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Barriers to Free-Trade: Is it only Trump?

June 11, 2018


 By Carl Christian Kontz (ITFD ’18)

As a European liberal and free-trade advocate, it has become quite entertaining to skim through social media, opinion pages, or listen to conversations about the latest tariffs imposed by the U.S. administration. One cannot help but wonder why a large fraction of Europeans, who just three years ago where protesting on the streets across all major European cities against the Transatlantic Trade and Investment Partnership (TTIP) and the infamous U.S. chlorinated chicken, are now the ones running their mouth about how “ignorant,” “stupid,” and “dangerous” Donald J. Trump’s decision to impose steel tariffs is. Surely, a lot of this has to be attributed to the very person associated with the tariff. It seems unlikely that people who regularly blame “neo-liberal” politics for the demise of literally everything are now in favor of a liberal stance on free trade and see a trade war as a threat to the welfare of the world.

Whatever one’s personal opinion about the 45th President of the United States is, we should acknowledge one thing: He is not alone in putting up trade barriers. Contrary to recent common belief, it’s not only Donald Trump who’s the biggest threat to increased welfare through global trade but also Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, the United States and the European Union. If you counted the latter, you already know where this is going: G20.

A recent policy brief addressed to the G20 members and their policymakers by Evenett[1] et al. (2018) shows this clearly. The policy brief states that over 6,000 interventions introduced by G20 members since the crises of 2009 that harm commercial interests are still in force. This is quite remarkable given the responses of the G7 members to the refusal of the United States to stand behind a common declaration of the recent sitting condemning protectionism. Moreover, it is in direct contradiction to the G20 summit declaration of 2008 and 2009, which posits that the G20 governments reject protectionism.

Further, the policy brief holds some uncomfortable truths for free-trade advocates as well as for globalization critiques. The former might be surprised by the extent to which trade barriers have grown since 2009, whereas the latter might be dazed by the consequences these barriers have on the least developed countries (LDCs).

Since the Great Recession and the financial crises of the late 2000s, trade barriers have risen sharply. Data gathered by Global Trader Alert, which has the most comprehensive coverage of all types of trade-discriminatory measures according to the IMF, indicates that a total of 200-250 new policies that harm foreign commercial interests have been implemented each quarter by G20 governments since November 2008. This amounts to a staggering 6,842 distortions to global commerce. It is imperative to emphasize that only 34% of them were outright import and export restrictions that a non-economist would normally think of when asked about trade barriers. Almost half of the trade distortions involve some type of state aid (e.g. subsidies, export incentives, and the like). Figure 2 of Evenett et al. (2018) summarizes this trend in the state of trade distortions by G20 members.

 

Notwithstanding, the picture of who imposes trade distortions is quite heterogeneous. Figure 3 of Evenett et al. (2018) gives an impressive graphical presentation of the reciprocal nature of the trade distortions of G20 members vis-á-vis each other. The heat map also unmasks one of Trumps notorious lies, or ignorance, i.e. that the United States is the “fair player” in global trade and that the world is cheating them. From the figure it is evident that since 2009 the U.S. has established a high number of protectionist measures across all G20 member countries, whereas only Germany, India, and Russia seem to have the same level of reciprocal measures against the U.S.. Poster children of free trade are emerging market economies like Turkey and South Africa, whereas the long-standing free-trade advocate United Kingdom is only somewhere in the upper third of free-traders. Unsurprisingly, the country which suffers the least from protectionist measures is Saudi Arabia, given its status as the world’s largest oil producer.

 

 

Using fine-grained UN trade data, the authors are able to identify to what extent these distortionary measures are affecting the export of goods of G20 members:

 

  • The percentage of G20 goods exports facing harmful policy acts has risen from 40% in 2009 to 80% in the first quarter of 2018.
  • Close to 9% of G20 goods exports compete in foreign markets where import tariffs have been raised.
  • Just under 19% of G20 exports compete in foreign markets against subsidies or bailed out domestic firms.
  • 75% of G20 exports now compete in foreign markets against foreign rivals that are eligible for some sort of state export incentive (mostly through incentives in the national tax systems).
  • 79% of LDC’s goods export compete in foreign markets against trade distortions implemented by G20 countries.

 

Where the final point should be emphasized. The trade distortions that LDCs face in exporting to G20 countries are also present in the competition on third country markets, further limiting the growth and development prospects of the poorest of the poor. Moreover, if the developed countries go ahead with this kind of policy and less developed countries adapt to this new state of the world by imposing trade distortions, we might end up in a bad equilibrium where less developed countries are excluded from global value chains.

 

We actually see this already happening. In the wake of the financial crises, the U.S. whipped up a massive fiscal stimulus to help their economy (and ours!) recover. However, the stimulus package had a provision that demanded that public procurement should buy national, effectively putting up a huge barrier to import goods. Figure 4 of Evenett et al. (2018) shows how fast this idea spread around the world. Almost all of the other G20 countries followed suit and so did some developing countries. Policymakers might think this kind of procurement provision helps their national industries, however, they have to take into account that it also might have a negative effect on the government budget through higher prices, because domestic producers do not face international competition.

If we want globalization and trade to be inclusive and lead to sustainable growth and development even in the least fortunate parts of the world, we must acknowledge that the trade barriers the G20 put in place are detrimental to this effort.

 

The policy brief by Evenett et al. (which includes two proposals to reverse the dangerous path we are on) can be obtained here.

 

 


[1]Simon J. Evenett is Professor of International Trade and Economic Development at the University of St. Gallen, Switzerland, and Co-Director of the CEPR Programme in International Trade and Regional Economics. He gives Policy Lessons on the international trade systems to students in the ITFD programme.

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Economics articles by BGSE alumni at CaixaBank Research

May 10, 2018

Ricard Murillo, Marta Guasch, and Mar Domènech in front of Caixabank. Photo by Marta Guasch.

We’ve just come across some articles written by several Barcelona GSE Alumni who are now Research Assistants and Economists at Caixabank Research in Barcelona. New articles are published each month on a range of topics.

Below is a list of all the alumni we found listed as article contributors, as well as their most recent publications in English (click each author to view his or her full list of articles in English, Catalan, and Spanish).

If you’re an alum and you’re also writing about Economics, let us know where we can find your stuff!

Gerard Arqué (Master’s in Macroeconomic Policy and Financial Markets ’09)

The (r)evolution in the regulatory and supervisory framework resulting from the crisis

Mar Domènech (Master’s in International Trade, Finance, and Development ’17)

Registered workers affiliated to Social Security: situation and outlook across sectors

Active labour market policies: a results-based evaluation

Equal opportunities: levelling the playing field for everyone

Cristina Farràs (Master’s in Macroeconomic Policy and Financial Markets ’17)

The financial situation of Millennial households in the US and Spain: will they catch up with previous generations?

Measures to improve equality of opportunities

Marta Guasch (Master’s in International Trade, Finance, and Development ’17)
and Adrià Morron (Master’s in Economics ’12)

Jay Gatsby’s American Dream: between inequality and social mobility

Ricard Murillo (Master’s in International Trade, Finance, and Development ’17)

Inflation will gradually recover in the euro area

Millenials and politics: mind the gap!

The sensitivity of inflation to the euro’s appreciation

Ariadna Vidal Martínez (Master’s in Finance ’12)

Situation and outlook for consumer financing


Source: Caixabank Research

May the 4th be with you: Economics of Star Wars

May 4, 2018

By Marco Albori (Economics ’18)


Cartoon by Marco Albori '18

Economics students, as all those students specializing in a particular field, love to share memes about their favorite subject, like jokes about strange convergence theorems, weird topological spaces, or absurd economic policy statements. However, it turns out that at least one day a year our nerdy preferences align, like planets would do, with those of the people outside the world of supply and demand, in name of the movie series that makes all nerd hearts beat: Star Wars! (If you thought it was Star Trek please leave this page!)

May the 4th, which is pronounced as “May the Force” if you studied English with Jar Jar Binks or if you are drunk enough after a night out in a disreputable bar of Tatooine with Han Solo, is the day chosen by Star Wars fans to celebrate the saga. Actually, it seems that this word pun was used for the first time not by a geeky guy brandishing a Made-in-Taiwan lightsaber but by the Conservative Party to wish good luck to the new elected Prime Minister Margaret Thatcher in 1979, “May the Fourth Be with You, Maggie. Congratulations.” [1] Too much culture already, let’s go back to the point.

Fun apart, we like the plot of Star Wars because it could be used to explain many of the real world past and current issues in political economy and international trade. Consider for instance the beginning of the story: Qui-Gon Jinn and his apprentice Obi-Wan Kenobi have to negotiate with the Trade Federation, which blockaded the planet Naboo as a protest against the Galactic Republic taxation of commercial routes. Sound realistic, doesn’t it?

The storyline continues with political conspiracies, taking us across the galaxy from highly developed planets where the production process is made mainly by droids to poor constellations where aliens harvest or starve, from growing free trade zones to stagnating stars. This also reminds us the issues our fellows from the Barcelona GSE International Trade, Finance, and Development (ITFD) Program are studying day after day. Investopedia [2] tells you all need to know about the “economics” of Star Wars galaxy, while Mark Thorton wrote a couple of interesting blog posts [3] for the Mises Institute discussing it from a political economy point of view, which, drawing from the Austrian tradition, is a liberal one. Indeed he defines The Phantom Menace as “one of the finest allegories on classical liberal political economy to ever appear on screen.”

Sometimes we just want to quote the saga to paint a little our mathematically intensive works: it is the case of Brodeur et al. (2016) who titled their paper on econometrics and the worry of every researcher (getting as many stars as possible on his regression coefficients) “Star Wars: The Empirics Strike Back.

Some other times we definitely go wild with creativity, as Zachary Feinstein, a financial engineer who estimated the cost of building the two Death Stars and the loss caused by their destruction due to the Rebels. His paper “It’s a Trap: Emperor Palpatine’s Poison Pill” [4] not only does an accurate accounting of the aforementioned costs in terms of Gross Galactic Product, but also analyses the systemic risk implication of such a disruption on the galactic banking and financial system. According to the author: “this would have been worse than the Great Depression. It would have been beyond anything that we’ve ever seen on Earth.” [5]

At this point it seems legit to ask ourselves: among the famous people named Lucas, are economists more like Robert or George?

No matter whether you are a galactic empiricist or a interstellar growth theorist, as an economist you have a lot of reasons to love Star Wars and watch the whole saga again or do it for the first time if you haven’t done it yet (shame!). And, let’s confess it, we would all like Yoda’s wisdom helping us during our homework nights at the library, of course keeping him away from Latex (imagine the mess caused by convoluted his talking way). Or even better, Chewbacca as a partner in crime when we have to go to an exam revision at the professor’s office.

Lego Chewbacca and economics paper

Photo by Marco Albori ’18

May the 4th be with you!


[1] Wikipedia

[2] Investopedia

[3] Mises Institute

[4] Feinstein

[5] CBC

Friedman’s Presidential Address in the Evolution of Macroeconomic Thought

May 3, 2018


 By Marco Albori (Economics ’18)

Summary of Gregory Mankiw and Ricardo Reis:                                                                      “Friedman’s Presidential Address in the Evolution of Macroeconomic Thought”

Fifty years ago Milton Friedman delivered his presidential address [1] to the American Economic Association. His speech is the third most-cited presidential address, preceded only by those of Kuznets [2] and Schultz [3], with more than 7500 citations. Why has it been so influential? Friedman stressed his opinion, built over years of study of monetary theory and history, distinguishing what monetary policy could and could not do. In less than 17 pages, with a simple writing not common to most of economic papers, without any equation or complicated model, he challenged the mainstream thought, opening a new era in macroeconomic research.

In occasion of this anniversary, Gregor Mankiw and Ricardo Reis explore the state of the art at that time, the main points of the address and the consequences it had not only on the field but most importantly on policy in a recent paper, “Friedman’s Presidential Address in the Evolution of Macroeconomic Though”, published in the Journal of Economic Perspectives.

Looking back at the beginning of the 60s, the mainstream thought in macroeconomics was the Keynesian one, based on Hicks and Hansen’s simplification of the general theory: the IS-LM model as a building block, accompanied by the belief that the Phillips curve was an actual instrument in the toolkit of policymakers and finally that the long-run behaviour of the economy was the results of the sum of Keynesian short runs. The Keynesian approach to the short and medium run, corrected with the advance made by theorists, is still the starting point of any introductory course on macro, while most of students are initiated to long-run theory through the Solow growth model.

On the contrary of Keynes, Friedman was  convinced that the long-run is the realm of classical economics and thus monetary policy, being neutral, cannot do anything to change real variable like the natural rate of unemployment which is pinned down by the characteristics of the market structure. Moreover, according to his view, the trade-off between inflation and unemployment is always necessarily temporary, as expectations evolve through time, frustrating central bank’s attempts. Milton Friedman’s definition of long-run was indeed the time horizon over which people become informed and align their expectations to the reality. The ground for the rational expectations revolution (and later the development of the RBC model) had been put in place, even though Friedman thought expectations were slow to adapt, sluggish rather than rational.

Following Friedman’s reasoning, central banks cannot take advantage of the Phillips curve infinitely to control real variables in the long run, as it will eventually disappear as expectations adjusts (it should be stressed that he did not consider feedbacks between inflation and unemployment in a fashion like the modern Taylor rule). Notwithstanding this view, and the fact that monetary policy is not timely but takes time to exert its effects, he was not a complete advocate of passive policy, as he believed that monetary policy and credit policy could be used to offset disturbances caused by other sources like fiscal policy (yes, he considered fiscal policy a disturbance, didn’t you know?). He finally proposed to use the rate of growth of some monetary aggregate as the baseline instrument of monetary policy, ruling out the exchange rate and the interest rate instead.

But decades have passed, and nowadays monetary policy could not be more different than that simple rule, with balance sheet policy, fine tuning operations and unconventional “weapons” used by central banks all around the world to cope with the crisis and impaired transmission mechanisms. Monetary policy today is mostly based on the interest rate instead, given its central role in asset pricing and as a driver of investment and saving decisions, and the paper explains the role of monetary policy today, digging into the current ideas which Friedman would have agreed with as well as those he would have opposed. Just to cite one, Galí and Gertler [4] point out the “significant role of expectations” in the transmission mechanism of monetary policy (which Friedman would be totally fine with), as opposed to “the importance for the central bank of tracking the flexible price equilibrium values of the natural levels of output and the real interest rate” which fosters the monetary policy activism criticized by the Nobel prize laureate.

The final section of the paper illustrates the “road ahead” and current research themes (and associated real world problems) which relate to Friedman’s theories. First, the natural rate hypothesis clashes against the stagnation affecting our economies, with the latter opening both to the competing views of hysteresis and shortage of aggregate demand. Second, the Philipps curve is still alive as a synonym of nominal rigidities and investigation of price and wage setting flourishes as that on expectations, recently driven by progresses in surveys and experimental/behavioural economics.

On the policy side, the effects of massive central banks interventions on the potential of fiscal authorities and their constraint and vice versa ask for a compelling understanding, as well as the role of liquidity in financial markets, the potential of macroprudential policy and finally the effectiveness of macroeconomic policy at the zero lower bound. As a matter of fact Friedman did not discuss the last two, which are today central issues in macroeconomic policy: the view that monetary policy could be ineffective and different instruments are needed as the interest rate approaches zero was Keynesian, and he did not reserved a role in macroprudential regulation to central banks. On the contrary, today it is recognized that monetary authorities should pay attention to credit variables as they are related to potential risks for financial stability and crises and ultimately to the potential functioning of the transmission mechanisms of monetary policy, in good and bad times.

Concluding, Mankiw and Reis article on the Journal is accompanied by two other related essays  “Should we reject the natural rate hypothesis?” by Blanchard and “Short-Run and Long-Run effects of Milton Friedman’s Presidential Address” by Hall and Sargent, which further contribute to the discussion surrounding Milton Friedman’s inheritance.

 


[1] https://www.andrew.cmu.edu/course/88-301/phillips/friedman.pdf

[2] “Economic Growth and Income Inequality”, The American Economic Review, 1955

[3] “Investment in Human Capital”, The American Economic Review, 1961

[4] “Macroeconomic Modelling for Monetary Policy Evaluation.”, Journal of Economic Perspectives, 2007

How to do research and write about it.

April 22, 2018


 By Carl Christian Kontz (International Trade, Finance, and Development ’18)

As we are already in the third term and the time to write the analysis for our Master’s project approaches steadily, I thought it might be a good idea to share some resources about (economic) academic writing I came across over the last years.

 

John Cochrane of U Chicago, known for his contributions to financial macroeconomics and his blog The Grumpy Economist, provides us with a concise yet comprehensive guide on how to write a paper:

 

Another great resource covering nearly all issues of a (term) paper are the notes produced by Plamen Nikolov of Harvard University:

 

The most comprehensive guide on how to write economics I have come across during my undergraduate is by Robert Neugeboren and Mireille Jabocson of Harvard University. The guide outlines the economic approach, writing economically, the language of economic analysis, finding and researching your topic, as well as formatting and documentation.

 

Matthew Gentzkow (Stanford) and Jesse M. Shapiro (Brown) wrote a fantastic practitioner’s guide on how you should structure your code, why you should automate almost everything, and how important version control is. More general, the handbook is about translating insights from experts in code and data into practical terms for empirical social scientists. It’s a must-read for everyone working empirically.

 

Deidre McCloskey, another U Chicago household name, provides a deeper analysis of how an economist writes and thinks in her seminal works on the rhetoric of economics.

 

A great resource on how to communicate your research using data visualization is given by Jonathan A. Schwabish of The Urban Institute. Schwabish is considered a leader in the data visualization field and is a leading voice for clarity and accessibility in research.

 

Last but not least, the all-time classic by Berkeley’s Hal Varian on how to build an economic model.

 

Other useful resources are

 

Good general purpose books on writing, including organization and style, non-fiction books are

 

Strunk, White, and Angell – Elements of Style

 

William Zinsser – On Writing Well: The Classic Guide to Writing Nonfiction

 

Michael Billig – Learn to Write Badly: How to Succeed in the Social Sciences

New BGSE Welcome Kit 2018

April 11, 2018


By Marco Albori (Economics ’18)


We are pleased to give you a first ever glance at the new Welcome Kit by Barcelona Graduate School of Economics (limited to one per Master student).

On the determinants of bitcoin returns: a LASSO approach

March 28, 2018


 By Orestis Vravosinos (Economics ’18)

 

Orestis shares his recent work on bitcoin, joint with professors Theodore Panagiotidis (Univeristy of Macedonia) and Thanasis Stengos (University of Guelph).

The paper is in press and currently available online at Finance Research Letters. It first appeared as a working paper of the Rimini Centre for Economic Analysis (RCEA).

Extended abstract: Bitcoin has recently received increased attention by both investors and researchers. The consumer base, transaction frequency in the digital currencies market and the number of businesses and organizations accepting payments in bitcoin have been rapidly expanding.

In this paper, within a Least Absolute Shrinkage and Selection Operator (LASSO) framework, we examine the significance of factors such as stock market indices, exchange rates, gold and oil, central bank rates, internet trends and policy uncertainty as drivers of bitcoin returns for alternate time (sub)periods within 2010-2017. The advantage of LASSO is that it performs coefficient shrinkage (even setting some coefficients to zero) and in this way automates model selection. Search intensity and gold returns emerge as the most important factors for bitcoin returns.

 

References

Panagiotidis, T., Stengos, T. and Vravosinos, O. (2018). On the determinants of bitcoin returns: a LASSO approach. Finance Research Letters, doi: 10.1016/j.frl.2018.03.016