en-us http://economics.ca/cje/en/ The journal of the Canadian Economics Association Copyright 2012, Canadian Economics Association green@econ.ubc.ca (David Green) werner@sauder.ubc.ca (Werner Antweiler) Journals 8640 Sun, 13 May 2012 17:00:01 -0700 http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01699.x/abstract International risk-sharing has far-reaching implications both for economic policy and for basic research in economics. When countries do not share consumption risk, individuals experience consumption fluctuations that are undesirable and possibly unnecessary. We investigate bilateral risk-sharing at short vs. long horizons. We find substantial cross-country consumption correlations at trend and business-cycle frequencies. Correlations are particularly high within Europe. Prior research focused on first-difference correlations, which are typically quite low. We argue that this reflects measurement error. At all horizons, we find that consumption correlations are not significantly different from output correlations, implying a lack of deliberate consumption risk-sharing. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0376(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01700.x/abstract Though financial globalization should improve international risk sharing, empirical support is lacking. We develop a simple welfare-based measure that captures how far countries are from the ideal of perfect risk sharing. Applying it to data, we find some evidence that international risk sharing has improved during globalization. Improved risk sharing comes mostly from the convergence in rates of consumption growth among countries rather than from synchronization of consumption at the business cycle frequency. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0394(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01701.x/abstract Securitization makes mortgage-related risks internationally tradeable and thus contributes considerably to the international diversification of macroeconomic risk: in the years 2003-2008, the increase in international cross-holdings of securitized mortgage debt has lowered industrialized countries' conditional consumption volatility (relative to the United States) by about 10-15 percentage points. We turn to the role of domestic credit in explaining this result. Domestic credit leads to better international risk sharing only if debt is securitized and traded internationally. Conversely, the risk-sharing benefits from securitization seem to evaporate if credit dries up - as it did in the recent financial crisis. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0493(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01702.x/abstract We estimate channels of international risk sharing between European Monetary Union (EMU), European Union, and other OECD countries, 1992-2007. We focus on risk sharing through savings, factor income flows, and capital gains. Risk sharing through factor income and capital gains was close to zero before 1999 but has increased since then. Risk sharing from capital gains, at about 6%, is higher than risk sharing from factor income flows for European Union countries and OECD countries. Risk sharing from factor income flows is higher for euro zone countries, at 14%, reflecting increased international asset and liability holdings in the euro area. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0472(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01703.x/abstract We show that recent explanations of the consumption-real exchange rate anomaly that rely on goods and financial market frictions are not robust to introducing just one additional international asset. When portfolios are selected optimally, international trade in two nominal bonds implies a consumption-real exchange rate correlation that is too high compared with the data even when there are many shocks. Monetary policy specification plays a potentially important role for the degree of risk sharing provided by nominal bonds, both in the benchmark model with only tradable and non-tradable sector supply shocks and also in the model that allows for news. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0535(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01704.x/abstract We decompose the correlation between relative consumption and the real exchange rate in its dynamic components at different frequencies. Using multivariate spectral analysis techniques, we show that, at odds with a high degree of risk sharing, in most OECD countries the dynamic correlation tends to be quite negative, and significantly so, at frequencies lower than two years - the appropriate frequencies for assessing the performance of international business cycle models. Theoretically, we show that the dynamic correlation over different frequencies predicted by standard open economy models is the sum of two terms: a term constant across frequencies, which can be negative when uninsurable risk is large; a term variable across frequencies, which in bond economies is necessarily positive, reflecting the insurance intertemporal trade provides against forecastable contingencies. Numerical analysis suggests that leading mechanisms proposed by the literature to account for the puzzle are consistent with the evidence across the spectrum. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0448(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01705.x/abstract Under efficient consumption risk sharing, as assumed in standard international business cycle models, a country's aggregate consumption rises relative to foreign consumption, when the country's real exchange rate depreciates. Yet empirically, relative consumption and the real exchange rate are essentially uncorrelated. This paper shows that this `consumption-real exchange rate anomaly' can be explained by a simple model in which a subset of households trade in complete financial markets, while the remaining households lead hand-to-mouth (HTM) lives. HTM behaviour also generates greater volatility of the real exchange rate and of net exports, which likewise brings the model closer to the data. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0566(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01706.x/abstract Cole and Obstfeld (1991) exposited a classic result where equilibrium movements in the terms of trade could make ex ante risk-sharing arrangements unnecessary: a unity elasticity of substitution across goods and production specialization. This paper extends their model to N countries and M commodities (N > M). Here the terms of trade provides insurance against commodity-specific shocks, not country-specific shocks. Using commodity-level production data at the national level and world commodity prices, we document significant terms of trade variability and positive responses of nation-specific production to terms of trade improvements. The endogenous terms of trade insurance mechanism highlighted in CO is virtually non-existent. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0417(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01707.x/abstract This paper documents some previously neglected features of sectoral shares at business cycle frequencies in OECD economies. We find that the non-traded output share is as volatile as aggregate GDP and for most countries is countercyclical. While the standard international real business cycle model has difficulty in accounting for these properties of the data, an extended model that allows for sectoral adjustment along both the intensive and the extensive margins does a much better job of replicating these statistics. The model also matches better the correlation between relative consumption growth and real exchange rate changes, a key measure of international risk-sharing. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0509(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01708.x/abstract Using six years of firm-level data covering 224 regions of the enlarged European Union, we evaluate the importance to a firm of locating its activities (production, headquarters, R&D, logistics and sales) close together. We find that, after controlling for regional characteristics, being closely located to a previous investment positively affects firm location choice. However, the impact of distance is dependent on the type of investment (production or service). The impact dies out faster for service activities. Finally, we show that a surprisingly positive effect comes from locating a new production plant close to an existing production investment, but in another country. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0672(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01709.x/abstract We estimate the effect of information about school achievement that is disseminated to the public through websites and school `report cards' on school choice decisions. We find that students are more likely to leave their school when public information reveals poor school-level performance. Some parents' school choice decisions respond to information soon after it becomes available. Others, including non-English-speaking parents, alter their school choice decisions only in response to information that has been disseminated widely and discussed in the media. Parents in low-income neighbourhoods are most likely to alter their school choice decisions in response to new information. JEL classification: I21, D83 http://economics.ca/cgi/jab?journal=cje&article=v45n2p0784(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01710.x/abstract This paper provides the first Canadian study of the link between cost to the student and the choice of university. Over the past two decades, there has been a substantial increase in the differences among Ontario universities in `net cost' defined as tuition and fees minus the expected value to an academically strong student of a guaranteed merit scholarship. Our estimates generally indicate no relationship between net cost and the overall share of strong applicants that a university is able to attract. An increase in net cost is associated with an increase in the ratio of strong students from high-income neighbourhoods to strong students from middle-income and low-income neighbourhoods in Arts and Science programs but not in Commerce and Engineering. Finally, more advantaged students are more likely to attend university, but merit aid is not of disproportionate benefit to those from more economically advantaged backgrounds, given registration. JEL classification: Health Education and Welfare http://economics.ca/cgi/jab?journal=cje&article=v45n2p0755(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01711.x/abstract We examine how trade liberalization by a large trading partner affects the ability of a small country's government to sustain free trade through a reputational mechanism. Unconditional liberalization by the large trading partner has an ambiguous effect on the small country's dynamic incentives. Liberalization through a reciprocal trade agreement, in which the large country lowers its tariffs conditionally on the small country doing the same, unambiguously dominates unconditional liberalization by the large country as a way of boosting trade reforms and reinforcing policy credibility in the small country. However, if capacity in the import-competing sector can be reduced only gradually, a conditional, reciprocal agreement may require an asynchronous exchange of concessions, where the large country liberalizes before the small country does. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0613(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01712.x/abstract This paper provides new evidence on the effects of overseas FDI on the skill-mix of multinational firms' home-country operations. The analysis exploits China's WTO accession to identify the impact of outward investment into a low-wage economy and uses plant-level data to investigate changes in industrial structure within firms driven by plant closures. As predicted by models of vertical FDI, the paper demonstrates that overseas investment in low-wage economies is associated with asymmetric effects on workers in low- and high-skill industries in the home economy and, in particular, with firms closing down plants in low-skill industries. JEL classification: F2 http://economics.ca/cgi/jab?journal=cje&article=v45n2p0698(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01713.x/abstract To what extent do reductions in corporate income tax (CIT) rates attract foreign tax bases? What are the revenue implications of a unilateral tax reduction when tax bases are internationally mobile? These questions are explored using annual data from 17 OECD countries spanning the period 1982 to 2005. Controlling for fixed country effects, year effects, and country time trends, and subjecting our results to an extensive robustness analysis, we find (i) a country's aggregate reported corporate profits are negatively and significantly affected by CIT rate reductions in neighbouring countries; (ii) a unilateral reduction in the domestic CIT rate results in lower domestic CIT revenues. http://economics.ca/cgi/jab?journal=cje&article=v45n2p0632(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01714.x/abstract An inability to borrow affected migration from Europe to North America. This capital constraint is formalized with a life-cycle model, where agents jointly choose how much to save, the optimal period to finance migration, and whether to migrate. Using a life-cycle model we show that preference for the home country, the period of adjustment after arrival, and the direct cost of migration affect the savings of migrants, age at migration, and who migrates. These results are discussed in light of wages in Canada and the Netherlands, and the characteristics of Dutch immigrants drawn from ship passenger manifests. Capital constraints delayed migration and help explain the large wage gap between the Netherlands and Canada. JEL classification: J61, N32, N34 http://economics.ca/cgi/jab?journal=cje&article=v45n2p0732(null) http://www.onlinelibrary.wiley.com/doi/10.1111/j.1540-5982.2012.01715.x/abstract This paper develops and empirically examines a model of relative productivity differences both within and across industries for small open economies. We decompose the effect of industry productivity on export performance into direct effect of own-firm productivity and an indirect effect of higher peer-firm productivity. In a sample of Chilean and Colombian plants, we find evidence of both a positive direct effect and a negative indirect effect. The empirical evidence supports our theoretical prediction that industry-specific factors of production and asymmetric substitutability between domestic and foreign varieties drive the negative indirect effect. JEL classification: F10, F11, F12 http://economics.ca/cgi/jab?journal=cje&article=v45n2p0585(null)