no price like home global house prices 1870 2012 how have house prices evolved in the long run this paper presents annual house price indices for 14 advanced economies since 1870 based on extensive data collection we are able to show for the first time that house prices in most industrial economies stayed constant in real terms from the 19th to the mid 20th century but rose sharply in recent decades land prices not construction costs hold the key to understanding the trajectory of house prices in the long run residential land prices have surged in the second half of the 20th century but did not increase meaningfully before we argue that before world war ii dramatic reductions in transport costs expanded the supply of land and suppressed land prices since the mid 20th century comparably large land augmenting reductions in transport costs no longer occurred increased regulations on land use further inhibited the utilization of additional land while rising expenditure shares for housing services increased demand

exchange rates and foreign direct investment an imperfect capital markets approach we examine the connection between exchange rates and foreign direct investment that arises when globally integrated capital markets are subject to informational imperfections these imperfections cause external financing to be more expensive than internal financing so that changes in wealth translate into changes in the demand for direct investment by systematically lowering the relative wealth of domestic agents a depreciation of the domestic currency can lead to foreign acquisitions of certain domestic assets we develop a simple model of this phenomenon and test for its relevance in determining international capital flows

wealth distribution with random discount factors abstract to explain the pareto tail behavior empirically observed in wealth distributions the quantitative macro literature has occasionally assumed that agents have random discount factors this paper formally proves that the stationary wealth distribution in a simple huggett model with random discounting has power law tails and characterizes the pareto exponents analytically i find that in general there is no clear relationship between the return on wealth and inequality and that the pareto exponent is highly sensitive to the persistence of the discount factor process i also provide a practical guidance for how to characterize the pareto exponents in richer models

the rise and decline of general laws of capitalism economists have long been drawn to the ambitious quest of discovering the general laws of capitalism david ricardo for example predicted that capital accumulation would terminate in economic stagnation and inequality as a greater and greater share of national income accrued to landowners karl marx followed him by forecasting the inevitable immiseration of the proletariat thomas piketty s 2014 tome capital in the twenty first century emulates marx in his title his style of exposition and his critique of the capitalist system piketty is after general laws that will demystify our modern economy and elucidate the inherent problems of the system and point to solutions but the quest for general laws of capitalism is misguided because it ignores the key forces shaping how an economy functions the endogenous evolution of technology and of the institutions and the political equilibrium that influence not only technology but also how markets function and how the gains from various different economic arrangements are distributed despite his erudition ambition and creativity marx was led astray because of his disregard of these forces the same is true of piketty s sweeping account of inequality in capitalist economies in the next section we review marx s conceptualization of capitalism and some of his general laws we then turn to piketty s approach to capitalism and his general laws we will point to various problems in piketty s interpretation of the economic relationships underpinning inequality but the most important shortcoming is that

capital is back wealth income ratios in rich countries 1700 2010 how do aggregate wealth to income ratios evolve in the long run and why we address this question using 1970 2010 national balance sheets recently compiled in the top eight developed economies for the united states united kingdom germany and france we are able to extend our analysis as far back as 1700 we find in every country a gradual rise of wealth income ratios in recent decades from about 200 300 in 1970 to 400 600 in 2010 in effect today s ratios appear to be returning to the high values observed in europe in the eighteenth and nineteenth centuries 600 700 this can be explained by a long run asset price recovery itself driven by changes in capital policies since the world wars and by the slowdown of productivity and population growth in line with the s g harrod domar solow formula that is for a given net saving

what goes around comes around export enhancing effects of import tariff reductions abstract in international trade transportation requires a round trip for which a transport firm has to commit to shipping capacity that is sufficient to meet the maximum shipping volume this may cause the backhaul problem trade theory suggests that facing the problem transport firms with market power adjust their freight rates strategically when import tariffs change as a consequence a country reducing its import tariffs may experience an increase in exports as well as imports using worldwide data covering 1995 2007 we find evidence that supports these predictions a 1 reduction in an importer s tariffs increases the import freight rates by around 0 8 decreases the export freight rates by around 1 1 and increases the export quantity by 0 6 to 1 these findings indicate a new mechanism through which import tariff reductions lead to export expansions

endogenous competition and strategic foreign investment direct foreign investment exerts a significant influence on domestic market structure in both developed and emerging economics an increased proportion of international commerce now takes the form of intrafirm trade and much of this trade involves foreign sourcing of production by domestic firms firms with such multinational production are also frequently the dominant firms in their domestic markets 1 several rationales exist for foreign investment and production by domestic firms most involve the effects of some inherent asymmetry between rival firms the possession by one firm of some internal advantage such as proprietary knowledge from research expenditures or superior management and marketing techniques could yield a cost advantage related explanations involve firms reacting to foreign entry in their domestic markets by sourcing labour intensive production abroad differential access to foreign subsidy programs the desire to secure access to a foreign market under the expectation of future import barriers sunk costs of entering a market under random fluctuations in the real exchange rate or a desire to hedge real exchange rate risk through diversification of production locations 2 while these explanations are plausible each relies on the existence of exogenous asymmetries between rival firms or on a corporate aversion to risk and imperfections in financial markets this paper offers a novel explanation for direct foreign investment in terms of its strategic value identical and risk neutral firms may engage in direct foreign investment and the timing of this can endogenously determine domestic market structure when uncertainty exists about production costs in a foreign location and the industry producing for the domestic market is concentrated direct foreign investment and production may occur because uncertainty over the relative costs of production at a foreign plant offers a

critical remarks on piketty s capital in the twenty first century this article discusses the central macroeconomic claims that are made in thomas piketty s book capital in the twenty first century the article aims to show that piketty s contentions are not only logically flawed but also contradicted by his own data

factor income distribution and endogenous economic growth piketty meets romer what is the relationship between the economy s long run growth rate its capital income ratio and its factor income distribution a satisfactory answer requires an endogenous growth and savings rate we scrutinize piketty s 2014 theory in a richly parameterized variant of romer s 1990 seminal model with and without population growth the economy s growth and savings rate are exogenous in piketty s theory and endogenous in romer s in contrast to piketty s second fundamental law of capitalism a smaller growth rate may be associated with a smaller capital income ratio moreover it may go together with a greater or a smaller capital share jel e10 e21 e25 o33 o41

merit and rent in a growing economy in the framework of romer s 1990 growth model we endogenize human capital accumulation as the risky outcome of an effort choice policies favouring the accumulation of physical capital may reduce the incentives to effort leading the economy on a balanced path with a high capital intensity and a low growth rate

hyteresis in import prices the beachhead effect this paper shows that temporary real exchange rate fluctuations can have persistent hysteretic effects on trade specifically when market entry costs are sunk sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis this simple result has strong implications for exchange rate theory t rade policy and estimation of trade equations empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in u s import prices namely the aggregate pass through equation of exchange rates to import prices shifted in the 1980s the shift s nature and timing is broadly consistent with the hysteresis hypothesis copyright 1988 by american economic association

pareto and piketty the macroeconomics of top income and wealth inequality abstract since the early 2000s research by thomas piketty emmanuel saez and their coauthors has revolutionized our understanding of income and wealth inequality in this paper i highlight some of the key empirical facts from this research and comment on how they relate to macroeconomics and to economic theory more generally one of the key links between data and theory is the pareto distribution the paper describes simple mechanisms that give rise to pareto distributions for income and wealth and considers the economic forces that influence top inequality over time and across countries for example it is in this context that the role of the famous r g expression is best understood

the potential impacts of climate change on capital in the 21st century abstract an endogenous growth model with a simple climate system is used to examine the potential impacts of climate change on the capital to net income ratio and the net of depreciation share of income to capital a measure of wealth concentration and income distribution between capital and labour respectively over the next two centuries if climate change only directly affects production as usually assumed the capital to net income ratio will increase as compared to what it would be in the absence of climate change the capital to income ratio will increase even further if climate change affects labour productivity in both cases the increase in the ratio after 2100 is due to the stock of capital being depleted at a lower rate than net income is falling however the capital to net income ratio will be lower and eventually fall if damage from climate change increases the depreciation rate of capital this decline is marginally reduced if climate change impacts both capital and labour productivity in the case where climate change impacts the depreciation of capital the ratio after 2100 is falling because the stock of capital is destroyed faster than net income is falling furthermore climate change reduces the net share of income accruing to capital in all scenarios with dramatic changes in the case of climate change affecting the depreciation of capital emissions abatement almost completely mitigates these impacts on the capital to net income ratio and the net share of income to capital

is piketty s second law of capitalism fundamental in capital in the twenty first century thomas piketty uses what he calls the second fundamental law of capitalism to predict that capital to income ratios are poised to increase dramatically as economies growth rates fall during the twenty first century this law states that in the long run the capital to income ratio equals s g where s is the economy s saving rate and g its growth rate we argue that this law rests on a theory of saving that is hard to justify first it holds the net saving rate constant as growth falls driving the gross savings rate to one as growth goes to zero second it is inconsistent with both the textbook growth model and the theory of optimal saving in both of these theories the net saving rate goes to zero as growth goes to zero third both of these theories provide a reasonable fit to observed data on gross and net saving rates and growth rates in cross country panel data whereas piketty s does not finally contrary to piketty s second law both of these theories predict that capital to income ratios increase only modestly as growth falls

hysteresis and export targeting abstract a direct and largely untested implication of hysteresis concerns the extent of market entering and leaving in response to large movements in exchange rates this note examines for 359 4 digit u s sic industries data on the distribution of u s exports by country of destination a proxy for the number of markets served from 1978 to 1987 and relates changes in these distributions to overall exchange rate movements we seek to explain differences in the response across industries on the basis of differences in sunk costs the empirical results are generally consistent with the hysteresis approach while in periods of general dollar depreciation firms spread exports more widely across foreign markets this effect is seen to be limited in industries with relatively large distribution and media advertising costs for which much of the costs of establishing export networks may be sunk

the trade reducing effects of market power in international shipping abstract developing countries pay substantially higher transportation costs than developed nations which leads to less trade and perhaps lower incomes this paper investigates price discrimination in the shipping industry and the role it plays in determining transportation costs in the presence of market power shipping prices depend on the demand characteristics of goods being traded we show theoretically and estimate empirically that ocean cargo carriers charge higher prices when transporting goods with higher product prices lower import demand elasticities and higher tariffs and when facing fewer competitors on a trade route these characteristics explain more variation in shipping prices than do conventional proxies such as distance and significantly contribute to the higher shipping prices facing the developing world a simple back of the envelope calculation suggests that eliminating market power in shipping would boost trade volumes by 5 9 for the us to 15 2 for latin america our findings are also important for evaluating the impact of tariff liberalization cargo carriers decrease shipping prices by 1 2 for every 1 reduction in tariffs

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

market concentration contestability and sunk costs this paper provides an exploratory assessment of the theory of contestability that is based on a diverse sample of industries and introduces a new important determinant of market concentration the results of the paper indicate that the variables determining the degree of contestability of markets are significant correlates of market concentration sunk costs account for a substantial portion of the sample variance of concentration even after technological factors are controlled for copyright 1990 by mit press

wealth and inequality over eight centuries of british capitalism abstract this paper constructs annual data for the wealth income ratio w y for the uk over the period 1210 2013 it is found that the w y ratio has fluctuated at one two century frequencies about a constant level of approximately 500 over the past eight centuries furthermore a u shaped w y path is identified over the past two centuries and it is argued that the descending part of the u shape is driven by the transition from pre industrial modes of production to industrialization and that the post 1980 upturn in the w y ratio represents the transition from the industrial to the post industrialization era

transportation costs and international trade in the second era of globalization while the precise causes of postwar trade growth are not well understood declines in transport costs top the lists of usual suspects however there is remarkably little systematic evidence documenting the decline this paper brings to bear an eclectic mix of data in order to provide a detailed accounting of the time series pattern of shipping costs the ad valorem impact of ocean shipping costs is not much lower today than in the 1950s with technological advances largely trumped by adverse cost shocks in contrast air shipping costs have dropped an order of magnitude and airborne trade has grown rapidly as a result as a result international trade has also experienced a significant rise in speed

thomas piketty and the rate of time preference using a standard model in which the individual consumption path is computed solving an optimal control problem we investigate central claims of piketty 2014 rather than r g confirmed in the data r g with being the rate of time preference matters if this condition holds and the elasticity of substitution in the production function is larger than one the capital share converges to one in the long run nevertheless this does not have major impact on the distribution of wealth the latter however converges to maximum inequality for heterogeneous time preferences or rates of interest either persistent or stochastic for the latter the presence of finite life times leads to a distribution with finite wealth inequality featuring fat tails

measuring intertemporal substitution in consumption evidence from a vat increase in japan abstract we estimate the intertemporal elasticity of substitution in consumption ies using a preannounced increase in japan s consumption tax rate because this tax is highly comprehensive the rate increase was announced prior to its implementation and because other factors that affect the real interest rate were constant the tax rate increase presents an ideal natural experiment to estimate the ies a japanese monthly household survey is exploited to accurately categorize nondurables and our empirical specification addresses intratemporal substitution bias we find that the ies is 0 21 and not significantly different from 0 but it is significantly less than 1

exchange rate pass through for strategic pricing and advertising abstract this paper builds a model in the new empirical industrial organization framework bresnahan t 1989 industries and market power in schmalensee r willig r eds handbook of industrial organization north holland amsterdam to estimate exchange rate pass through in price and advertising price cost margins market structure and firm conduct are estimated endogenously allowing for precise estimation of the degree of and reasons for incomplete pass through i demonstrate that price and advertising pass through are functions of demand cost and market conduct in the short run in the long run the market conduct and cost technologies are in turn determined by the exchange rate movements 1997 elsevier science b v

perverse consequences of the gatt export subsidies and switching costs gatt permits its members to retaliate against unfair trade practices committed by its signatories however gatt imposes requirements on this retaliation these include establishing injury to the pertinent industry in the offended country requiring that the unfair practice be currently in existence and mandating that duties not exceed the dumping or subsidy margin because the injury requirement gives the foreign government a period lead in introducing the export subsidy the home government is unable to completely restore the competitive balance when switching costs are present because of these restrictions thus gatt may induce the behavior that it seeks to deter copyright 1996 by the london school of economics and political science

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

savings and growth in neoclassical growth models a comment on is piketty s second law of capitalism fundamental abstract this note explores the response of saving rates to the rate of income growth in models of optimal growth contrary to the claims in krusell and smith 2015 the sign of this response depends on the consumption intertemporal elasticity of substitution

does slow growth lead to rising inequality some theoretical reflections and numerical simulations this paper explores the hypothesis most notably made by french economist thomas piketty that slow growth rates lead to rising inequality if true this hypothesis would pose serious challenges to achieving prosperity without growth or meeting the ambitions of those who call for an intentional slowing down of growth on ecological grounds it would also create problems of social justice in the context of a secular stagnation the paper describes a closed demand driven stock flow consistent model of savings inequality and growth in a macroeconomic framework sigma with exogenous growth and savings rates sigma is used to examine the evolution of inequality in the context of declining economic growth contrary to the general hypothesis we find that inequality does not necessarily increase as growth slows down in fact there are certain conditions under which inequality can be reduced significantly or even eliminated entirely as growth declines the paper discusses the implications of this finding for questions of employment government fiscal policy and the politics of de growth

rent shifting export subsidies with an imported intermediate product abstract this paper examines the implications of foreign or domestic imperfect competition in intermediate goods supply for strategic trade policy assuming cournot competition an export subsidy aimed at shifting rents from foreign to domestic final good producers may also shift rents to foreign suppliers weakening the incentive for the subsidy however the incentive for a subsidy tends to increase if the intermediate good industry is purely domestic or if the industry is purely foreign but the subsidy reduces the price of the imported input alternative rent shifting policies a production subsidy and an import tariff applied to the input are also considered