Sebastián Claro

A CROSS-COUNTRY ESTIMATION OF THE ELASTICITY OF SUBSTITUTION BETWEEN LABOR AND CAPITAL IN MANUFACTURING INDUSTRIES

This paper presents a simple methodology to estimate the elasticity of substitution between labor and capital for firms operating in perfectly competitive markets with CRS production functions. It is applied in a cross-country sample to 28 3-digit ISIC manufacturing industries. The econometric procedure relies on measures of sectorial capital stock, that are estimated for a sample of more than 30 countries. Unlike older studies, the estimates are consistent with hicks-neutral cross-country technology differences. The results reveal that in most industries the elasticity of substitution is smaller than one, rejecting the null hypothesis of Cobb-Douglas production functions. The paper provides then an estimation of ¾LK at a level of aggregation extremely useful for research in the international trade literature.

FDI Liberalization as a Source of Comparative Advantage in China

Two features of Chinas trade patterns suggest that elements beyond factor abundance explain its export performance. The high penetration in world markets of labor-intensive products has been accompanied by: (i) a high share in exports of productivity-advanced foreign-invested enterprises (FIEs) and (ii) a high penetration of FIEs in labor-intensive sectors. We show that FDI liberalization endogenously introduces Ricardian features to an otherwise standard endowment-based trade model, strengthening Chinas natural comparative advantage in labor-intensive products. We discuss how capital accumulation, productivity growth, rural–urban migration, incentives for foreign investment, and distortions in financial markets affect this bias.

The China Phenomenon: Price, Quality or Variety?

China’s exports have skyrocketed in the last 15 years. We use highly-disaggregated import data from Chile between 1990 and 2005 to decompose the causes of such export performance. We find that China’s high export growth is mainly explained by an increase in the quality of its varieties relative to those from the rest of the world, which raises world demand for its varieties as well as it increases the number of varieties produced in China. Our results show that Chinese products are cheaper than those from the rest of the world, but the small decline in their relative price has a negligible contribution to the growth of China’s penetration. There is heterogeneity across products, however. The increase in quality and the decline in product prices are more pronounced for highly-differentiated products. Because international product-price differences reflect productivity and factor cost differences, these results reveal that productivity growth has been higher in highlydifferentiated products, which coincides with the pattern of quality growth. Therefore, we conjecture that productivity growth is behind the increase in the quality of Chinese varieties as well as the raise in number of varieties produced and exported by China.

Trade costs and the role of international trade intermediaries

As tariffs have become less important in shaping trade patterns, researchers have begun to study the impact that other trade costs have on trading behavior. In this chapter, the authors detail research on the role that export and import intermediaries play in reducing the costs both of acquiring and consolidating the products of domestic producers for export to foreign markets and of matching the imported products of foreign producers with domestic customers. They present the current state of knowledge on these intermediaries and suggest avenues of future research on the market imperfections that generate intermediaries and their policy implications.

Channels of US Monetary Policy Spillovers into International Bond Markets

We document significant US monetary policy (MP) spillovers to international bond markets. Our methodology identifies US MP shocks as the change in short-term treasury yields within a narrow window around FOMC meetings, and traces their effects on international bond yields using panel regressions. We emphasize three main results. First, US MP spillovers to long-term yields have increased substantially after the global financial crisis. Second, spillovers are large compared to the effects of other events, and at least as large as the effects of domestic MP after 2008. Third, spillovers work through different channels, concentrated in risk neutral rates (expectations of future MP rates) for developed countries, but predominantly on term premia in emerging markets. In interpreting these findings, we provide evidence consistent with an exchange rate channel, according to which foreign central banks face a tradeoff between narrowing MP rate differentials, or experiencing currency movements against the US dollar. Developed countries adjust in a manner consistent with freely floating regimes, responding partially with risk neutral rates, and partially through currency adjustments. Emerging countries display patterns consistent with FX interventions, which cushion the response of exchange rates but reinforce capital flows and their effects in bond yields through movements in term premia. Our results suggest that the endogenous effects of FXI on long-term yields should be added into the standard cost-benefit analysis of such policies.

Sources of China’s Export Growth

We use detailed data on Chilean imports between 1990 and 2005 to analyze the causes of China’s import penetration relative to other countries. China exports a wide variety of products. The growth in China’s exports, however, is mainly driven by an increase in import penetration within common product categories with the rest of the world—the intensive margin—rather than by an increase in the number of product varieties exported—the extensive margin. Surprisingly, the growth in the intensive margin is explained by an increase in exported quantities without a significant fall in the relative price of Chinese varieties. This apparent paradox suggests that an increase in either the number of unobserved varieties or the willingness to pay for Chinese products—an increase in the relative quality of Chinese products—is the driving force behind China’s export performance. We present evidence regarding China’s export prices, the similarity of China’s export bundle to that of developed countries, and the relative quality of Chinese products, to conclude that improvements in the quality of Chinese products is an important dimension of Chinese export growth.