The NBER Reporter 2008 Number 3: Conferences
Frontiers in Health Policy Research
TAPES Conference on Income Taxation
Nineteenth Annual EASE Conference
31st International Seminar on Macroeconomics
NBER Conference in Beijing
Frontiers in Health Policy Research
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The goals of different health reform proposals are varied, but at their core many aim to increase both the extent and the stability of health insurance coverage. Some propose to do this through the expansion of public programs, others through the reform of private health insurance markets, often coupled with the availability of subsidies for low-income or high-expenditure population. Some of these proposals are explicitly intended to affect the individual and small-group markets, while others may have unintended or indirect effects. These proposals have very different implications for the type of insurance policies that will be available, the number and composition of those covered by insurance, the cost of those policies (both in private premiums and in public expenditures), and the value and quality of care delivered through the health care system. A clearer understanding of these implications can help to facilitate a more realistic assessment of both the upside potential and the downside risks of different proposals. Baicker synthesizes existing evidence to shed light on the effect of different reform proposals. Proposals that focus exclusively on coverage threaten to be unsustainable, and design details can have profound effects on the level and distribution of insurance coverage and on the value of care subsequently delivered. One of the key determinants of a policy's effects is the incentives it creates for individuals with different risk profiles to obtain insurance, firms to offer insurance, and insurers to provide high-value insurance to broad pools. Reforms that promote both broad coverage and high-value care can foster greater innovation, quality, and breadth of coverage.
Critics of me-too innovation often argue that follow-on drugs offer little incremental clinical value over existing pioneer products, while at the same time increasing health care costs. Jena and co-authors examine whether consumers view follow-on and pioneer drugs as close substitutes or distinct clinical therapies. For five major classes of drugs, the authors find that large reductions in the price of pioneer molecules after patent expiration - which would typically lead to decreased consumption of strong substitutes - have no effect on the trend in demand for follow-on drugs. Their findings are likely unaffected by health insurance, competitive pricing of me-toos, marketing, and switching costs.
The hospital merger wave of the 1990s transformed the market for inpatient hospital care. There were about 1,199 mergers and acquisitions in the hospital industry between 1994 and 2005, with about 826 of these occurring between 1994 and 1999. Antwi and his co-authors document the trend in inpatient hospital prices before and after the wave of mergers in the mid-1990s using California financial data from 1992 to 2005. They measure price as net inpatient revenue per discharge and check that their results are robust to adjustment for patient demographics, DRG, and severity. They find a downward trend in price for private pay patients in the 1990s followed by a very sharp increase in price starting in 2000. Prices in 2005 were almost double prices in 2000. The authors do not see this sharp increase in net revenues for Medicare and MediCal patients. Nor does the increase in prices seem to be correlated with either the initial level or the change in hospital market concentration. Los Angeles County, where there were many mergers and consolidation, saw very small increases in price. Two regulations -- the seismic retrofit mandate and the mandatory nurse staffing ratio -- affected hospital costs significantly. However, the cost increase attributable to the nursing staffing regulations was not large enough to account for the observed price increase, and the price increase was not substantially correlated with proxies for the costs of compliance with the seismic retrofit mandate. One possible cause for higher prices is the increase in inclusiveness of managed care provider networks and the concomitant decline in health plans' bargaining power. However, the evidence on this is largely anecdotal. Thus, the large price run-up since 1999 in California remains something of a mystery.
Glied and her co-authors offer a novel approach to workforce planning in the physician market. Rather than projecting the future demand for physician services, they use a human capital model to estimate the societal cost of producing a physician service. Social planners should choose the quantity of physicians such that the marginal societal cost of producing a physician service is equal to the marginal societal benefit obtained from the service. The same approach can be used to compare the marginal private benefits and marginal private costs of physician human capital and the resulting information can be used to assess whether physicians earn rents. The analysis concludes that the average social cost of each primary care doctor visit is between $54 and $77. This figure is at the high end of plausible estimates of the marginal societal value of these visits. The estimated private rate of return for primary care doctors falls in the range of 7-9 percent, suggesting that primary care doctors do not earn substantial rents. These results imply that expanding the supply of primary care physicians is unlikely to be a socially cost-effective way to deliver the marginal primary care service.
Levine and Schanzenbach examine the impact of public health insurance expansions through both Medicaid and SCHIP on children's educational outcomes, measured by fourth and eighth grade reading and math test scores, available from the National Assessment of Educational Progress (NAEP). They use a triple difference estimation strategy, taking advantage of the cross-state variation over time and across ages in children's health insurance eligibility. Using this approach, they find that test scores in reading, but not math, increased for those children affected at birth by increased health insurance eligibility. A 50 percentage point increase in eligibility is found to increase reading test scores by 0.09 standard deviations. The authors also examine whether the improvements in educational outcomes can be at least partially attributed to improvements in health status itself. First, they provide further evidence that increases in eligibility are linked to improvements in health status at birth. Second, they show that better health status at birth (measured by rates of low birth-weight and infant mortality), is linked to improved educational outcomes. Although the methods used to support this last finding do not completely eliminate potentially confounding factors, the authors believe it is strongly suggestive that improving children's health will improve their classroom performance.
These papers will be published by Berkeley Electronic Press and will appear online at http://www.bepress.com/fhep/frontiers/. They will also be available at "Books in Progress" on NBER's website.
TAPES Conference on Income Taxation
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Fang and Silverman empirically implement a dynamic structural model of labor supply and welfare program participation for never-married mothers with potentially time-inconsistent preferences. Using panel data on the choices of single women with children from the NLSY 1979, they estimate the degree of time-inconsistency and its influence on the welfare take-up decision. With these estimates, they conduct counterfactual experiments to quantify the utility loss stemming from the inability to commit to future decisions, and the potential utility gains from commitment mechanisms such as welfare time limits and work requirements.
Previous research has used survey and diary data to document the fact that Food Stamp recipients decrease their expenditures and their consumption of food throughout the benefit month, which begins on the date that benefits are distributed. The reliance on survey and diary data, however, has meant that researchers could not test two rational hypotheses for why food consumption is cyclical. Using detailed grocery store scanner data, Hastings and Washington ask: 1) whether cycling is attributable to a desire for variation in foods consumed, leading to substitution across product quality within the month; and 2) whether cycling is driven by variation in food prices throughout the month. They do not find support for either of these hypotheses. They find instead that the decrease in food expenditures is driven largely by reductions in food quantity, not quality. They further show that the grocery retailer responds to the large predictable increase in purchases: prices for foods purchased by benefi households vary pro-cyclically with demand. Benefit households therefore could save money by delaying their food purchases until later in the month. The researchers conclude, concurring with previous literature, that food cycling behavior is most likely attributable to short-run impatience.
Huysentruit and Lefevere analyze a randomized experiment that sheds light on the role of standard information, goal framed information, and decision task complexity in the choice of method of payment by child benefit recipients. The experiment encouraged a random sample of 19,707 beneficiaries to change from payment by check to payment via direct transfer. The experiment multiplied by more than four times the switching rate of these treated individuals (relative to controls). Simple, low-cost additions to the standard, informative letter (drafted by government) successfully increased individual switching rates. Adding a flyer-specific plan supplement to the standard letter produced the largest effect, particularly among population groups (like female, elderly, and long-term unemployed beneficiaries) who are often less financially literate and otherwise hard to reach (that is, they did not significantly respond to the letter plus flyer or letter alone). The researchers provide a simple, behavi economics' interpretation to account for their results.
Neumark and Wascher explore how the effects of the Earned Income Tax Credit (EITC) are influenced by the level of the minimum wage. In principle, such interactions can occur if low-skilled individuals who are eligible for the EITC are more productive and have higher reservation wages than other low-skilled individuals. The results here indicate that the EITC boosts employment and earnings for single women with children, and coupling the EITC with a higher minimum wage appears to enhance this positive effect. In contrast, the earnings of less-skilled minority men appear to be more adversely affected by the EITC when the minimum wage is higher. At the family level, a higher minimum wage appears to increase the poverty-reducing effects of the EITC for families with children; in that sense, a higher minimum wage does appear to enhance the effects of the EITC. But whether the policy combination of a high EITC and a high minimum wage is viewed as favorable or unfavorable depends in part on whose in policymakers are trying to increase.
The principal U.K. in-work cash transfer program for households with children has a minimum work requirement that was reduced in 1988 from three to two days per week. At the same time, the cash value of the credit was increased, and eligibility to associated in-kind child nutrition programs was removed. This was effectively a partial, but variable, cash-out of these in-kind transfers that depended on household demographics. The principal out-of-work cash transfer program continued to provide eligibility to the in-kind transfers. Bingley and Walker estimate a model of labor supply and participation in multiple programs using a sample of lone mothers drawn from repeated cross-section surveys that bridge the reform. Their focus is on the effect of in-kind transfers on labor supply and they exploit the reform for identification and allow for participation in the in-work cash program and several in-kind programs. They find that in-work cash and in-work in-kind transfers both have large positive la supply effects. There is, however, some utility loss from program participation and this is larger for cash than for child nutrition programs. This implies that the partial cash out of the in-kind benefits can be shown to have reduced labor supply.
Fack and Landais develop new estimates of price and income elasticities of charitable contributions that avoid the usual empirical pitfalls (simultaneity and endogeneity of price and income variables) encountered in previous literature. They focus on the French tax reduction system by which every taxpayer gets the same reduction rate, whatever the income or the level of its gift may be. The researchers use time variations in the reduction rate in order to identify the elasticity of charitable giving to tax incentives, based on data from a unique sample of the French Fiscal Administration, with more than 500,000 taxpayers every year. Their estimation technique investigates distributional effects using a multi-step censored quantile regression estimator which deals with heavy censoring with minimal assumptions. Their results demonstrate that the elasticity of charitable giving with respect to tax subsidy is weaker than previously found, and is also strongly heterogenous, in particular with the level of income. This suggests that a tax subsidy scheme varying with income might be more efficient than a unique reduction rate for all taxpayers.
French children start public pre-elementary school either the year they turn two or the year they turn three. Maurin and Goux provide the first comprehensive evaluation of the effect of this unique early schooling policy. Using the discontinuities in enrollment rates generated by the eligibility rules, they find that pre-elementary school availability has a significant employment effect on single-parent families, but no effect on two-parent families. Also, they show that substituting one year of pre-elementary school for one year of alternative modes of childcare has no significant effect on two year olds' subsequent educational outcomes. Overall, given its relatively low cost for society (compared to existing alternatives), pre-elementary school is more cost-effective than existing alternative modes of childcare for two-year olds in France.
Nielsen, Sørensen, and Taber investigate the responsiveness of the demand for college to changes in student aid arising from a Danish reform. They separately identify the effect of aid from that of other observed and unobserved variables such as parental income. They exploit the combination of a kinked aid scheme and a reform of the student aid scheme to identify the effect of direct costs on college enrollment. To allow for heterogeneous responses attributable to borrowing constraints, they use detailed information on parents' assets. They find that enrollment is less responsive than other studies suggest and that the presence of borrowing constraints only deters college enrollment to a minor extent. This is, however, in large part because of subsidies already being substantial.
During the 1990s, U.S. welfare policy underwent dramatic reforms aimed at promoting employment and reducing dependence. Although the immediate effects on adult labor supply and family income have been studied extensively, this paper is the first to evaluate the long-run effects on children's well-being. Using a decade of national math achievement data, and controlling for contemporaneous changes in education policy and environment, Miller and Zhang associate welfare reform with relative improvements in low-income students' test scores. Larger gains occur in states with greater initial welfare caseloads and caseload reductions. Preliminary analysis shows relative improvements in low-income children's time use and parental interaction.
Chetty and Saez characterize the welfare gains from redistributive taxation and social insurance in an environment where the private sector provides partial insurance. They analyze a model in which adverse selection or imperfect optimization in the private sector creates a role for government intervention. They generalize earlier elasticity-based formulas for optimal taxation and insurance to allow for endogenous private insurance. The simple formulas they derive provide a method of mapping estimates of the degree of "crowd-out" of private insurance into quantitative predictions for optimal policy. Empirical applications to unemployment and health insurance show that taking private market insurance into account matters significantly for optimal benefit levels.
These papers will be considered for publication in a special issue of the American Economic Journal: Economic Policy and will be posted at "Books in Progress" on NBER's website.
Nineteenth Annual EASE Conference
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Lee, Lee, and Mason note that declining mortality followed by declining fertility over the demographic transition initially will produce decades of rising child dependency, then decades of improving support ratios as child dependency falls (the "first dividend" that raises per capita consumption, other things equal), and finally population aging. India and ASEAN are in the first dividend period; China and Korea are near its end; and Japan's population is aging. Between 2008 and 2050, Japan's support ratio will decline by 25 percent, Korea's by 22 percent, and China's by 14 percent; and India and ASEAN's support ratios will rise. Population aging and the forces leading to it can produce not only frightening declines in support ratios, but also very substantial increases in productivity and per capita income by raising physical and human capital intensity. Longer life, lower fertility, and population aging all raise the demand for wealth to provide for old age consumption. This raises capital per worker (the "second dividend") despite declining aggregate saving rates, unless the increased demand for wealth is met through increased familial or public pension transfers for old age support: institutions and policies matter. Lower fertility and mortality are associated with higher human capital investment per child, and with rising labor productivity. Together, these positive changes likely will outweigh the problems of declining support ratios as population ages.
Population aging affects the structure of government expenditure in various ways. In addition to the effects on aggregate expenditures, population aging affects per capita expenditures on such things as education and social welfare by changes in political power. If the elderly have selfish and shortsighted preferences, they may use their political power to reduce expenditures on compulsory education not directly related to benefits for themselves. On the other hand, the elderly may support the maintenance of government expenditures on compulsory education if they are altruistic or long-term decisionmakers. Using prefectural panel data from 1975 to 2005, Ohtake and Sano analyze the relationship between the age structure of the population and public expenditure on compulsory education. Their estimated results indicate that the ratio of the elderly population had positive effects on per-student government expenditures on compulsory education in the 1970s and 1980s. This relationship was reversed in the 1990s. Because the elderly began to live independently from children old enough to receive compulsory education, they may have become less concerned about public expenditure on compulsory education. However, the reversal cannot be explained by the change in living arrangements of the elderly in this analysis. The researchers speculate that the change was caused by the change from the national government to the local governments in the subsidy system for compulsory education.
Ogawa and his co-authors analyze some important effects of Japan's unprecedented population aging on its postwar economy, drawing heavily on the computed results of the NTA-Japan project, ranging from the first and second demographic dividends to the life-cycle reallocations. They also shed light on the rapidly changing roles of public and familial support systems for the elderly in Japan, which have evolved together with the family organizational transformation and the rapid development of the social security system over the past several decades. One of the principal findings of this paper is that an effective use of the demographic dividends, particularly the accumulated second demographic dividend, which is likely to remain substantial for the next few decades, appears to be an attractive policy option for Japan in order to place its future economic growth on a steady path. Another important finding derived from this study is that, since the bursting of the bubble economy in the early 1990s, the Japanese elderly have been informally playing the role of the society's safety net by providing financial assistance to their adult children and/or grandchildren through the traditional familial transfer mechanism.
Hahn and Park offer some empirical evidence, at both the macro and micro levels, for a possible linkage between demographic transition and long-term economic performance. Based on theoretical works by Becker, Murphy, and Tamura (1990), Tamura (1995), and Lucas (2002) among others, they present two hypotheses on the linkages among human capital accumulation, change in demographic structure, and economic growth. Theoretical works show that an increase in the rate of return to human capital may trigger a shift from low-growth high-fertility Malthusian equilibrium to high-growth low-fertility development equilibrium by stimulating human capital investment and substitution of quantity for quality of children. One can infer that these theoretical studies predict a positive correlation between the speed of demographic transition and the speed of economic growth. Faster demographic transition is also related to faster accumulation of human capital, because the main driving force is the increase in the rate return to human capital investment. Using a traditional cross-county growth regression framework and newly suggested measures of speed of demographic change, the researchers find positive answers for both of the hypotheses. They also provide supporting evidence for the quality-quantity trade-off hypothesis with micro-level household survey data from Korea where they have observed some of the fastest economic growth and demographic change.
Liu and San find that, of the electronics firms in Taiwan surveyed, 64 percent of them agree that the aging problem will have an adverse impact on Taiwan's electronics industry, while only 35 percent of the firms surveyed do not agree that it will have such an impact. They also find that the possible reasons for the aging problem having such an adverse impact are the inevitable difficulties faced in recruiting skilled manpower, together with the outward relocation of electronics firms in Taiwan. The relaxation of the relevant labor laws that enable part-time workers to participate more actively in the labor force and the relevant child-care policies that enable female workers to participate more in Taiwan's labor market might lead to a reduction in the possible adverse impact of the aging problem on the electronics industry in Taiwan.
Australia is nearing the end of a "demographic sweet spot" that has resulted in relatively low total dependency ratios, high labor force participation, and higher levels of GDP per capita. Over the coming years declining mortality, together with relatively low fertility, will lead to a very different, older population structure. While declining mortality, in particular, is to be welcomed, the process of population aging presents important economic and fiscal challenges. Furnell and her co-authors show how higher migration can mitigate somewhat the economic and fiscal impacts of population aging through its impact on Australia's demography and labor force participation. Specifically, drawing on the long-term projection methodology used in the Australian second Intergenerational Report, they compare the outcomes of that report with a 'high immigration scenario." These projections, which focus on the impact of migration on demography and the labor force, should be interpreted in the context of the broader economic effects of immigration.
Lee estimates the labor force participation rate (LFPR) of older males in Korea from 1955 through 2005, and analyzes the effects of several determining factors on labor-force participation decisions at older ages. The LFPR of older men increased substantially from the mid-1960s to the late-1990s. This pattern is in sharp contrast to the historical experiences of most other OECD countries, where the LFPR of older males declined rapidly over the last century. The rise in the LFPR of older males in Korea between 1965 and 1995 is largely explained by the dramatic increase in the labor-market activity of the rural elderly population. The results of regression analyses suggest that the acceleration of population aging in rural areas because of the selective out-migration of younger persons was the major cause of the sharp increase in the LFPR of older males. It is likely that the relative decline of the rural economy in the course of industrialization made it increasingly difficult for the rural elderly population to save for retirement.
Takayama begins with a brief sketch of Japanese demography and its impact on financing social security. He then explains the Japanese social security pension program and summarizes Japan's major pension problems. He further examines the 2004 pension reform and uses a balance-sheet approach to analyze its economic implications. His paper discusses future policy options for pensions, as well. Financial sustainability of social security pensions is not often attained, even when income statements show a surplus. The balance-sheet approach is an indispensable tool for people to understand the long-run financial sustainability of social security pensions and to evaluate the varying financial effects of different reform alternatives. When it comes to social security pensions, the most important question is whether they are worth buying. Contributions must be much more directly linked to old-age pension benefits, while an element of social adequacy has to be incorporated into a separate tier of pension benefits financed by sources other than contributions. Takayama also shows that a shift to a consumption-based tax to finance the basic pension in Japan will induce smoother increases in pension burdens among different cohorts.
Kim investigates intergenerational transfers in Korea, focusing on children's financial assistance to their elderly parents. Even though it is not always sufficient, financial help from adult children has alleviated income deficiency among Korean elderly, as at least 30 percent of income for those in their seventies comes from their children's transfers. Using data from the Korean Longitudinal Study of Ageing (KLoSA) and the Korean Retirement and Income Study (KReIS), Kim finds that altruism is the main motive for familial transfers in Korea and that positive expectations about public support decrease elderly parents' net transfer receipts in the family. The exchange motive, however, also appears to operate, in the form of more transfers to parents who look after their grandchildren. The family fixed-effect models using the KLoSA sibling sample show that the eldest son still undertakes the heaviest burden of supporting his elderly parents through financial help or co-residence with them. In addition a child's additional year of education only leads to an additional net transfer of 90,000 won (roughly 90 dollars) per year for the elderly parents, implying that child education can hardly be a retirement plan. Moreover, the familial support mechanism has been deteriorating in Korea, and the burden of supporting the increasing number of elderly has been shifting from families to government; within a family, it has been shifting from the eldest son to the elderly parents themselves. Therefore, individuals need better planning for retirement and longevity risk. The government too should consider ways to reduce poverty among the elderly, including promoting elderly employment, enhancing long-term saving incentives, and making pension reforms.
Almond and his co-authors estimate the effects of maternal stress and malnutrition using the Chinese famine of 1959-61 as a natural experiment. Observed forty years later, in the 2000 China Census (1 percent sample), famine survivors showed impaired literacy, labor market, wealth, and marriage market outcomes. In addition, maternal malnutrition reduced the sex ratio (males to females) in two generations - those prenatally exposed and their children - presumably through heightened male mortality. This tendency toward female cohorts can be interpreted in light of the Trivers-Willard (1973) hypothesis, according to which parents in poor condition should skew the offspring sex ratio toward daughters. Hong Kong Natality microdata from 1984-2004 further confirm this pattern. The persistence of poor nutrition in China - particularly in rural areas and among girls - suggests that health and economic outcomes will be compromised well into the twenty-first century.
The decline in the total fertility rate between 1960 and 2005, coupled with an increase in life expectancy and the dynamic evolution of past variation in birth and death rates, is producing a significant shift in age structure in Asia. The age distribution has shifted from one with a high youthful population share to one with a high old-age population share. Bloom and his co-authors illustrate the role of these separate forces in shaping the age distribution. They also argue that the economic consequences of population aging depend on behavioral responses to the shift in age structure: the female labor force participation response to the decline in fertility, child quality/quantity trade-off in the face of the fertility decline, savings adjustments to an increase in life expectancy, and social security distortions insofar as the pace of life expectancy improvements is faster than the pace of policy adjustments. They estimate the association between old- and young-population shares and economic grow Their results suggest that population aging does not, and will not, significantly impede the growth of income per capita in Asia.
In recent decades, several East Asian economies have been going through a rapid demographic transition. With total fertility rates well below the replacement ratio, childless families not surprisingly have begun to emerge on a large scale. For example, in Hong Kong, where the total fertility rate is less than one, 30 percent of the women in their mid-forties do not have any children at all, and this ratio is increasing quickly. This poses new challenges, not only to public policymaking but also to the theoretical literature on the quality-quantity tradeoff of children. When there are no children, the vehicle for human capital investment may disappear. Lui presents a model that that can naturally generate the demographic transition with a corner solution occurring at zero fertility. Using a variety of models to analyze the data collected from a survey conducted before the spring of 2008, Lui verifies that parental human capital is a very significant factor affecting the fertility rate. Moreover, several important factors that may have an impact on the demographic transition and zero fertility are identified.
31st International Seminar on Macroeconomics
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France's 1998 implementation of the 35-hour workweek has been one of the greatest regulatory shocks on labor markets. Few studies evaluate the impact of this regulation because of a lack of identification strategies. Chemin and Wasmer find that for historical reasons, because of the way Alsace-Moselle was returned to France in 1918, the implementation of France's 35-hour workweek was less stringent in that region than in the rest of the country. Yet they find no significant difference in employment with the rest of France, which casts serious doubt on the effectiveness of this regulation in raising employment.
Baldwin and Di Nino investigate whether the euro boosted Eurozone integration by impeding pricing-to-market behavior. They study the pricing strategies of exporters from 20 countries (Eurozone and non-Eurozone) to identify variations in the average cost mark-up and exchange rate pass through. Their preliminary findings suggest that the euro has not accelerated the speed of convergence of export prices within the area but rather has brought about a one-time jump in convergence around the date of its adoption. Pricing-to-market estimations reveal no changes in the average markup or in the exchange rate pass through elasticity. Overall, they find that the euro's introduction has had little impact on trade pricing behavior.
In the last 15 years the nature of the corporation has been changing. This has involved a change in management style to more decentralized and less hierarchical decision-making, a stronger focus on "core competences", the emergence of talent as the "new stakeholder" in the firm, and the organization of the corporation in an international value chain in which different stages of production are taking place in different countries. At the same time, the firm boundaries have been shifting, leading to outsourcing of firm activities on the one hand and merger activities on the other. Marin explores the role of international trade and foreign direct investment and the opening up to the former communist countries as the driving forces behind the emergence of the "new corporation" in Europe. She also examines the challenges these changes in corporate organization may pose, in particular in the areas of trade policy and human resource policies.
Using firm-level data for 79 developed and developing countries, Alfaro and her co-authors investigate whether differences in the allocation of resources across plants that are heterogeneous in size are a significant determinant of cross-country differences in income per worker. The researchers use a standard version of the neoclassical growth model augmented to incorporate monopolistic competition among heterogeneous firms. For their preferred calibration, the model explains 58 percent of the log variance of income per worker, as compared to the 42 percent success rate of the usual model.
Bergin and Lin find that currency unions and direct exchange rate pegs raise trade through distinct channels. Panel data analysis of the period 1973-2000 indicates that currency unions have raised trade predominantly at the extensive margin, the entry of new firms or products. In contrast, direct pegs have worked almost entirely at the intensive margin, increased trade of existing products. The authors develop a stochastic general equilibrium model, featuring price stickiness and firm entry under uncertainty, to understand this result. Because both regimes tend to reliably provide exchange rate stability over the horizon of a year or so, which is the horizon of price setting, both lead to lower export prices and greater demand for exports. But because currency unions historically are more durable than pegs over a longer horizon, they encourage firms to make the longer-term investment needed to enter a new market. The model predicts that whenever exchange rate uncertainty is completely and permanently eliminated, all of the adjustment in trade occurs at the extensive margin.
Taylor and Kim carry out an analysis of European real exchange rate behavior before and after the implementation of Economic and Monetary Union (EMU). In particular, in an explicitly nonlinear framework, they model real exchange rates for a number of EMU and non-EMU countries against Germany, and they allow for variation in the equilibrium level of the long-run equilibrium real exchange rate using either relative productivities or real diffusion indexes. The estimated models show that real variables are a significant determinant of long-run real exchange rates when incorporated into a nonlinear framework. The researchers also find that the speed of adjustment is generally faster after the implementation of EMU.
Curcuru, Thomas, and Warnock provide a brief but relatively complete survey of various theories that have been offered regarding the sustainability of the U.S. current account deficit. They focus on the data these theories rely on, provide an evaluation of the relative reliability of data on various subcomponents of the international accounts, and through this analysis weigh in on which theories are better supported by the data. Their analysis of the dark matter theory from a relative data reliability perspective is that it fails because it is built on the assumption that an item that is largely unmeasured is the most accurate component of the entire set of international accounts. Their analysis of the exorbitant privilege theory requires much more depth, as they must first construct estimates of adjustments for known shortcomings in the accounts. After plugging various holes in the accounts, they find that the positive returns differential the United States earns on its net international investment position is much smaller than implied by the exorbitant privilege theory.
A considerable literature has examined the causes, consequences, and policy responses to surges in international capital flows. A related strand of papers has attempted to catalog systematically the current account reversals and capital account "sudden stops." Reinhart and Reinhart offer an encompassing approach with an algorithm cataloging capital inflow bonanzas in both advanced and emerging economies during 1980-2007 for 181 countries and 1960-2007 for a subset of 66 economies from all regions. In line with earlier studies, this study shows that global factors -- such as commodity prices, international interest rates, and growth in the world's largest economies -- have a systematic effect on the global capital flow cycle. Bonanzas are no blessing for advanced or emerging market economies. In the case of the latter, capital inflow bonanzas are associated with a higher likelihood of economic crises (debt defaults, banking, inflation, and currency crashes). Bonanzas in developing countries ar associated with pro-cyclical fiscal policies and attempts to curb or avoid an exchange rate appreciation - very likely contributing to economic vulnerability. For the advanced economies, the results are not as stark, but bonanzas are associated with more volatile macroeconomic outcomes for GDP growth, inflation, and the external accounts, lower growth, and sustained declines in equity and housing prices will follow at the end of the inflow episode.
Clarida's paper provides some intuition and quantitative insight into monetary policy choices faced in the open economy. The theoretical sections of the paper focus on three main building blocks: the "open economy" IS curve, the open economy Phillips curve, and the open economy Taylor rule. The following results are based upon a benchmark specification of the model, which assumes that the elasticity of substitution in consumption is less than one: first, in general there will be a spillover from foreign output to potential domestic output -- potential output in the open economy is not a closed-economy construct and cannot be defined without reference to global developments. Second, in general there will be a spillover from foreign output growth to the domestic neutral real interest rate -- again the "domestic" neutral real interest rate cannot be defined without reference to global developments. Third, a more open economy may be expected to have a flatter Phillips curve. Finally, Clarida reviews a novel empirical implication of a version of this model, one that is supported in the data: that bad news about inflation will be good news for the exchange rate under a version of inflation targeting, notwithstanding an assumption that PPP (purchasing power parity) holds in the long run. He also introduces a new way to calibrate forward looking central bank policy rules using financial market data on real interest rates on inflation indexed bonds and break-even inflation rates instead of the instrumental variable, GMM approach introduced in his earlier work. He applies this approach to the Fed and ECB (European Central Bank) reaction functions since 2000 and finds that it accounts well for policy with much less emphasis on interest rate smoothing than in prior work. According to this analysis, variations in the neutral real interest rate, perhaps caused by the "global saving glut" and enhanced financial integration in a world of inflation targeting central banks, have played an important role in Fed policy this decade. For the ECB, the results are less clear cut because of the limited issuance of inflation indexed bonds during much of the sample, but are nonetheless encouraging.
A selection of these papers will appear in an NBER volume published by the University of Chicago Journals Division. They will also be available at "Books in Progress" on the NBER's website.
The tenth annual NBER-CCER Conference on China and the World Economy took place at the China Center for Economic Research (CCER) in Beijing on July 2-4. The conference program was jointly arranged by the National Bureau of Economic Research, the CCER at Beijing University, and Tsinghua University.
At this conference, the discussion topics presented by Chinese participants included: how factor income is distributed in China; the Chinese real estate market; the importance of productivity growth in China; an evaluation of China's poverty alleviation program; and stock market valuation, and the inelastic demand for stocks, in China.
U.S. participants at this year's conference were: NBER President Emeritus Martin Feldstein of Harvard University, and Professor Shang-Jin Wei of Columbia University and NBER, both serving as the U.S. conference organizers; Gita Gopinath of Harvard University; Jens Ludwig and Tomas Philipson, University of Chicago; and Charles Hulten, University of Maryland. They discussed: international trade and finance; the economics of crime; the Chinese saving puzzle; the importance of productivity; and health economics.
The entire conference program with links to other related information is available on the NBER's web site at here.