could tariffs be pro cyclical abstract conventional wisdom says that tariffs are counter cyclical we analyze the relationship between business cycles and applied mfn tariffs using a disaggregated product level panel dataset covering 72 countries between 2000 and 2011 strikingly and counter to conventional wisdom we find that tariffs are pro cyclical further investigation reveals that this pro cyclicality is driven by the tariff setting behavior of developing countries tariffs are acyclical in developed countries we present evidence that pro cyclical market power drives the pro cyclicality of tariffs in developing countries providing further evidence of the importance of terms of trade motivations in explaining trade policy

tariff retaliation versus financial compensation in the enforcement of international trade agreements the authors analyze whether financial compensation is preferable to the current system of dispute settlement in the world trade organization that permits member countries to impose retaliatory tariffs in response to trade violations committed by other members they show that monetary fines are more efficient than tariffs in terms of granting compensation to injured parties when there are violations in equilibrium however fines suffer from an enforcement problem since they must be paid by the violating country if fines must ultimately be supported by the threat of retaliatory tariffs they fail to yield a more cooperative outcome than the current system the authors also consider the use of bonds as a means of settling disputes if bonds can be posted with a third party they do not have to be supported by retaliatory tariffs and can improve the negotiating position of countries that are too small to threaten tariff retaliation

backward stealing and forward manipulation in the wto abstract motivated by the structure of wto negotiations we analyze a bargaining environment in which negotiations proceed bilaterally and sequentially under the most favored nation mfn principle we identify backward stealing and forward manipulation problems that arise when governments bargain under the mfn principle in a sequential fashion we show that these problems impede governments from achieving the multilateral efficiency frontier unless further rules of negotiation are imposed we identify the wto nullification or impairment and renegotiation provisions and its reciprocity norm as rules that are capable of providing solutions to these problems in this way we suggest that wto rules can facilitate the negotiation of efficient multilateral trade agreements in a world in which the addition of new and economically significant countries to the world trading system is an ongoing process

a bit is better than a lot bilateral investment treaties and preferential trade agreements the landscape of the global economy is dotted with institutions that regulate investment and trade in recent years the number of bilateral investment treaties bit s and preferential trade agreements pta s in particular has grown at a torrid pace practically every country is a member of at least one if not many of these institutions for all the scholarly attention that these institutions have received however there is little research tying bit s and pta s together this is surprising since both aim to increase commerce by making it more predictable the authors seek to fill this gap in the literature they argue that a bit between a developed and a developing country should make it more likely that this pair of states will subsequently form a pta that said the wrinkle in the story is that more is not better in this regard the authors further argue that a developing country that has many bit s is less likely to conclude a pta with a wealthy state the authors test these hypotheses using annual data on pairs of developing and developed countries between 1960 and 2004 and find strong evidence in support of their argument

a new perspective on the new rule of the current account abstract in an influential series of contributions kraay and ventura 2000 2003 offer a new rule for the current account in response to a temporary income shock the change in the current account is equal to the change in saving times the ratio of net foreign assets to wealth we analyze the impact of a temporary income shock on the current account in the context of a two country dynamic general equilibrium model of portfolio choice and show that the new rule does not hold we also show that the cross section evidence reported by kraay and ventura in favor of the new rule is a feature implied by the steady state of the model that is conceptually distinct from the new rule we argue that the new rule could only hold in a model with one way capital flows only inflows or outflows but not both a feature that is strongly counterfactual

the endogeneity of money during the german hyperinflation a reappraisal this paper provides evidence that casts doubt on the conclusioon of several studies of the german hyperinflation that since government raised most of its revenue from money creation the money supply process was endogenous this conclusion in the literature is based on the assumption that the money supply and the price level can be described by linear arima models it is shown here that the linearity assumption is violated by the data and that relaxing this assumption reverses the earlier results the paper provides additional evidence in support of the finding that the money supply process may be exogenous

the clash of liberalizations preferential versus multilateral trade liberalization in the european union there has been an explosion in the number of preferential trade agreements in the past decade preferential trade agreements are characterized by liberalization with respect to only a few partners and thus they can potentially clash with and retard multilateral trade liberalization despite this important concern with preferential trade agreements there is almost no systematic evidence on whether they actually affect multilateral trade liberalization the authors model the effect of preferential trade agreements on multilateral trade liberalization and show that preferential trade agreements slow down multilateral trade liberalization unless they have a common external tariff and allow for internal transfers next they use detailed data on product level tariffs negotiated by the european union in the past two multilateral trade rounds to structurally estimate their model the authors confirm the main prediction the european union s preferential trade agreements have clashed with its multilateral trade liberalization and find that the effect is quantitatively significant moreover they also confirm several auxiliary predictions of the model and provide new evidence on the political economy determinants of multilateral liberalization in the european union

is the wto passe the wto has delivered policy outcomes that are very different from those likely to emerge out of the recent wave of preferential trade agreements ptas should economists see this as an efficient institutional hand off where the wto has carried trade liberalization as far as it can manage and is now passing the baton to ptas to finish the job this paper surveys a growing economics literature on international trade agreements and argues on this basis that the wto is not passe rather and subject to some caveats this survey of research to date suggests that the wto warrants strong support while a more cautious view of ptas seems appropriate

towards a theory of current accounts the current accounts data of industrial countries exhibits some strong patterns that are inconsistent with the intertemporal approach to the current account this is the basic model that international economists have been using for more than two decades to think about current account issues this paper shows that it is possible to go a long way towards reconciling the theory and the data by introducing two additional features to the basic model investment risk and adjustment costs to investment moreover these extensions generate new and unexpected theoretical predictions that receive substantial support in the data the overall message is therefore positive with a couple of reasonable modifications the intertemporal approach to the current account provides a fairly good description of the industrial country data

reaping what you sow an empirical analysis of international patent harmonization abstract this paper extends analysis of the gatt uruguay round by quantifying the impact of international patent harmonization as implied by the trips agreement patent harmonization has the capacity to generate large transfers of income between countries the us being the major beneficiary developing countries are major contributors to these transfers but canada the uk and japan also make sizable contributions

financial integration and the wealth effect of exchange rate fluctuations abstract recent years have witnessed a large increase in international financial integration in the form of largely offsetting cross holdings across countries we assess how such financial leverage affects the international transmission of monetary shocks and find that it leads to sizable welfare differentials that far exceed the impact due to nominal rigidities we document the relevance of the exact nature of holdings with bond holdings associated with larger effects than equity holdings the impact of financial leverage on welfare is also sensitive to the extent of exchange rate pass through and the substitutability between goods produced in different countries

country portfolio dynamics this paper presents a general approximation method for characterizing timevarying equilibrium portfolios in a two country dynamic general equilibrium model the method can be easily adapted to most dynamic general equilibrium models it applies to environments in which markets are complete or incomplete and it can be used for models of any dimension moreover the approximation provides simple easily interpretable closed form solutions for the dynamics of equilibrium portfolios

composition and growth effects of the current account a synthesized portfolio view abstract this paper analyzes a useful accounting framework that breaks down the current account to two components a composition effect and a growth effect we show that past empirical evidence which strongly supports the growth effect as the main driver of current account dynamics is misconceived the remarkable empirical success of the growth effect is driven by the dominance of the cross sectional variation which under conditions met by the data is generated by an accounting approximation in contrast to previous findings that the portfolio share of net foreign assets to total assets is constant in a country both our theoretical and empirical results support a highly persistent process or a unit root process with some countries displaying a trend finally we reestablish the composition effect as the quantitatively dominant driving force of current account dynamics in the past data

are global trade negotiations behind a fragmented world of gated globalization abstract we show that global trade negotiations can prevent global free trade in a simple model where global tariff negotiations precede sequential free trade agreements ftas we show fta formation can expand all the way to global free trade in the absence of global tariff negotiations but global free trade never emerges when global tariff negotiations precede fta formation this result arises precisely because global tariff negotiations successfully elicit concessions from negotiating countries moreover global tariff negotiations can produce a fragmented world of gated globalization where some countries form ftas that eliminate tariff barriers among themselves while outsiders continue facing higher tariffs

a theory of managed trade this paper proposes a theory that predicts low levels of protection during periods of normal trade volume coupled with episodes of special protection when trade volumes surge this dynamic pattern of protection emerges from a model in which countries choose levels of protection in a repeated game facing volatile trade swings high trade volume leads to a greater incentive to defect unilaterally from cooperative tariff levels therefore as the volume of trade expands the level of protection must rise in a cooperative equilibrium to mitigate the rising trade volume and hold the incentive to defect in check copyright 1990 by american economic association

trade conflict and political integration explaining the heterogeneity of regional trade agreements many historians argue that the main goal of european trade integration was the preservation of peace this paper investigates whether this reasoning is relevant for the eu and other regional trade agreements rtas i provide empirical evidence that customs unions and common markets deep rtas do reduce the probability of war between members partial scope and free trade agreements shallow rtas however have no effect on war probabilities accordingly international insecurity has a differential impact on incentives to create rtas deep rtas are signed between countries that are involved in many interstate disputes and that have low trade costs with the rest of the world whereas the opposite is true for shallow rtas

conditional versus unconditional trade concessions for developing countries we consider a small open economy that faces a commitment problem in trade liberalization we examine how the relationship with a large trading partner affects the ability of the small countrys government to sustain free trade through a reputational mechanism if the small country s government is patient enough it can overcome its domestic commitment without the help of the large country unconditional liberalization by the large trading partner has an ambiguous effect on the small country s dynamic incentives liberalization through a reciprocal trade agreement in which the large country lowers its tariffs conditionally on the small country doing the same unambiguously dominates unconditional liberalization by the large country as a way of boosting trade reforms and reinforcing policy credibility in the small country however if capacity in the import competing sector can only be reduced gradually a conditional reciprocal agreement may require an asynchronous exchange of concessions with the large country liberalizing before the small country

feasible multilateralism and the effects of regionalism recent research has underlined the efficiency of the gatt wto rules from the standpoint of politically motivated governments emphasizing that the current multilateral rules are capable of delivering a politically efficient equilibrium such an equilibrium is however economically inefficient global free trade in particular is generally unattainable even in a fully cooperative world provided that governments have distributive motivations in such a context we show that regional trade agreements can help move the world towards a welfare superior equilibrium the reason is that as members of regional trade agreements lower trade barriers against one another they are induced to reduce their multilateral tariff sa s well once we account for these endogenous changes and only then we find that regionalism can raise world welfare even in a fully cooperative but political world we also find however that members are likely to gain too much from regional integration thereby harming outsiders

inflationary effects of changes in effective exchange rates ldcs experience the inflationary effects of devaluations in less developed countries is investigated using rate of change of effective exchange rates it is shown that for most countries in the sample devaluations or depreciations are inflationary during the current floating exchange rate system in addition to inflationary effects of depreciations excees money supply imported inflation and expectation are also identified as additional sources of inflation in less developed countries

trade wars and trade talks when governments meet in the international arena their actions reflect the political situations at home previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest here we introduce domestic politics into the analysis of international economic relations we study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups our analysis sheds light on the determinants of the structure of protection in non cooperative and cooperative policy equilibria

are preferential trade agreements with non trade objectives a stumbling block for multilateral liberalization in many preferential trade agreements ptas countries exchange not only reductions in trade barriers but also cooperation in non trade issues such as labor and environmental standards intellectual property etc we provide a model of ptas motivated by cooperation in non trade issues and analyze its implications for global free trade and welfare we find that such ptas increase the cost of multilateral tariff reductions and thus cause a stumbling block to global free trade this occurs because multilateral tariff reductions decrease the threat that can be used in ptas and thus the surplus that can be extracted from them by explicitly modeling the interaction between preferential and multilateral negotiations we derive a testable prediction and provide novel econometric evidence that supports the model s key prediction the welfare analysis shows that the current wto rules allowing this type of ptas may be optimal for economically large countries thus the model can predict the rules we observe we also analyze alternative rules that constitute a pareto improvement

regionalism and falling external protection in high and low tariff members abstract this paper provides evidence that the reduction in applied most favoured nation mfn tariffs resulting from a decrease in preferential tariffs is restricted to or significantly larger in high tariff members of preferential trade agreements ptas this heterogeneous impact is observed only when the share of preferential imports increases leading to a decline in tariff revenue this makes countries which tend to heavily depend on tariff revenue as a source of government funding more likely to reduce their mfn tariffs which is also observed in the data these results that are consistent with a mechanism operating through trade deflection and the associated loss of tariff revenue therefore lend support to the building bloc view of regionalism in countries applying high external tariffs before the agreement in contrast driven by other factors the impact in low tariff countries remains unclear with either insignificant effects or tariff substitution

the demand for money the reform effect and the money supply process in hyperinflation the evidence from greece and hungary ii reexamined newly uncovered data on money and prices in greece and hungary duri ng their hyperinflations are used to reestimate the cagan money demand equation and to repeat the sargent and wallace causality tests it is no longer necessary to exclude observations at the end of each episo de on the premise that they represent the response to an anticipated monetary reform the results for each country now conform to the sargent and wallace findings for most other hyperinflation episodes that causality runs from prices to money i e that money is endogenous copyright 1988 by ohio state university press

trade preferences to small developing countries and the welfare costs of lost multilateral liberalization the proliferation of preferential trade liberalization over the past 20 years has raised the question of whether it slows down multilateral trade liberalization recent theoretical and empirical evidence indicates this is the case even for unilateral preferences that industrial countries provide to small and poor countries but there is no estimate of the resulting welfare costs to avoid this stumbling block effect the authors suggest replacing unilateral preferences by a fixed import subsidy they argue that this scheme would reduce the drag of preferences on multilateral liberalization and generate a pareto improvement more important the authors provide the first estimates of the welfare cost of preferential liberalization as a stumbling block to multilateral liberalization by combining recent estimates of the stumbling block effect of preferences with data for 170 countries and over 5 000 products they calculate the welfare effects of the united states european union and japan switching from unilateral preferences to the developing countries to the import subsidy scheme even in a model with no dynamic gains to trade the authors find that the switch produces an annual net welfare gain for the 170 countries 4 354 million and for each group the united states european union and japan 2 934 million the developing countries 520 million and the rest of the world 900 million

does issue linkage work evidence from european alliance negotiations 1860 to 1945 though scholars widely claim that issue linkage the simultaneous negotiation of multiple issues for joint settlement can help states conclude international agreements there exist some notable skeptics resolving this debate requires empirical evidence however beyond a few case studies there exists no direct and systematic evidence that issue linkages actually increase the probability of agreement i address this lack of direct and systematic evidence by combing original data on failed alliance negotiations with data from the alliance treaty obligations and provisions atop database using matching techniques i find that for alliance negotiations between 1860 to 1945 offers of trade linkage did substantially increase the probability of agreement besides confirming issue linkage s ability to help clinch an agreement this article s research design and evidence have far reaching implications for the study of negotiations and alliances the research design illustrates the value of considering the dogs that didn t bark as it identifies both successful and failed negotiations the article s evidence explains the high rate of alliance compliance identified by previous scholars and highlights a need to rethink the alliance formation process

international capital flows abstract the surge in international asset trade since the early 1990s has lead to renewed interest in models with international portfolio choice we develop the implications of portfolio choice for both gross and net international capital flows in the context of a simple two country dynamic stochastic general equilibrium dsge model we focus on the time variation in portfolio allocation following shocks and resulting capital flows endogenous time variation in expected returns and risk which are the key determinants of portfolio choice affect capital flows in often subtle ways the model is consistent with a broad range of empirical evidence an additional contribution of the paper is to overcome the technical difficulty of solving dsge models with portfolio choice by developing a broadly applicable solution method

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

the external wealth of nations measures of foreign assets and liabilities for industrial and developing countries abstract although capital flows are closely monitored surprisingly little is known about the accumulated stocks of foreign assets and liabilities held by various countries especially in the developing world this paper constructs estimates of foreign assets and liabilities and their equity and debt subcomponents for a sample of 67 industrial and developing countries it characterizes the stylized facts of international balance sheets and asks whether there are trends in net foreign asset positions and shifts in debt equity ratios over time finally it explores the sensitivity of estimated stock positions to the treatment of valuation effects not captured in balance of payments data

optimum tariffs and retaliation revisited how country size matters in his seminal work on tariff retaliation johnson review of economic studies 21 1953 1954 showed that a country will win a bilateral tariff war if its relative monopoly monopsony power in world trade is sufficiently large however it is unclear from johnson s analysis and from subsequent research on the subject how this power is determined in general economic environments an important goal of this paper is to address this issue with the help of a neoclassical trade model in which country size is at centre stage it is shown that a sufficient condition for a country to prefer a non cooperative nash tariff equilibrium retaliation over free trade is that its relative size be sufficiently large the paper also refines the structure of the general trade model and generates additional characterization results on the importance of country size for best response tariff functions retaliatory tariffs and welfare

current accounts in debtor and creditor countries the authors reexamine a classic question in international economics what is the current account response to a transitory income shock such as a temporary improvement in the terms of trade a transfer from abroad or unusually high production to answer this question they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities despite its conventional ingredients the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries evidence from thirteen oecd countries broadly supports this theoretical prediction

developing countries in the world trading system from gatt 1947 to the third ministerial meeting of wto 1999 the debate on the role of openness to international flows of goods technology and capital in the development process is as old as economics after all adam smith praised the virtues of openness and competition in the wealth of nations a moment s reflection should be enough to convince anyone that the sources of economic development are essentially three the growth in inputs of production improvements in the efficiency of allocation of inputs across economic activities and innovation that creates new products new uses for existing products and brings about increases in the efficiency of use of inputs

regional integration as diplomacy regional integration agreements rias are examples of second best and have an ambiguous impact on welfare contend the authors they build a model in which rias unambiguously raise welfare by correcting for externalities it assumes that trade between neighboring countries increases trust between them and reduces the likelihood of conflict the optimum intervention in that case is a subsidy on imports from the neighbor the authors show that an equivalent solution is for the neighboring countries to tax imports from the rest of the world that is to form an ria together with imposing some domestic taxes in fact security threats have moved neighboring countries to form rias examples include the creation of the european coal and steel community 1951 and the european economic community 1957 to reduce the threat of war in europe as well as various rias among developing countries the authors show among other things that 1 the optimum tariffs on imports from the rest of the world are likely to decline over time 2 deep integration implies lower optimum external tariffs if it is exogenous 3 but if deep integration is endogenous it implies higher optimum external tariffs before it occurs and lower ones thereafter and 4 enlargement of a bloc in terms of symmetric countries has an ambiguous impact on external tariffs but improves welfare and some form of domino effect exists in the sense that enlargement increases the incentive for nonmembers to seek accession although externalities associated with security matters imply that an ria may maximize welfare this model suggests that the ria is a transitory arrangement in the sense that optimum trade preferences are highest at the time the ria is formed when security is low and tend to decline over time in other words the ria s external trade policy becomes increasingly open over time as well as following deep integration

exchange rate sensitivity of the demand for money in developing countries there is consensus among researches that under the present floating exchange rate system although developing countries peg their exchange rate to a major currency they cannot avoid fluctuation in their effective exchange rates as long as major currencies fluctuate against one another few authors have investigated the effects of changes in effective exchange rates of developing countries on their imports exports trade balance demand for international reserves inflation etc in this paper we try to inestigate the effects of effective exchange rates of developing countries on their demand for money previous authors who have estimated a money demand function inclusive of an exchange rate variable bilateral or effective have restricted themselves to industrial countries only by using quarterly data over the 1973 85 period it is shown that in most developing countries while the short run effcts of depreciation could be in either direction its long run effects are negative indicating that deprecia

regionalism in a multilateral world recent regional initiatives have been addressed from a vinerian perspective of trade creation and trade diversion this is true of both policy oriented economists who tend to be critical of the initiatives and theorists who have added dynamic and gametheoretic elements to the vinerian structure this paper describes the stylized facts of much recent regional integration and develops an alternative model the analysis suggests that regional integration far from threatening multilateral liberalism may in fact be a direct consequence of the success of past multilateralism and an added guarantee for its survival

building climate coalitions on preferential free trade agreements in this paper we discuss the endogenous formation of climate coalitions in an issue linkage regime in particular we propose a preferential free trade agreement on which a climate coalition should be built the basic idea is that the gains of free trade can provide strong incentives for countries to join the coalition as a framework a multi stage strategic trade model is employed in which each country may set an emission cap being effective on a permit market in addition a discriminatory import tariff may be imposed on dirty goods however at the heart of our approach is a preferential free trade arrangement among the members of a climate coalition leading to a favourable shift in the terms of trade as a main result trade liberalisation is found as an institution highly effective in building climate coalitions in particular the parametrical simulation of the model shows that participation in joint emission reduction is higher consumption patterns are more environmentally friendly and coalitional welfare is much more improved than in case of a single issue environmental agreement

short waves in hungary 1923 and 1946 persistence chaos and lack of control abstract monetary policies follow a complex and chaotic process one that is enhanced when monetary growth is taken to the extreme as in hyperinflation while we have a basic understanding of the complex dynamics of hyperinflation a less explored phenomenon accompanying hyperinflationary episodes is the effect that they have on institutional development building on recent advances in economic history examining monetary policy and institutions this analysis uses more explicit recourse to complexity theory and in particular complex adaptive systems to examine two separate hyperinflationary episodes in hungary 1923 and 1946 delving into the institutional and cultural roots of the inflationary policies of the hungarian government and detailing the institutional effects which succeeded hyperinflation this paper shows that the twin experiences of hungary were both chaotic and created a chaotic and complex aftermath the results of which are still being felt indeed hungary s 1923 and especially its 1946 hyperinflation shows that some economic chaos cannot be restrained by political institutions and in fact the institutions themselves were changed when staring into the abyss hungary also found that the abyss stared back

do countries free ride on mfn abstract the most favored nation mfn clause has long been suspected of creating a free rider problem in multilateral trade negotiations to address this issue we model multilateral negotiations as a mechanism design problem with voluntary participation we show that an optimal mechanism induces only the largest exporters to participate in negotiations over any product thus providing a rationalization for the principal supplier rule we also show that through this channel equilibrium tariffs vary according to the herfindahl hirschman index of export shares higher concentration in a sector reduces free riding and thus causes a lower tariff estimation of our model using sector level tariff data for the u s provides strong support for this relationship

gradualism in trade agreements with asymmetric countries this paper uses recursive methods to characterize the payoff frontier of self enforcing trade agreements between countries of asymmetric size we show that at points on the frontier where only one country s incentive constraint binds the efficient agreement will be a non stationary one that starts with a positive trade distortion but eventually reaches free trade our analysis illustrates how i relative country size ii consumption smoothing incentives and iii sunk investments affect the form of efficient trade agreements in contrast to previous work on gradualism our results are obtained from a model in which the economic environment is stationary