Beverly J. Lapham

Monopolistic Competition, Increasing Returns, and the Effects of Government Spending

The dynamic effects of government spending are considered in a general equilibrium model with monopolistic competition and increasing returns. In the economy, changes in the level of government spending endogenously raise total factor productivity, even though the spending itself is entirely wasteful. This leads to several results which contrast with the effects of government spending policies in environments with constant returns. A permanent increase in government spending increases the steady-state wage and may increase steady-state consumption. Also, regardless of its persistence, a temporary shock to government spending may simultaneously raise output, investment, the real wage, and consumption. Copyright 1996 by Ohio State University Press.

Aggregate fluctuations with increasing returns to specialization and scale

The effects of technology shocks in a real business cycle model with monopolistic competition and increasing returns to both specialization and scale are considered. Market power per se and increasing returns due to fixed costs have no effect on the responses of aggregate variables to a technology shock relative to those exhibited by a standard, perfectly competitive real business cycle model. In contrast, the responses of aggregates to technology shocks are reduced by returns to scale in variable factors and increased by returns to specialization. Returns to specialization and scale also affect the measurement of technology shocks. Increasing returns to scale generally cause the variance of the Solow residual to undermeasure the variance of the ‘true’ technology shock, while returns to specialization result in the opposite bias. With both types of increasing returns present, the variance of output is increased relative to a standard competitive model despite a significant reduction of the variance of technology shocks.

Government Spending and Welfare with Returns to Specialization

We explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity, without directly affecting either utility or production possibilities. In the presence of monopolistic competition and increasing returns to specialization, it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition. This is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods. If the degree of increasing returns to variety is large enough, a rise in such wasteful government spending may increase consumption levels enough to increase welfare. Copyright 2000 by The editors of the Scandinavian Journal of Economics.

Monopolistic competition, technology shocks, and aggregate fluctuations

Abstract We analyze a real business cycle (RBC) model in which aggregate production exhibits increasing returns to specialization in conjunction with imperfect competition and free entry and exit of firms over the business cycle. We show that the requirements of both high variance and high persistence in technology shocks that have been noted by critics of RBC theory may arise from the assumptions of perfect competition and constant returns to scale, rather than from the general proposition that real productivity shocks can significantly account for the business cycle.

A dynamic model of endogenous trade policy

Empirical evidence suggests that past levels of protection are significant determinants of current levels of protection. We investigate dynamic interactions among interest groups and resulting endogenous links between current and future trade policies. We explore these intertemporal links in a small open economy in which lobbying and tariff policies are the outcome of a dynamic game among factor owners. The model can generate cycles with prolonged periods of free trade and/or prolonged periods of restricted trade (i.e., persistent trade policies). An interesting aspect of the environment is the role of lobbying as a partial substitute for intertemporal trade.

Firm Dynamics in Retail Trade: The Response of Canadian Retailers to Exchange Rate Shocks

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 retailers 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.

Firms in International Trade: Trade Policy Implications of the New New Trade Theory

This paper discusses the implications of recent developments in firm-based trade theory and empirics for trade policy. We sketch the evolution of this modern theory, and review the implications of the available empirical analysis in order to demonstrate the need for a new new trade policy. We argue that the newest approaches to evaluating trade at the level of the firm, where trade actually takes place, imply that policies focused on overcoming the fixed costs of trade and reducing uncertainty will lead to increased trade at the extensive margin, which is where the biggest gains in productivity and welfare are found. Nevertheless non-discrimination and reciprocity still anchor the trading system and comparative advantage still has its influence, if at the level of trade in tasks. The traditional market access agenda ought now to be less important on the multilateral agenda than services, customs cooperation, standards, trade facilitation, procurement, and innovation policy. The analytic needs of the new new trade policy require new models, and more access to firm-level data to appropriately formulate and evaluate the impacts of trade policy. * Dan Ciuriak is a consulting economist, formerly Deputy Chief Economist, Foreign Affairs and International Trade Canada; Beverly Lapham is in the Department of Economics, Queens University; Robert Wolfe is with the School of Policy Studies, Queen’s University; Terry Collins-Williams is a Senior Associate at the Centre for Trade Policy and Law, Carleton University and University of Ottawa; and John Curtis is Distinguished Fellow with the Centre for International Governance Innovation. We are grateful for the comments of participants when earlier versions of this paper were presented to: the Canadian Departments of Foreign Affairs and International Trade, Finance, and Agriculture and AgriFood; an IISD/ICTSD/UNEP seminar in Geneva; the Annual Conference of the European Trade Study Group, Copenhagen; and the Queen’s Annual Institute on Trade Policy. We are also grateful for the confidential comments of officials in Ottawa and Geneva.

The Canadian border and the US dollar: The impact of exchange rate changes on US retailers

This paper provides a micro-level investigation into the impact of changes in the USCanada nominal exchange rate on retailers in US regions lying close to the USCanada border. Using a large data set on product-level retail prices and sales in the United States over a nine year period, we explore the links between changes in exchange rates, cross-border travel and the price and quantity responses of US retailers. This allows us to assess the importance of geography and distance in affecting the pass-through of exchange rate changes into prices and quantities at the level of the consumer. We develop a two-stage theoretical model of cross-border travel and industry equilibrium for retail sales at the border. Our empirical results accord well with the implications of the model.

Interpolation of Economic Time Series, with Application to German and Swedish Data

It is a common occurrence in empirical work that some time series are available on a monthly basis, some quarterly, and some only on an annual basis, and one wishes to construct a higher-frequency series from a low-frequency one (say quarterly from annual) given information on related time series that are available at a higher frequency. Two examples of this are: (1) stock variables like plant and equipment, information on which may be available only at particular times of the year (say the first quarter); and (2) flow variables such as national income or price level, which may be available only for the entire year. In the case of a stock variable, one would want the interpolated series to agree with the actual series at the point in time when information on the latter is available. In the case of a flow variable, one would want the sum (or average, as the case may be) of the interpolated (say quarterly) series to agree with the the actual annual series.