Kei-Mu Yi

The Nature and Growth of Vertical Specialization in World Trade

Dramatic changes are occurring in the nature of international trade. Production processes increasingly involve a sequential, vertical trading chain stretching across many countries, with each country specializing in particular stages of a goods production sequence. We document a key aspect of these vertical linkages--the use of imported inputs in producing goods that are exported -- which we call vertical specialization. Using input-output tables from the OECD and emerging market countries we estimate that vertical specialization accounts for up to 30 percent of world exports, and has grown as much as 40 percent in the last twenty-five years. The key insight about why vertical specialization has grown so much lies with the fact that trade barriers (tariffs and transportation costs) are incurred repeatedly as goods-in-process cross multiple borders. Hence, even small reductions in tariffs and transport costs can lead to extensive vertical specialization, large trade growth, and large gains from trade. We formally illustrate these points by developing an extension of the Dornbusch-Fischer-Samuelson ricardian trade model.

Can the standard international business cycle model explain the relation between trade and comovement

Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures, complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country-pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pairs business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model.

Is There Endogenous Long-Run Growth? Evidence from the United States and the United Kingdom.

The key feature of endogenous growth models is that they imply that perrnanent changes in government policy can have permanent effects on growth rates. In this paper we develop and implement an empirical framework to test this implication. In a regression of growth rates on current and lagged policy variables the sum of the slope coefficients for each policy variable should be nonzero (zero) for endogenous (exogenous) growth models. In our estimation we use time series data spanning up to 100 years for the United States and 160 years for the United Kingdom. We find that the implication for exogenous growth is usually rejected when both a tax variable and a public capital variable are included in the regression; failing to include both variables biases the results in favor of exogenous growth models. Our findings show that it is possible to have endogenous growth even when U.S. and U.K. GDP growth rates appear to be stable over time. We conclude that at the aggregate level, the production function appears to exhibit constant returns to scale in reproducible inputs.

A Simple Time Series Test of Endogenous vs. Exogenous Growth Models: An Application to the United States

This paper presents evidence supporting endogenous growth models that emphasize public structural capital. The authors apply a simple test of endogenous vs. exogenous growth models. In exogenous growth economies temporary innovations to policy variables lead only to temporary changes in GNP levels, while in endogenous growth economies the innovations can lead to permanent changes in GNP levels. Of the seven U.S. policy variables they examine, only non-military equipment capital and non-military structural capital have a statistically and economically significant effect upon long-run GNP levels. Further estimation suggests that the non-military equipment capital result is not robust and that several disaggregate components of structural capital contribute significantly. Copyright 1996 by MIT Press.

Structural change in an open economy

We study the importance of international trade in structural change. Our framework has both productivity and trade cost shocks, and allows for non-unitary income and substitution elasticities. We calibrate our model to investigate South Koreas structural change between 1971 and 2005. We find that the shock processes, propagated through the models two main transmission mechanisms, non-homothetic preferences and the open economy, explain virtually all of the evolution of agriculture and services labor shares, and the rising part of the hump-shape in manufacturing. Counterfactual exercises show that the role of the open economy is quantitatively important for explaining South Koreas structural change.

Can world real interest rates explain business cycles in a small open economy

Abstract While the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies, much of the recent quantitative research that studies this mechanism concludes that it has little effect on output, investment, and net exports. We re-examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology. We begin with a small open economy business cycle model. But, rather than specifying the stochastic processes for the shocks and then solving and simulating the model to evaluate how well these shocks explain business cycles, we use the model to back out the shocks that are consistent with the models observable endogenous variables. Then we use variance decompositions to examine the importance of each shock. We apply this methodology to Canada and find that world real interest rate shocks can play an important role in explaining the cyclical variation in a small open economy. In particular, they can explain up to one-third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets.

The Trade Comovement Problem in International Macroeconomics

Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. Our main finding is that under international financial autarky the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. In our benchmark calibrations, the model explains at most 6 percent of the responsiveness of GDP correlations to trade found in the empirical research. This result is robust to many combinations of shock specifications, import shares, and elasticities of substitution. Because the difference between business cycle theory and the empirical results cannot be resolved by changes in parameter values and the structure of the standard models, we call this discrepancy the trade comovement problem.

How Much of South Korea's Growth Miracle Can Be Explained by Trade Policy?

South Koreas growth miracle has been well documented. A large set of institutional and policy reforms in the early 1960s is thought to have contributed to the countrys extraordinary performance. In this paper, the authors assess the importance of one key set of policies, the trade policy reforms in Korea, as well as the concurrent GATT tariff reductions. They develop a model of neoclassical growth and trade that highlights two forces by which lower trade barriers can lead to increased per worker GDP: comparative advantage and specialization, and capital accumulation. The authors calibrate the model and simulate the effects of three sets of tariff reductions that occurred between the early 1962 and 1995. Their main finding is that the model can explain up to 32 percent of South Koreas catch-up to the G7 countries in output per worker in the manufacturing sector. The authors find that the effects of the tariff reductions taken together are about twice as large as the sum of each reduction applied individually.

Can World Real Interest Rates Explain Business Cycles in a Small Open Economy

While the world real interest rate is potentially an important mechanism for transmitting international shocks to small open economies, much of the recent quantit ative research that studies this mechanism concludes that it has little effect on output, investment, and net exports. We re-examine the importance of world real interest rate shocks using an approach that reverses the standard real business cycle methodology. We begin with a small open economy business cycle model. But, rather than specifying the stochastic processes for the shocks, and then solving and simulating the model to evaluate how well these shocks explain business cycles, we use the model to back out the shocks that are consistent with the models observable endogenous variables. Then we use variance decompositions to examine the importance of each shock. We apply this methodology to Canada and find that world real interest rate shocks can play an important role in explaining the cyclical variation in a small open economy. In particular, they can explain up to one-third of the fluctuations in output and more than half of the fluctuations in net exports and net foreign assets.