Volume 15, Issue 2

How does factor accumulation affect an open economy’s pattern of international specialization and returns to capital? We provide a new integrated treatment to this question using a panel of 44 developing and developed countries over the period 1976–2000. The data confirm the Heckscher-Ohlin prediction that, with sufficient differences in country endowments, there is no factor price equalization and countries specialize in different subsets of goods. Innovatively, we obtain the returns to capital implied by this model: these are consistent with the Lucas paradox, which we explain after accounting for cross-country differences in the cost of capital goods. Our findings are also consistent with Ventura’s hypothesis that the growth of small open economies can be promoted by “beating the curse of diminishing returns” – indeed we find no decrease in the return to capital at any given capital-labor ratio despite capital accumulation by most countries within a cone of diversification.

In the 1990s, in many countries, wages became a more convex function of education: returns to college increased and returns to intermediate education declined. This paper argues that an important cause of this convexification was an exogenous increase in the demand for skilled labour: the increased demand stimulated a supply response, and the supply of intermediate-educated workers further increased the demand for college-educated workers because these two types of labour are complementary. This argument is supported by an empirical equilibrium model of savings and educational choices for Mexico, where the degree of convexification was amplified by loosening credit constraints.

Despite the widespread diffusion of productivity-enhancing agricultural technologies the world over, agriculture in Sub-Saharan Africa has typically stagnated. This paper develops a quantitative model in order to shed light on the sources of low labor productivity in African agriculture. The model provides a vehicle for understanding the mechanisms leading to low agricultural labor productivity, in particular, how the interactions between factor endowments, government investment and technology adoption may have culminated in agricultural stagnation. I calibrate the model to data for four Sub-Saharan African economies, and use this calibrated model to provide insight into policy aimed at increasing agricultural productivity in these four countries. Policies aimed at improving rural infrastructure or productivity in the non-agricultural sectors, or allowing for land transferability, would be most effective for increasing agricultural labor productivity, and would further bring increases in household welfare for each of the countries I calibrate to.

This article examines the effects of sectorial shifts and structural transformation on the recent productivity path of Latin America. We use a four-sector (agriculture, industry, modern services and traditional services) general equilibrium model calibrated to the main economies in the region. The model very closely replicates labor reallocations across sectors and the growth of aggregate labor productivity from 1950 to 2005. Structural transformation explains a sizeable portion of the region’s convergence in the first decades. In most cases, the poor performance of the traditional services sector is the main cause of the slowdown in productivity growth observed in the region after the mid-1970s and is a key factor in explaining the divergence during this period.

Many studies in the empirical literature show that public debt is negatively correlated with economic growth but there is no paper that studies the causal links between these variables using rigorous tests based on Granger’s ideas. Accordingly, we investigate the causal links between debt-to-GDP ratio and economic growth using both linear parametric and nonlinear nonparametric Granger causality tests. We focus on 12 euro countries for the period 1970–2012. Our empirical results suggest a unidirectional causality running from debt to economic growth for Spain and Portugal and a bidirectional causality for Belgium, Germany, Greece, Ireland and Italy. No causality in either direction is identified for Austria, Finland, Luxembourg and the Netherlands. Finally, for France, the tests provide evidence for a unidirectional causality running from GDP growth to debt-to-GDP ratio. In addition, the nonlinear tests indicate that overlooking nonlinearities may result in misleading conclusions about Granger causality. Caveats of the analysis, as well as policy conclusions, are also discussed.

Many successful examples of economic development, such as South Korea, exhibit long periods of sustained capital accumulation. This process is characterized by a gradually rising investment rate along with a moderate rate of return to capital, both of which are strongly at odds with the standard neoclassical growth model that predicts an initially high and then declining investment rate with an extremely high return to capital. We show that minor modifications of the neoclassical model go a long way toward accounting for the capital accumulation path of the South Korean economy. Our modifications recognize that (i) agriculture (which makes up a large share of the aggregate economy in the early stage of development) does not rely much on capital and (ii) the relative price of capital declined substantially during the transition period.

This paper investigates household saving behavior in Australia, as well as the drivers behind the recent rise in the aggregate household saving ratio. Our results explaining differences in saving behavior across households are consistent with theory and previous findings. As might be expected, households’ saving ratios tend to increase with income, but decrease with wealth and gearing. More at-risk households such as single-parent and migrant households tend to save more than other households, all else being equal. While saving differs substantially across age groups we find that, at least in part, this reflects differing circumstances. Our results suggest that the rise in household saving between 2003/2004 and 2009/2010 was driven by changes in behavior rather than changes in population characteristics: in particular, more educated households, as well as households with high debt and/or wealth increased their propensity to save. Our interpretation of these results is that a reduction in future income growth expectations for more highly educated households after the financial crisis, and an associated effort to rebuild wealth and repay debt, drove to the aggregate rise in household saving.

The two leading explanations of the observed persistence in policy interest rate changes are monetary policy inertia and omitted serially correlated shocks. This paper addresses the persistence debate from the perspective of how to properly model policy rates. An ordered probit model is used to account for the discrete nature of interest rate adjustment, an aspect of policy absent in standard models. Ordered probit results show that the impact of inertia on interest rate setting is considerably smaller than indicated by standard models.

This paper implements a structural vector auto regression (SVAR) analysis to investigate the impacts and importance of fiscal shocks on the dynamics of the real exchange rate and the trade balance in three emerging economies: Brazil, Chile and Mexico. We show that the effects of an unexpected increase in government spending are not uniform across countries with higher spending leading to a depreciation of the real exchange rate in Brazil and Chile, whereas in Mexico, we observe an appreciation. The trade balance deteriorates in all three countries. We also report that an unexpected increase in taxes leads to recessionary impacts and improves the trade balance. Only in Mexico is there evidence of a real exchange rate depreciation. Finally, we show that fiscal shocks account for roughly 20% of real exchange fluctuations.

The extant literature indicates that remittance inflows from developed to developing countries provide liquidity for domestic financial institutions, which aids in the development process. However, the reverse effect has been neglected. This paper tests whether more financial services and opportunities in the home country attract remittances to developing countries. It addresses this hypothesis using a dataset of 72 developing countries over the period 1997–2011. The paper finds evidence that remittance inflows are driven by increased availability of domestic financial services. In particular, the presence of microfinance institutions is found to be a key driver in stimulating migrant remittances. These findings, perhaps, suggest that remittance-sending migrants may not be altruistic and send remittances to maximize their own future income. Alternatively, the results suggest that microfinance organizations have been successful in attracting remittances by lowering transaction costs and proving linked services.

This paper assesses the convergence in per capita income of a group of 18 Latin American countries over the period 1950–2008. We employ a novel regression based convergence test proposed by (Phillips, P. C. B., and D. Sul. 2007. “Transition Modeling and Econometric Convergence Tests.” Econometrica 75: 1771–1855). Contrary to most previous studies, our approach allows us to examine for evidence of club convergence and enables to endogenously identify groups of countries that convergence to different equilibria. Our results support the existence of convergence clubs, indicating that Latin American countries form three separate groups within which income per capita dispersion is decreasing over time. Moreover, results from an ordered logit model suggest that differences in institutions quality among Latin America countries have played a crucial role in determining club membership.