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This paper develops a model in which two competing fiat currencies may coexist as media of exchange. Domestic currency has lower transactions costs but a higher growth rate than foreign currency. It is used in everyday transactions and has a higher velocity of circulation in equilibrium. In contrast, foreign currency is hoarded for occasional high consumption shocks. A precautionary transactions demand for foreign currency arises because it is a better store of value. The different endogenous roles for the currencies provide an explanation for the nondisappearance of the hyperinflating domestic currency in the presence of a stable foreign currency. Though the presence of foreign currency lowers the value of the domestic currency, it may increase welfare when large amounts of seigniorage must be generated.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2010.06.003 Byline: Maggie Xiaoyang Chen, Sumit Joshi Keywords: Free trade agreements; Third-country effect; Loss sharing; Concession erosion Abstract: The recent proliferation of free trade agreements (FTAs) has resulted in an increasingly complex network of preferential trading relationships. The economics literature has generally examined the formation of FTAs as a function of the participating countries' economic characteristics alone. In this paper, we show both theoretically and empirically that the decision to enter into an FTA is also crucially dependent on the participating countries' existing FTA relationships with third countries. Accounting for the interdependence of FTAs helps to explain a significant fraction of FTA formations that would not otherwise be predicted by countries' economic characteristics. Article History: Received 10 October 2007; Revised 26 April 2010; Accepted 22 June 2010 Article Note: (footnote) [star] We are very grateful to Dan Trefler and three anonymous referees for valuable comments and suggestions that have significantly improved the paper. We also thank Caroline Freund, Bob Goldfarb, Keith Maskus, Mike Moore, Roberto Samaniego, and seminar participants at George Washington University for very helpful feedback and discussions. Financial support from GW CIBER is gratefully acknowledged by Maggie Chen. An earlier version of this paper appeared as a GW Institute for International Economic Policy working paper.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2010.07.002 Byline: James Harrigan Keywords: Trade; Comparative advantage; Transport costs; Airplanes Abstract: Airplanes are a fast but expensive means of shipping goods, a fact which has implications for comparative advantage. The paper develops a Ricardian model with a continuum of goods which vary by weight and hence transport cost. Comparative advantage depends on relative air and surface transport costs across countries and goods, as well as stochastic productivity. A key testable implication is that the U.S. should import heavier goods from nearby countries, and lighter goods from faraway counties. This implication is tested using detailed data on U.S. imports from 1990 to 2003. Looking across goods the U.S. imports, nearby exporters have lower market share in goods that the rest of the world ships by air. Looking across exporters for individual goods, distance from the US is associated with much higher import unit values. These effects are large, which establish that the model identifies an important influence on specialization and trade. Article History: Received 18 February 2007; Revised 15 June 2010; Accepted 12 July 2010 Article Note: (footnote) [star] This paper has benefited from audience comments at Ljubljana, Illinois, Michigan, Columbia, the World Bank, NBER, CEPR, Hitotsubashi, Tokyo, City University of Hong Kong, and Hong Kong University of Science and Technology. I thank Christina Marsh and Geoffrey Barrows for excellent research assistance.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2010.08.006 Byline: Peter M. Morrow Keywords: Heckscher-Ohlin; Ricardian; Increasing returns to scale; Omitted variable bias Abstract: This paper derives and estimates a unified and tractable model of comparative advantage due to differences in both factor abundance and relative productivity differences across industries. It derives conditions under which ignoring one force for comparative advantage biases empirical tests of the other. I emphasize two empirical results: First, factor abundance- and relative productivity-based models each possesses explanatory power when nesting the other as an alternate hypothesis. Second, productivity differences across industries do not bias tests of the HO model in my sample. However, I find weak and mixed evidence that Heckscher-Ohlin forces can potentially bias tests of the Ricardian model. Article History: Received 20 July 2009; Revised 26 April 2010; Accepted 23 August 2010 Article Note: (footnote) [star] This paper previously circulated with the title 'East is East and West is West': A Ricardian-Heckscher-Ohlin Model of Comparative Advantage.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2010.06.002 Byline: Eric C.Y. Ng Keywords: International business cycles; Comovement; Production fragmentation Abstract: International trade increasingly involves trade in goods being produced in fragmentation arrangements across countries, with each country specializing in different stages of a production sequence. This paper examines empirically whether pairs of countries with more bilateral production fragmentation arrangements tend to have more correlated business cycles. Using cross-country data from 30 countries, we find that bilateral production fragmentation has a positive effect while the standard bilateral trade intensity indicator has a negative impact on business-cycle comovement. We also find that the positive effect of trade in complements (captured by bilateral production fragmentation) dominates the negative effect of trade in substitutes (explained by bilateral trade intensity), resulting in an overall positive impact of trade. Hence, bilateral production fragmentation plays a key role underlying the positive response of business-cycle comovement to increases in trade. Article History: Received 20 October 2007; Revised 29 April 2010; Accepted 22 June 2010 Article Note: (footnote) [star] The views expressed in this paper are those of the author and do not represent those of Industry Canada or the Government of Canada. I would like to thank Jim MacGee, Igor Livshits, John Whalley, Hiroyuki Kasahara, and two anonymous referees for useful comments and suggestions.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.06.005 Byline: Stephanie E. Curcuru (a), Tomas Dvorak (b), Francis E. Warnock (c)(d)(e)(f) Keywords: Returns differential; Timing effect Abstract: We decompose the returns differential between U.S. portfolio claims and liabilities into the composition, return, and timing effects. Our most striking and robust finding is that foreigners exhibit poor timing when reallocating between bonds and equities within their U.S. portfolios. The poor timing of foreign investors-caused primarily by deliberate trading, not a lack of portfolio rebalancing-contributes positively to the U.S. external returns differential. We find no evidence that the poor timing is driven by mechanical reserve accumulation by emerging market countries; rather, it is driven almost entirely by the poor timing of rich, developed (mainly European) countries. Finally, while poor foreign timing appears to be persistent across subsamples, other terms in our decomposition (the composition and return effects and U.S. timing abroad), as well as the overall differential, are sometimes negative, sometimes positive, and usually indistinguishable from zero. Author Affiliation: (a) Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551, United States (b) Union College, 807 Union Street, Schenectady, NY 12308, United States (c) Darden Graduate School of Business, University of Virginia, Charlottesville, VA 22906-6550, United States (d) Institute for International Integration Studies, Trinity College, Dublin, Ireland (e) Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, 2200 N. Pearl Street, Dallas, Texas 75201, United States (f) National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138, United States Article History: Received 6 June 2008; Revised 10 June 2009; Accepted 13 June 2009 Article Note: (footnote) [star] This paper is a much-revised and updated version of a paper previously circulated as 'The Stability of Large External Imbalances: The Role of Returns Differentials.' The views in this paper are solely the responsibility of the author(s) and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Dallas, or of any other person associated with the Federal Reserve System. We are thankful for the helpful comments of two anonymous referees, Carol Bertaut, Ricardo Caballero, Charles Engel (the editor), Kristin Forbes, Gian Maria Milesi-Ferretti, Cedric Tille, Charles Thomas, Ralph Tryon, Eric van Wincoop, Jon Wongswan, and seminar participants at the Dallas Fed, the European University Institute, Harvard, the IMF Conference on International Macro-Finance, and UNC. Warnock thanks the Darden School Foundation for its generous support.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.05.007 Byline: Juan Carlos Gozzi (a), Ross Levine (a)(b), Sergio L. Schmukler (c) Keywords: International finance; Corporate finance; Bonding; Segmentation; Market timing Abstract: This paper documents several new patterns associated with firms issuing stocks and bonds in foreign markets that motivate the need for and help guide the direction of future research. Three major patterns stand out. (1) A large and growing fraction of capital raisings, especially debt issuances, occurs in international markets, but a very small number of firms accounts for the bulk of international capital raisings, highlighting the cross-firm heterogeneity in financial globalization. (2) Changes in firm performance following equity and debt issuances in international markets are qualitatively similar to those following domestic issuances, suggesting that capital raisings abroad are not intrinsically different from those in domestic markets. (3) Firms continue to issue securities both abroad and at home after accessing international markets, suggesting that international and domestic markets are complements, not substitutes. Existing theories do not fully account for these patterns. Author Affiliation: (a) Brown University, United States (b) NBER, United States (c) World Bank, United States Article History: Received 28 June 2008; Revised 13 May 2009; Accepted 14 May 2009 Article Note: (footnote) [star] We received very helpful comments from Charles Engel, Chris Meissner, Nirvikar Singh, two anonymous referees, and participants at presentations held at Brown University, the ESRC-WEFRP/IMF International Macro-Finance Conference (Washington, DC), the LACEA-LAMES Annual Meetings (Rio de Janeiro, Brazil), and the NIPFP-DEA workshop (Delhi, India). We are grateful to Francisco Ceballos, Tomislav Ladika, Mercedes Politi, and Aleksandar Zaklan for excellent research assistance. We thank the World Bank Finance Research Program and Research Support Budget for ample financial support. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and do not necessarily represent the views of the World Bank.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.06.001 Byline: Michael B. Devereux (a)(b)(c), Alan Sutherland (c)(d) Keywords: Valuation effects; Net foreign asset dynamics; Current account imbalances; Country portfolios; Risk sharing Abstract: 'Valuation effects' can imply that the traditional current account is an inaccurate measure of the change in the net foreign asset (NFA) position. This paper uses new developments in the analysis of portfolio choice in general equilibrium to investigate valuation effects in a two-country model. Broadly speaking, the valuation effects in the model correspond to those observed in the data. But there is a key distinction between 'unanticipated' and 'anticipated' valuation effects. Unanticipated effects can be large, dominating the movement in NFA, but anticipated effects arise only at higher orders of approximation and are small for reasonable parameterizations. Author Affiliation: (a) Department of Economics, University of British Columbia, 997-1873 East Mall, Vancouver, B.C. Canada V6T 1Z1 (b) NBER, United States (c) CEPR, UK (d) School of Economics and Finance, University of St Andrews, St Andrews, Fife, KY16 9AL, UK Article History: Received 2 July 2008; Revised 23 May 2009; Accepted 2 June 2009 Article Note: (footnote) [star] We are grateful for many useful comments on an earlier draft of this paper from two anonymous referees, the Editor, participants in the April 2008 IMF-ESRC-WEF conference, IEA Istanbul 2008, HEC Montreal, SNB Zurich, Harris Dellas and Helene Rey. We thank Hung Nguyen for the research assistance. We are also grateful for the support from ESRC World Economy and Finance Program, award 156-25-0027, SSHRC, the Bank of Canada, and Royal Bank of Canada. The views here are the authors' own and they do not represent the view of the Bank of Canada.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.08.001 Byline: Daniel M. Bernhofen Keywords: Heckscher-Ohlin; Multiple cones; Factor content restrictions Abstract: This paper examines the theoretical predictions of the multi-cone Heckscher-Ohlin model and the empirical evidence for it. I extend Helpman (1984)by identifying additional restrictions that characterize the free trade equilibrium. I illustrate that the complete set of restrictions are the building blocks of a multi-cone factor content specification which is the factor content dual to Alan Deardorff's (1979)well-known chain of comparative advantage goods prediction. The theoretical analysis implies that the existing tests of Helpman are incomplete. Applying the complete set of restrictions to Choi and Krishna's data set of 8 OECD countries, I find limited empirical support. This is compatible with previous studies suggesting that OECD countries do not occupy different cones. Author Affiliation: School of Economics and Leverhulme Centre for Research on Globalization and Economic Policy, University of Nottingham, University Park, Nottingham, NG7 2 RD, UK Article History: Received 22 July 2008; Revised 20 July 2009; Accepted 17 August 2009 Article Note: (footnote) [star] I am grateful to Pravin Krishna for providing me access to the data set used in Choi and Krishna (2004). This paper benefitted from discussions with Jim Harrigan, Elhanan Helpman, Willi Kohler, Peter Neary, two anonymous referees and seminar participants at several conferences and universities. I am particularly indebted to Rod Falvey for the key theoretical insight in the early development of this paper.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.07.006 Byline: Taiju Kitano (a), Hiroshi Ohashi (b) Keywords: Safeguard; Tariff; Random coefficient discrete choice model; Motorcycles Abstract: This paper examines US safeguards applied to the motorcycle market in the 1980s. After receiving temporary protection by means of a maximum tariff of over 45%, Harley-Davidson sales recovered dramatically. Simulations, based on structural demand and supply estimates, indicate that while safeguard tariffs did benefit Harley-Davidson, they only account for a fraction of its increased sales. This is primarily because consumers perceived that Harley-Davidson and Japanese large motorcycles were poorly matched substitutes for each other. Our results provide little evidence that safeguard provisions triggered restructuring in Harley-Davidson. Author Affiliation: (a) National Graduate Institute for Policy Studies, Japan (b) Department of Economics, University of Tokyo, Japan Article History: Received 22 November 2007; Revised 10 February 2009; Accepted 23 July 2009 Article Note: (footnote) [star] We thank Istvan Konya, Eiichi Tomiura, Ryuhei Wakasugi, Yasuyuki Yoshida, Kazuo Wada, two anonymous referees, and participants at various conferences and seminars for comments. We are grateful to Mayumi Ueno Bendiner and Masako Onuki for making the data available for the paper.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.08.002 Byline: Christopher Gust (a), Sylvain Leduc (b), Nathan Sheets (a) Keywords: Exchange-rate pass-through; Trade prices; Trade balance Abstract: This paper assesses whether partial exchange-rate pass-through to trade prices has important implications for the prospective adjustment of global external imbalances. To address this question, we develop and estimate an open-economy DSGE model in which pass-through is incomplete due to the presence of local currency pricing, distribution services, and a variable demand elasticity that leads to fluctuations in optimal markups. We find that the overall magnitude of trade adjustment is similar in a low and high pass-through environment with more adjustment in a low pass-through world occurring through movements in the terms of trade rather than real trade flows and through a larger response of the exchange rate. Author Affiliation: (a) Federal Reserve Board, 20th and C Street, Washington DC 20551, USA (b) Federal Reserve Bank of San Francisco, San Francisco, CA, USA Article History: Received 14 November 2006; Revised 13 August 2009; Accepted 14 August 2009 Article Note: (footnote) [star] The authors thank Charles Engel, Chris Erceg, Joseph Gagnon, Luca Guerrieri, Dale Henderson, Karen Johnson, Steven Kamin, Jamie Marquez, Trevor Reeve, and two anonymous referees for useful comments and suggestions. The views expressed in this paper are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Board of Governors of the Federal Reserve System, Federal Reserve Bank of San Francisco, or of any other person associated with the Federal Reserve System.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.05.005 Byline: Marcus M. Opp (a), Hugo F. Sonnenschein (b), Christis G. Tombazos (c) Keywords: Rybczynski theorem; Heckscher-Ohlin; Factor endowments; Immiserizing growth; Transfer paradox Abstract: We demonstrate that Rybczynski's classic comparative statics can be reversed in a Heckscher-Ohlin world when preferences in each country favor the exported commodity. This taste bias has empirical support. An increase in the endowment of a factor of production can lead to an absolute curtailment in the production of the commodity using that factor intensively, and an absolute expansion of the commodity using relatively little of the same factor. This outcome - which we call 'Reverse Rybczynski' - implies immiserizing factor growth. We present a simple analytical example that delivers this result with unique pre- and post-growth equilibria. In this example, production occurs within the cone of diversification, such that factor price equalization holds. We also provide general conditions that determine the sign of Rybczynski's comparative statics. Author Affiliation: (a) Haas School of Business, University of California, Berkeley, 2220 Piedmont Avenue, Berkeley, CA 94720, United States (b) Department of Economics, University of Chicago, 1126 E. 59th Street, Chicago, IL 60637, United States (c) Department of Economics, Monash University, Clayton, Victoria, 3800, Australia Article History: Received 22 March 2007; Revised 27 March 2009; Accepted 19 May 2009 Article Note: (footnote) [star] A previous version of this paper was presented in Melbourne as the first Xiaokai Yang Memorial Lecture. It is dedicated to the memory of Professor Yang. The paper was also presented in Delhi as a Sukhamoy Chakravarty Memorial Lecture, and in seminars at the University of Chicago, the University of Rochester, Princeton University, and the College of William and Mary. It is a pleasure to acknowledge helpful discussions and communications with Avinash K. Dixit, Peter Dixon, Gene M. Grossman, Matthew Jackson, Ronald W. Jones, Murray Kemp, Samuel S. Kortum, Andreu Mas-Colell, Philip Reny, and John S. Chipman. We also thank the Journal of International Economics' editor Jonathan Eaton, and two anonymous referees for helpful comments and suggestions on an earlier draft. A previous version of this paper by Sonnenschein and Opp was entitled 'A reversal of Rybczynski's comparative statics via 'Anything Goes'' and was first submitted to this journal in March of 2007.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.06.003 Byline: Hilde C. BjA[cedilla]rnland Keywords: Exchange rate; Uncovered interest parity (UIP); Dornbusch overshooting; Monetary policy; Structural vector autoregressive (VAR) Abstract: Dornbusch's exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has been viewed by some researchers as a 'stylized fact' to be reckoned with in policy modelling. However, many of these studies, in particular those using vector autoregressive (VARs) approaches, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them. In contrast, we achieve identification by imposing a long-run neutrality restriction on the real exchange rate, thereby allowing for contemporaneous interaction between the interest rate and the exchange rate. In a study of four open economies, we find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate, which appreciates on impact. The maximum effect occurs within 1-2 quarters, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with uncovered interest parity (UIP). Author Affiliation: Department of Economics, Norwegian School of Management (BI), Nydalsveien 37, 0484 Oslo, Norway Norges Bank, Bankplassen 2, P.O. Box 1179 Sentrum, N-0107 Oslo, Norway Article History: Received 11 January 2007; Revised 4 June 2009; Accepted 8 June 2009 Article Note: (footnote) [star] This paper has previously been circulated under the title: 'Monetary Policy and the Illusionary Exchange Rate Puzzle'. I am grateful for comments and suggestions from Steinar Holden, three anonymous referees, Leif Brubakk, Carlo A. Favero, Nils Gottfries, JA[cedilla]rn I. Halvorsen, Kai Leitemo, Jesper Linde, Sharon McCaw, Kjetil Olsen, AsbjA[cedilla]rn RA[cedilla]dseth, Luca Sala, and the participants at the seminars in the Bank of England, Norges Bank, Sveriges Riksbank, University of Oslo, Uppsala University and at the CEF 2006 conference in Cyprus and the EEA 2007 conference in Budapest. Thanks to Kathrine Lund for collecting the data. I gratefully acknowledge financial support from the Norwegian Financial Market Fund under the Norwegian Research Council. The usual disclaimer applies. The views expressed in this paper are those of the author and should not be attributed to Norges Bank.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.06.002 Byline: Marcel Fratzscher Keywords: Group of Seven; G7; Exchange rate; Communication; Policy; Adjustment; Success; Event-study methodology; US dollar; Yen; Euro Abstract: The paper assesses the extent to which the Group of Seven (G7) has been successful in its management of major currencies since the 1970s. Using an event-study approach, the paper finds evidence that the G7 has been overall effective in moving the US dollar, yen and euro in the intended direction at horizons of up to three months after G7 meetings, but not at longer horizons. While the success of the G7 is partly dependent on the market environment, it is also to a significant degree endogenous to the policy process itself. In particular the reputation and credibility of the G7, as well as its ability to communicate a consensus among individual G7 members, are important determinants for the G7's ability to manage major currencies. The paper concludes by analyzing the factors that help the G7 build reputation and consensus, and by discussing the implications for global economic governance. Author Affiliation: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt/Main, Germany Article History: Received 17 August 2008; Revised 2 June 2009; Accepted 3 June 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.04.003 Byline: Ben Zissimos Keywords: Comparative statics; Efficiency; North-South; Tariff war; Terms of trade Abstract: This paper identifies a new terms-of-trade externality that is exercised through tariff setting. A North-South model of international trade is introduced in which the number of countries in each region can be varied. As the number of countries in one region is increased, each government there competes more aggressively with the others in its region, by lowering its tariff, to attract imports from the other region. In doing so, all countries in a region exert a negative terms-of-trade externality on each other, collectively undermining their own terms of trade and welfare. This externality can increase efficiency if the numbers of countries in both regions are increased simultaneously. Author Affiliation: Department of Economics, Vanderbilt University, Nashville, TN 37235, USA Article History: Received 1 August 2008; Revised 31 March 2009; Accepted 2 April 2009 Article Note: (footnote) [star] First and foremost I would like to thank Francis Bloch for his contribution to the ideas in this paper; indeed, he was a coauthor of an early draft which circulated under the same title. In addition, I would like to thank Rabah Amir, Rick Bond, Costas Syropoulos and two anonymous referees for very useful conversations and/or comments about the paper. I am also grateful for comments from Bruce Blonigen, Mario Crucini, Amrita Dhillon, Peter Neary, Dennis Novy, Emanuel Ornelas, Dimitra Petropoulou, Steve Redding, Joel Rodrigue, Adrian Wood, Isleide Zissimos, and seminar participants at Drexel University, London School of Economics, University of Oregon, University of Oxford, University of Warwick, Vanderbilt University, the GPED 50th Anniversary Conference, the North American Summer Meetings of the Econometric Society at Duke University and the 2009 AEA Meetings in San Francisco.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.01.016 Byline: Jorge Balat (a), Irene Brambilla (a)(b), Guido Porto (c) Keywords: Exports of coffee; Tea; Cotton; Trade costs; Trade facilitation; Market access; Intermediation; Uganda Abstract: This paper explores the role of export costs in the process of poverty reduction in rural Africa. We claim that the marketing costs that emerge when the commercialization of export crops requires intermediaries can lead to lower participation into export cropping and, thus, to higher poverty. We test the model using data from the Uganda National Household Survey. We show that: i) farmers living in villages with fewer outlets for sales of agricultural exports are likely to be poorer than farmers residing in market-endowed villages; ii) market availability leads to increased household participation in export cropping (coffee, tea, cotton, fruits); iii) households engaged in export cropping are less likely to be poor than subsistence-based households. We conclude that the availability of markets for agricultural export crops help realize the gains from trade. This result uncovers the role of complementary factors that provide market access and reduce marketing costs as key building blocks in the link between the gains from export opportunities and the poor. Author Affiliation: (a) Yale University, 37 Hillhouse, New Haven, Connecticut 06511, United States (b) NBER, United States (c) Development Research Group, The World Bank, MailStop MC3-303, 1818 H St., Washington, DC 20433, United States Article History: Received 28 August 2007; Revised 13 June 2008; Accepted 27 January 2009 Article Note: (footnote) [star] We thank J. Muwonge at the Uganda Bureau Of Statistics (UBOS) for assistance with the data and D. Merotto and H. Tang at the World Bank for encouragement and support. We thank H. Ennis, P. Goldberg, A. Harrison, K. Krishna, M. McMillan, and two anonymous referees for detailed comments, and seminar participants at Duke, NBER, Penn State, and the University of Connecticut. This paper was supported by a DECRG Research Support Budget grant and two Dfid projects on trade and services and on trade facilitation. All errors are our responsibility.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.01.010 Byline: Anthony Landry Keywords: State-dependent pricing; Variable demand elasticity; International business cycle transmission; Exchange rate dynamics Abstract: This paper presents a two-country DSGE model with state-dependent pricing as in Dotsey et al. [Dotsey, M., King, R.G., and Wolman, A.L., 1999. State-dependent pricing and the general equilibrium dynamics of money and output. Quarterly Journal of Economics 114, 655-690] and variable demand elasticity as in Kimball [Kimball, M.S., 1995. The quantitative analytics of the basis neomonetarist model. Journal of Money, Credit, and Banking 27, 1241-1277]. Following a domestic monetary expansion, the model predicts: (i) positive hump-shaped responses of domestic output and consumption, (ii) positive spillover effects on foreign output and consumption, (iii) a high international output correlation relative to consumption correlation, (iv) a delayed increase in domestic and foreign inflation, (v) a delayed nominal exchange rate overshooting, (vi) a deterioration in the terms of trade, and (vii) a J-curve in the trade balance. The model matches the impulse responses from an identified VAR more closely than an otherwise identical model with time-dependent pricing. Author Affiliation: Federal Reserve Bank of Dallas, 2200 North Pearl Street, Dallas, Texas, 75201, United States Article History: Received 13 June 2007; Revised 12 January 2009; Accepted 15 January 2009 Article Note: (footnote) [star] First and foremost, I would like to thank Marianne Baxter and Robert G. King for continuous guidance and support. I also gratefully acknowledge comments and suggestions from two anonymous referees and Giancarlo Corsetti, Russell Cooper, Mario Crucini, Jon Faust, Simon Gilchrist, Dale Henderson, Sylvain Leduc, John Rogers, Tatsuma Wada, and seminar participants at the American Economic Association 2006 Annual Meeting, the Bank of Canada, Boston University, the Canadian Economic Association2005 Annual Meeting, the Computing in Economics and Finance Conference 2005, the Conference on International Macroeconomics 2006, FRB-Boston, FRB-Dallas, the Federal Reserve Board, Georgetown University, HEC Montreal, North Carolina State University, the Society for Economic Dynamics 2006 Annual Meeting, the University of Colorado-Boulder, and Universite de Montreal. The views expressed in this paper do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.02.003 Byline: Takashi Kano Keywords: Current account; Habit formation; World real interest rate; Present-value model; Small open economy model; Bayesian analysis Abstract: In a recent paper, Gruber (Gruber, J.W., 2004. A present value test of habits and the current account. Journal of Monetary Economics 51, 1495-1507) claims that habit formation in consumption plays an important role in current account fluctuations in selected developed countries, extending the present-value model of the current account (PVM) with consumption habits. In this paper, however, I show that the habit-forming PVM is observationally equivalent to the PVM augmented with persistent transitory consumption, which is induced by world real interest rate shocks. Based on a small open-economy real business cycle (SOE-RBC) model endowed with consumption habits as well as persistent world real interest rate shocks, this paper resolves the inherent identification problem of the habit-forming PVM by Bayesian methods to seek effects of habit formation on current account fluctuations in typical small open economies, Canada and the United Kingdom. Results reveal no clear evidence that habit formation plays a crucial role in current account fluctuations. Author Affiliation: Graduate School of Economics, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, 113-0033, Japan Article History: Received 1 August 2007; Revised 29 January 2009; Accepted 10 February 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.02.008 Byline: Isabelle Mejean (a), Cyrille Schwellnus (b) Keywords: Price convergence; Firm heterogeneity; European integration Abstract: In this paper we use data on French export prices at the disaggregated firm and product level to evaluate the effect of economic integration on price convergence. We use the European integration 'experiment' and firm-level data on export prices to distinguish between two possible margins of adjustment: At the intensive margin economic integration induces different pricing strategies within the firm, whereas at the extensive margin it affects the composition of firms with different pricing strategies. In our sample price convergence is 40 percent faster in the European Union than in an appropriately defined control group. 30 percent of this effect can be attributed to the fact that a higher share of firms with a low propensity to price discriminate serve European markets. Author Affiliation: (a) Ecole Polytechnique, Department of Economics, 91128 Palaiseau Cedex, France (b) OECD, Economics Department and CEPII. OECD, 2 rue Andre-Pascal, 75775 Paris CEDEX 16, France Article History: Received 19 August 2008; Revised 23 February 2009; Accepted 23 February 2009 Article Note: (footnote) [star] Many thanks to Martine Carre, Matthieu Crozet, Jean Imbs and Daria Taglioni for helpful comments. The paper has also benefited from remarks of participants to seminars at CEPII, Ecole Polytechnique, the ELSNIT 2007 Conference in Barcelona and the CAED 2008 Conference in Budapest. The research leading to these results has received funding from the European Community's Seventh Framework Programme (FP7/2007-2013) under grant agreement Nr. 225551.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.01.002 Byline: Benjamin Eden Keywords: Optimal tariffs; Sequential trade; Demand uncertainty; Terms of trade Abstract: This paper studies the choice of tariffs and other type of consumption taxes and subsidies in a flexible price version of the Prescott [Prescott, Edward C., 1975. Efficiency of the Natural Rate. Journal of Political Economy 83, 1229-1236.] hotels model. It is shown that a country with unstable demand may benefit from a tariff on imports. More surprisingly, the exporting country may also benefit from the tariff. In general, I consider the problem of a world planner who chooses country specific consumption taxes and subsidies. I show that buyers in countries that tend to consume relatively more in the high demand state should be taxed and buyers in countries that tend to consume relatively more in the low demand state should be subsidized. Author Affiliation: Department of Economics, Vanderbilt University, Box 351819B, Nashville, TN 37235-1819, United States Article History: Received 25 April 2007; Revised 11 January 2009; Accepted 14 January 2009 Article Note: (footnote) [star] I would like to thank Rick Bond, Maya Eden and Philip J. Glandon Jr. for very useful comments on earlier drafts of this paper.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2009.01.006 Byline: Martina Lawless Keywords: Firm exports; Market coverage; Market entry and exit Abstract: Two recent trends in international economics have been an increased focus on the geography of trade (e.g. what factors determine where a country exports) and the emergence of new theoretical and empirical work examining exporting activity at the firm-level. However, data limitations have prevented much progress in combining these two areas, because very few countries provide firm-level data breaking down firm exports by their destination. This paper uses a unique survey of Irish exporting firms with information on over fifty destinations for a five-year period to fill some of the gaps in this empirical literature. In particular we investigate how well the predications of a model of exporting with firm heterogeneity fits with the patterns of this detailed data source. Amongst our findings are that firm productivity differences are a factor in explaining the number of export markets a firm has but the prediction of a hierarchy of markets could only be weakly upheld by the data. Firm involvement in individual export markets is found to be much more dynamic than export status. Entry and exit to markets is shown to be a quantifiably important component of overall export flows, with this factor becoming more important for less popular markets. The paper also shows how the patterns of entry and exit into export markets combine to determine the overall firm-level distribution of number of markets entered. Author Affiliation: Central Bank and Financial Services Authority of Ireland, PO Box 559, Dame Street, Dublin 2, Ireland Article History: Received 23 February 2007; Revised 9 January 2009; Accepted 14 January 2009

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2008.08.005 Byline: Mikhail M. Klimenko Keywords: Trade policy; Trade agreements; Technical standards; Network externalities Abstract: The paper considers a country (home) in which consumers have heterogeneous preferences over ex ante incompatible domestic and imported products and benefit from a network externality. We analyze the cases with trade under perfect competition and the international duopoly, in which both governments strategically use policies toward compatibility but cannot use conventional trade policies. In both cases, the equilibrium outcome of the non-cooperative game depends upon the strength of the network externality effect and involves either an excessively high equilibrium level of compatibility (in combination with either too much or too little trade) or very low equilibrium levels of both compatibility and trade. The paper concludes with the analysis of the international agreements on policies toward compatibility and evaluates the existing provisions in the WTO legal system aimed at minimizing the trade-inhibiting impact of standards and regulations in the area of technical compatibility. Author Affiliation: School of Economics, Georgia Institute of Technology, Atlanta, GA 30332-0615, USA Article History: Received 18 April 2006; Revised 22 May 2008; Accepted 12 August 2008 Article Note: (footnote) [star] I thank the editor and two anonymous referees for guidance and comments. I gratefully acknowledge the financial support of the Korea Foundation and the East-West Center, which hosted me during part of this research. The views expressed in this paper are those of the author.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2008.11.001 Byline: Tanya Molodtsova (a), David H. Papell (b) Keywords: Out-of-sample predictability; Exchange rates; Taylor rules Abstract: An extensive literature that studied the performance of empirical exchange rate models following Meese and Rogoff's [Meese, R.A., Rogoff, K., 1983a. Empirical Exchange Rate Models of the Seventies: Do They Fit Out of Sample? Journal of International Economics 14, 3-24.] seminal paper has not convincingly found evidence of out-of-sample exchange rate predictability. This paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate Taylor rule fundamentals. We find evidence of short-term predictability for 11 out of 12 currencies vis-a-vis the U.S. dollar over the post-Bretton Woods float, with the strongest evidence coming from specifications that incorporate heterogeneous coefficients and interest rate smoothing. The evidence of predictability is much stronger with Taylor rule models than with conventional interest rate, purchasing power parity, or monetary models. Author Affiliation: (a) Emory University, Department of Economics, Atlanta, GA 30322-2240, United States (b) University of Houston, Department of Economics, Houston, TX 77204-5882, United States Article History: Received 26 January 2007; Revised 20 November 2008; Accepted 24 November 2008

There is little work on the inner workings of journals. What factors seem to affect the ability to publish in a journal? Could simple rules (which are already used by some journals) like the desk rejection of a significant minority of papers, help to streamline the process? At what cost? How well do journals seem to do in choosing papers? What can we say about the extent of type 1 and type 2 errors? Do editors seem to have uniform standards or are some harsher than others? We use data on submissions to the Journal of International Economics to help answer these questions. Keywords: Publishing in Economics Performance evaluation Probit model Selection bias JEL: A14

Three well known facts that characterize exchange rate data are: (a) the high correlation between bilateral nominal and real exchange rates; (b) the high degree of persistence in real exchange rate movements; and (c) the high volatility of real exchange rates, This paper attempts a joint, albeit partial, rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter, There are two key innovations in the paper, First, we augment a standard two-country open economy model with learning-by-doing in production at the firm level. This induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior. Specifically, firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production. Second, we introduce habits in leisure, This makes the labor supply decision dynamic and adds an additional source of propagation. We show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts. Moreover, as in the data, the model also produces a positive correlation between the terms of trade and the nominal exchange rate. Keywords: Real exchange rate movements Endogenous price stickiness Learning-by-doing JEL classification: F1 F2

This paper estimates the effects of regional agreements on trade flows controlling for country pair, importer-year, and exporter-year fixed effects. These fixed effects capture the determinants of trade flows normally included in gravity model specifications and control for yearly shocks to countries' trade. Controlling for the fixed effects generally reduces the estimated trade impacts of regional agreements. The estimates reveal that regional agreements have significant anticipatory effects on trade flows and continue to affect trade for up to 11 years after they begin. The paper also presents estimated effects on individual countries' trade flows in year five of the agreements. Keywords: Regional trade agreements Trade creation Trade diversion Gravity model JEL classification: F15

It is often argued that many economies are affected by conditions in foreign countries. This paper explores the connection between interest rates in major industrial countries and annual real output growth in other countries. The results show that high foreign interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that this effect is centered on countries with fixed exchange rates. The paper then examines the potential channels through which major-country interest rates affect other economies. The effect of foreign interest rates on domestic interest rates is the most likely channel when compared with other possibilities, such as a trade effect. Keywords: Exchange rate regime; International transmission; Interest rates JEL classification: F3; F4

This paper uses a multi-sector version of the Ricardo--Viner model of international trade to quantify empirically the effects of technological changes, international trade, changes in the sectoral composition of the economy, and other factors on the US wage premium. The main finding of the paper is that changes in the sectoral composition of the economy were the most important force behind the widening of the wage gap, accounting for about 60% of the relative increase in wages of skilled workers between 1970 and 1996. In essence, capital was reallocated to sectors where it is relatively complementary to skilled workers. Keywords: International trade; Ricardo--Viner; Income inequality; Structural change; Technological change JEL classification: F1; F11; D33

In this paper, we develop a dynamic stochastic general equilibrium (DSGE) model for an open economy, and estimate it on Euro area data using Bayesian estimation techniques. The model incorporates several open economy features, as well as a number of nominal and real frictions that have proven to be important for the empirical fit of closed economy models. The paper offers: i) a theoretical development of the standard DSGE model into an open economy setting, ii) Bayesian estimation of the model, including assessments of the relative importance of various shocks and frictions for explaining the dynamic development of an open economy, and iii) an evaluation of the model's empirical properties using standard validation methods. Keywords: DSGE model; Open economy; Monetary policy; Nominal rigidities; Bayesian inference; Business cycle JEL classification: E40; E47; E52; C11

This paper explores the successes and failures of the new open economy macroeconomics more critically by addressing the performance of the model at all frequencies along the line of Watson's [Watson, M.W., 1993. Measures of Fit for Calibrated Models, Journal of Political Economy 101, 1011-1041] measures of fit. This paper shows that the NOEM model with either PCP or PTM is not successful in generating the spectral density of the selected variables calculated from the data. In particular, the model cannot generate mass spectra of the exchange rates at low frequencies as in the data. It shows that the NOEM model with either separable preference or incomplete asset market cannot generate the typical hump-shaped spectra of exchange rates. Keywords: Exchange rate volatilities; Measures of fit; New open economy macroeconomics; Spectral density; Taylor rule JEL classification: E52; F31

This paper documents how productivity varies with globalization modes, based on a firm-level data set covering all manufacturing industries in Japan without any firm-size threshold. Only a small fraction of firms outsource, export, or invest abroad. Foreign outsourcers and exporters tend to be less productive than the firms active in FDI or in multiple globalization modes but more productive than domestic firms. This productivity ordering is robust even when firm size, factor intensity, and/or industry are controlled for. This paper also finds that outsourcers are on average less capital intensive than other globalized firms. Keywords: Foreign outsourcing; Exporting; FDI; Heterogeneity; Firm-level data; Productivity JEL classification: F12; F23; D20; F14

This paper shows how the institutional rules imposed on its signatories by the GATT created a strategic incentive for countries to liberalize gradually. Trade liberalization must be gradual, and free trade can never be achieved, if punishment for deviation from an agreement is limited to a 'withdrawal of equivalent concessions' and if initial deviation from an agreement is also limited. The paper shows how (sufficiently patient) countries have an incentive to deviate in a limited way when operating under GATT dispute settlement procedures. Keywords: Free trade; Gradual trade liberalization; Strategic interactions; Trade agreement; Welfare JEL classification: F02; F13; F15; C73

WTO rules prohibit 'disguised protection' in the form of domestic policies. How then do governments cooperate over trade and domestic policies when none can verify whether a nation's domestic tax reduction is a protective measure or a reaction to a production externality? In this paper, each government privately observes whether a production externality associated with its import-competing good is high or low. This paper finds that in an optimal agreement, disguised protection with domestic policies is never used by governments with a high externality, and is never commonly realized. Moreover, in an optimal agreement, tariffs may be conditional on domestic policies. Keywords: Trade agreement; Private information; Domestic policy; Disguised protection JEL classification: C73; F13

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2005.05.014 Byline: Oya Celasun Keywords: Inflation; Disinflation; Inflation persistence; Exchange rate pegs; Consumption Abstract: This paper tests the empirical validity of the forward-looking pricing hypothesis using data from four exchange rate based stabilization (ERBS) episodes. It finds that backward-looking components of inflation play an important role in inflation dynamics, in some cases exceeding the importance of forward-looking components. The paper then shows that the presence of empirically relevant degrees of inflation stickiness increases the size of the real exchange rate appreciation predicted by an imperfect credibility model of ERBS. The 12% real appreciation predicted by the sticky inflation model is a 70% improvement over the predictions of the fully forward looking pricing setup, but as in other ERBS models, still falls short of matching the real appreciations observed in practice. Author Affiliation: Research Department, International Monetary Fund, 700 19th Street NW, Washington DC 20431, United States Article History: Received 4 May 2004; Revised 11 February 2005; Accepted 17 May 2005

This paper tests the empirical validity of the forward-looking pricing hypothesis using data from four exchange rate based stabilization (ERBS) episodes. It finds that backward-looking components of inflation play an important role in inflation dynamics, in some cases exceeding the importance of forward-looking components. The paper then shows that the presence of empirically relevant degrees of inflation stickiness increases the size of the real exchange rate appreciation predicted by an imperfect credibility model of ERBS. The 12% real appreciation predicted by the sticky inflation model is a 70% improvement over the predictions of the fully forward looking pricing setup, but as in other ERBS models, still falls short of matching the real appreciations observed in practice. Keywords: Inflation; Disinflation; Inflation persistence; Exchange rate pegs; Consumption JEL classification: E3; F4

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2005.05.012 Byline: Mark De Broeck (a), Torsten SlA[cedilla]k (b) Keywords: Real exchange rates; Transition economies; Balassa-Samuelson effects Abstract: Real exchange rate movements in the transition economies during the initial transition period were unusually large by the standards of other economies and periods. Using cross-sectional evidence, this paper documents how real exchange rates were generally misaligned at the onset of the transition and how most of this misalignment was eliminated over a relatively short period. Turning to the time series dimension, the paper shows that estimates from a consensus-type single-equation model of the real exchange rate are well-behaved and provide a good fit for exchange rate movements in the early transition period. The results highlight the role of productivity-driven real exchange rate movements that can be interpreted as reflecting both the impact of the structural transformation process on productivity in the tradables sector per se and the effects of changes in tradables versus non-tradables productivity. Furthermore, the results show that the relationship between productivity and real exchange rates holds both when productivity is increasing and when it is falling. Author Affiliation: (a) Fiscal Affairs Department, International Monetary Fund, 700 19th Street, NW, Washington, DC 20431, USA (b) Deutsche Bank Foreign Exchange Research, 60 Wall Street, New York, NY 10005, USA Article History: Received 19 November 2001; Revised 1 September 2004; Accepted 20 May 2005

Real exchange rate movements in the transition economies during the initial transition period were unusually large by the standards of other economies and periods. Using cross-sectional evidence, this paper documents how real exchange rates were generally misaligned at the onset of the transition and how most of this misalignment was eliminated over a relatively short period. Turning to the time series dimension, the paper shows that estimates from a consensus-type single-equation model of the real exchange rate are well-behaved and provide a good fit for exchange rate movements in the early transition period. The results highlight the role of productivity-driven real exchange rate movements that can be interpreted as reflecting both the impact of the structural transformation process on productivity in the tradables sector per se and the effects of changes in tradables versus non-tradables productivity. Furthermore, the results show that the relationship between productivity and real exchange rates holds both when productivity is increasing and when it is falling Keywords: Real exchange rates; Transition economies: Balassa-Samuelson effects

This paper broadens the protection for sale model of Grossman and Helpman (1994) by incorporating the Krugman-Dixit-Stiglitz model of monopolistic competition, given its importance in explaining the prevalence of intraindustry trade. Several new results arise in this paper. First, the endogenous import tariff will never fall below zero, even in unorganized sectors. Second, the endogenous export policy for organized sectors is not necessarily an export subsidy, and can be an export tax as in unorganized sectors. Third, the level of import protection varies inversely with the degree of import penetration, regardless of whether the sector is organized or not. Keywords: Trade policy: Political economy: Protection for sale; Monopolistic competition; Intraindustry trade JEL classification: F12; F13

The paper examines the Japanese steel industry to evaluate the role of export subsidy policies. Export subsidies can be instrumental in increasing an industry's cost competitiveness in the presence of learning by doing, a characteristic of production in the steel industry. Using a dynamic estimation model, this paper identifies a significant learning rate of above 20% with little intra-industry knowledge spillover. Simulations made with the model indicate that the subsidy policy had an insignificant impact on industry growth. The paper finds that the export subsidy had a small effect in stimulating industry growth, because the estimated steel supply function was relatively inelastic. Keywords. Learning by doing: Export subsidies; Knowledge spillover; Industry growth; Steel industry JEL classification. D21; F13; L61; O12

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2004.09.002 Byline: Pao-Li Chang Keywords: Trade policy; Political economy; Protection for sale; Monopolistic competition; Intraindustry trade Abstract: This paper broadens the protection for sale model of Grossman and Helpman (1994) by incorporating the Krugman-Dixit-Stiglitz model of monopolistic competition, given its importance in explaining the prevalence of intraindustry trade. Several new results arise in this paper. First, the endogenous import tariff will never fall below zero, even in unorganized sectors. Second, the endogenous export policy for organized sectors is not necessarily an export subsidy, and can be an export tax as in unorganized sectors. Third, the level of import protection varies inversely with the degree of import penetration, regardless of whether the sector is organized or not. Author Affiliation: School of Economics and Social Sciences, Singapore Management University, 469 Bukit Timah Road, Singapore 259756, Singapore Article History: Received 17 October 2003; Revised 27 August 2004; Accepted 4 September 2004

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2004.06.009 Byline: Torben M. Andersen (a), Niels C. Beier (b) Keywords: Exchange rates; Imperfect information; New open economy macroeconomics; Nominal shocks; Transitory and persistent shocks; Persistence Abstract: We analyze the transmission of monetary shocks in a new open-economy macroeconomics model with one-period nominal contracts and imperfect information. Shocks may have transitory and persistent components that can be disentangled only through the accumulation of information over time. As a consequence, the responses to shocks are significantly altered compared with the case of full information. There are persistent effects on international relative prices, and delayed exchange-rate overshooting is possible following a persistent shock. In some cases, there are (ex post) excess returns as a positive interest rate spread is accompanied by an appreciating currency (or vice versa). Lastly, it is demonstrated that staggering reinforces persistence. Author Affiliation: (a) University of Aarhus, CEPR, and EPRU, Denmark (b) Danmarks Nationalbank, Denmark Article History: Received 28 November 2001; Revised 28 May 2003; Accepted 25 June 2004 Article Note: (footnote) [star] A revised version of CEPR Discussion Paper 2360. We acknowledge constructive comments from two anonymous referees, co-editor Michael Devereux, as well as Michael Jansson, Morten B. Jensen, Maurice Obstfeld, Peter E. Storgaard, SA[cedilla]ren V. SA[cedilla]rensen, and Aaron Tornell. We would also like to thank participants at presentations at Danmarks Nationalbank, EPRU (Copenhagen), Econometric Society World Congress (Seattle), European Economic Association Annual Meeting (Lausanne), Humboldt University Berlin, Society for Economic Dynamics Annual Meeting (San Jose), University of Aarhus, the ZEI Summer School in International Finance in Bonn, and the Zeuthen Workshop in Copenhagen for comments on earlier drafts of this paper. The views expressed are our own and not necessarily those of Danmarks Nationalbank.

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2004.06.008 Byline: Hiroshi Ohashi Keywords: Learning by doing; Export subsidies; Knowledge spillover; Industry growth; Steel industry Abstract: The paper examines the Japanese steel industry to evaluate the role of export subsidy policies. Export subsidies can be instrumental in increasing an industry's cost competitiveness in the presence of learning by doing, a characteristic of production in the steel industry. Using a dynamic estimation model, this paper identifies a significant learning rate of above 20% with little intra-industry knowledge spillover. Simulations made with the model indicate that the subsidy policy had an insignificant impact on industry growth. The paper finds that the export subsidy had a small effect in stimulating industry growth, because the estimated steel supply function was relatively inelastic. Author Affiliation: Department of Economics, University of Tokyo, 7-3-1 Hongo, Tokyo, Japan Article History: Received 29 April 2003; Revised 15 June 2004; Accepted 25 June 2004

This paper develops and analyzes a welfare maximizing model of infant industry protection. The domestic infant industry is competitive and experiences dynamic learning effects that are external to firms. The competitive foreign industry is mature and produces a good that is an imperfect substitute for the domestic good. A government planner can protect the infant industry using domestic production subsidies, tariffs, or quotas in order to maximize domestic welfare over time. As protection is not always optimal (although the domestic industry experiences a learning externality), the paper shows how the decision to protect the industry should depend on the industry's learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods. Assuming some reasonable restrictions on the flexibility over time of the policy instruments, the paper subsequently compares the effectiveness of the different instruments. Given such restrictions, the paper shows that quotas induce higher welfare levels than tariffs. In some cases, the dominance of the quota is so pronounced that it compensates for any amount of government revenue loss related to the administration of the quota (including the case of a voluntary export restraint, where no revenue is collected). In similar cases, the quota may even be preferred to a domestic production subsidy. Keywords: Infant industry protection; Quotas and tariffs; Learning-by-doing JEL classification: F13

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jinteco.2004.02.007 Byline: Peter Debaere Abstract: In this paper, I show that the increasing similarity in GDPs among OECD country pairs leads to higher bilateral trade to GDP ratios. This finding provides some support for the prediction of Helpman [J. Jpn. Int. Econ. 1 (1987) 62], whose model explains intra-industry trade that is prevalent among developed countries. I also show that Helpman's prediction is rejected for non-OECD countries, among which intra-industry trade is not critical. This result contrasts with the findings of Hummels-Levinsohn [Q. J. Econ. 110 (1995) 799], which play an important role in the debate about whether or not New Trade Theory explains international trade patterns at the country level. Author Affiliation: Department of Economics, University of Texas, Austin, TX 78712-1173, United States Article Note: (footnote) [star] The title of the working paper version of this paper is 'Testing 'New' Trade Theory without Testing for Gravity: Re-interpreting the Evidence'.

How many dimensions adequately characterize voting on U.S. trade policy? How are these dimensions to be interpreted? This paper seeks those answers in the context of voting on the landmark 1988 Omnibus Trade and Competitiveness Act. The paper takes steps beyond the existing literature. First, using a factor analytic approach, the dimension issue is examined to determine whether subsets of roll call votes on trade policy are correlated. A factor-analytic result allows the use of a limited number of votes for this purpose. Second, a structural model with latent variables is used to find what economic and political factors comprise these dimensions. The study yields two mare findings. More than one dimension determines voting in the Senate, with the main dimension driven by economic interest, not ideology. Although two dimensions are required to fully account for House voting, one dimension dominates, That dimension is driven primarily by party. Based on reported evidence, and a growing consensus in the congressional studies literature, this finding is attributed to interest-based leadership that evolves in order to solve collective action problems faced by individual legislators. Keywords: Dimensionality; Roll call voting: Omnibus Trade Act: Interest; ideology JEL classification: F13; D72: C39

This paper empirically evaluates the relative importance of embodied vs. disembodied idea flows in explaining income gaps and total factor productivity (TFP) gaps. Trade is used as a measure of embodied idea flows and telephone call traffic a measure of disembodied flows. Since both trade and telephone traffic may be endogenous, this paper uses the geographic, linguistic, and colonial components of trade and telephone traffic as instruments to identify their effects on income and TFP. The results provide little support for the embodied object models when both Wade and telephone traffic are included in the regressions. Telephone traffic has a quantitatively larger effect on income per worker and TFP than trade. Keywords: Embodied and disembodied idea flows; Telephone traffic; Trade; Income gaps; TFP gaps JEL classification: F43; O33:040

This paper examines the link between relative goods prices and relative wages during two periods of Mexico's trade liberalization. The relative price of skill-intensive goods rose following Mexico's entrance to the General Agreement and Tariffs and Trade (GATT) in 1986, but fell after Mexico entered the North American Free Trade Agreement (NAFTA) in 1994. This paper adds a band pass filter to two established techniques to compare the relationship between prices and wages. Results from all three approaches are consistent with a positive long-run relationship between relative output prices and relative wages, The band pass filter results suggest that the relevant time frame for the relationship begins after 3-5 years. Keywords: Trade liberalization; Wage inequality; Mexico JEL classification: F16; J31

This paper determines the equilibrium market structure in an international oligopoly, where a state enterprise is sold at an auction. The paper suggests that high greenfield costs and high trade costs do not necessarily induce foreign acquisitions in privatizations, despite the fact that foreign firms would gain considerably from acquiring in such situations. The reason is that domestic firms can then prevent foreign firms from becoming strong local competitors and thus, their willingness to pay for the state assets is high. Keywords: Privatization; FDI; Acquisitions; Investment liberalization; Tariff-jumping JEL classification: F23; L13; L33

This paper develops a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability, but value the flexibility to adjust the nominal exchange rate in response to shocks, in order to attain real exchange rate objectives. The paper provides an endogenous characterization of the optimal exchange rate band in terms of the underlying distribution of shocks to the current and capital accounts of the balance of payments and in terms of the commitment reputation of policymakers. Keywords: Exchange rate bands; Pegs; Floats; Partial commitment; Credibility; Reputation; Flexibility JEL classification: F31; F33; E5