Linda L. Tesar

Home bias and high turnover

Abstract This paper documents the available evidence on international portfolio investment in five OECD countries. We draw three conclusions from the data. First, there is strong evidence of a home bias in national investment portfolios despite the potential gains from international diversification. Second, the composition of the portfolio of foreign securities seems to reflect factors other than diversification of risk. Third, the high volume of cross-border capital flows and the high turnover rate on foreign equity investments relative to turnover on domestic equity markets suggests that variable transactions costs are an unlikely explanation for home bias.

SAVINGS, INVESTMENT AND INTERNATIONAL CAPITAL FLOWS

Abstract The high correlation between national savings and domestic investment rateshas been interpreted as evidence that capital is not internationally mobile. This paper surveys the theory and evidence on the relationship between savings and investment. In a sample of 23 OECD countries a positive correlation between savings and investment rates is found in both the short and long runs, However, a wide variety of models generate such co-movements in savings and investment in response to exogenous disturbances, even under conditions of complete financial markets. Thus, the savings-investment correlation provides little evidence on the question of international capital mobility.

International risk-sharing and non-traded goods

Abstract The high correlation between savings and investment, the low cross-country correlation between consumption growth rates and the home bias in investment portfolios have been interpreted as evidence that international financial markets are insufficient for complete risk-sharing. This paper demonstrates that these facts are consistent with complete financial markets when agents face stochastic fluctuations in the output of non-traded goods. Consumer preferences over traded and non-traded goods and over the intertemporal allocation of consumption may skew portfolios toward claims on domestic output. A dynamic version of the model calibrated to estimates of the parameters describing preferences and technology replicates the main features of savings, investment, consumption and output.

Trade, production sharing, and the international transmission of business cycles ☆

Abstract Countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations. We use data on trade flows between US multinationals and their affiliates as well as trade between the United States and Mexican maquiladoras to measure production-sharing trade and its link with the business cycle. We then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production-sharing trade and internationally synchronized business cycles. A key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good.

Evaluating the gains from international risksharing

Abstract Cross-country evidence on consumption, income, saving, and investment indicates that there remain opportunities for international risksharing. One explanation for the lack of global risksharing is that the gains are not sufficient to offset even small frictions. This paper evaluates the utility gains from risksharing under different assumptions about market structure, country size, technology, and preferences. I find that the gains from risksharing range from zero to two percent of lifetime consumption. When countries are able to “self-insure” by adjusting labor supply and investment, the gains from risksharing are insignificantly different from zero.

Saving Europe?: The Unpleasant Arithmetic of Fiscal Austerity in Integrated Economies

What are the macroeconomic effects of tax adjustments in response to large public debt shocks in highly integrated economies? The answer from standard closed-economy models is deceptive, because they underestimate the elasticity of capital tax revenues and ignore cross-country spillovers of tax changes. Instead, we examine this issue using a two-country model that matches the observed elasticity of the capital tax base by introducing endogenous capacity utilization and a partial depreciation allowance. Tax hikes have adverse effects on macro aggregates and welfare, and trigger strong cross-country externalities. Quantitative analysis calibrated to European data shows that unilateral capital tax increases cannot restore fiscal solvency, because the dynamic Laffer curve peaks below the required revenue increase. Unilateral labor tax hikes can do it, but have negative output and welfare effects at home and raise welfare and output abroad. Large spillovers also imply that unilateral capital tax hikes are much less costly under autarky than under free trade. Allowing for one-shot Nash tax competition, the model predicts a “race to the bottom” in capital taxes and higher labor taxes. The cooperative equilibrium is preferable, but capital (labor) taxes are still lower (higher) than initially. Moreover, autarky can produce higher welfare than both Nash and Cooperative equilibria.

Greek Budget Realities: No Easy Options

ABSTRACT:This paper uses a quantitative dynamic open economy macroeconomic model to examine alternative strategies that the Greek government could implement to increase its primary balance on a flow basis by 1 percent of GDP, representing roughly one quarter of Greece’s total annual liability. We examine the impact of increases in distortionary taxes and reductions in government expenditures on the macroeconomy in both the short and long run. The necessary fiscal adjustments are large and entail substantial macroeconomic costs. These costs are even greater when one takes into account realistic elasticities of the tax base and the fact that Greece is a small open economy. Delaying fiscal adjustment could yield short-term benefits, but ultimately such delays come at a high price unless Greece’s creditors are willing to provide additional finance at below-market rates. The basic framework holds the growth rate of the Greek economy fixed. Naturally, fiscal adjustments become less painful under a scenario in which the Greek economy returns to a positive growth path. Whether structural reforms or other policies can generate such growth remains an open question.

Macroeconomics After the Great Recession, II

No abstract available.