in unrealized gains to the world’s workers and global economy. A relaxation of these barriers would generate worker welfare gains that dwarf gold-standard poverty reduction programs.

Article

Used for hundreds of years and adapted to a variety of contexts, arbitration is a form of adjudicative dispute settlement where parties consent to selecting third-party neutrals that resolve a specific dispute by applying the applicable law to the facts. Part of arbitration’s success involves its flexibility in adapting procedures and selecting applicable law to meet parties’ unique needs, including having some control over the appointment of an arbitrator who may have unique substantive expertise. Parties may agree to arbitration hoping to avoid the time-consuming, expensive, and complex process of litigation by streamlining or tailoring dispute mechanics. Yet, it is not empirically verifiable that arbitration always saves time and costs, as assessing relative savings requires comparison to a national court and there are over 190 national judiciaries to which arbitration could be compared, as well as nonadjudicative forms of dispute resolution like direct negotiation and mediation. As parties inevitably negotiate in the “shadow of the law,” arbitration aids the assessment of conflict management options; and, particularly internationally, arbitration remains a powerful tool that incentivizes voluntary compliance with awards and streamlines enforcement. Despite the availability of many types of arbitration with different policy considerations, the parties’ consent to it and their agreement to arbitrate (including the applicable law) is the backbone of this form of dispute settlement. Arbitration agreements require parties to make core choices, such as deciding on the scope of agreements submitted to arbitration, the legal place of arbitration, and applicable rules. Such an agreement then provides the framework for fundamental elements of the proceedings, namely, the basis of the tribunal’s jurisdiction and power over the dispute, the standards for appointing arbitrators, the structure and rules of the proceedings, and the content and form of derivative awards. Having a valid arbitration agreement (and an arbitration proceeding conducted in accordance with those legal obligations) also influences whether courts at the place of arbitration will set the award aside and whether courts at a place of enforcement will recognize and enforce an arbitration award. In the modern era, arbitration will continue evolving to address concerns about local policy considerations (particularly in national arbitration), confidentiality and ethics, technology and cybersecurity, diversity and inclusion, and to ensure arbitration is an ongoing value proposition.