Economics master project by Eimear Flynn, Florencia Saravia, Josefina Cenzon, Nimisha Gupta, and Selena Tezel ’19
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.
Is financial globalization beneficial to economies at all levels of development? Or are there certain “threshold” levels of financial, institutional and economic development a country must first attain in order to realize the growth benefits of globalization? Kose, Prasad and Taylor (2009) develop a unified empirical framework to answer this question. The debate on the literature is ongoing. Yet few studies have explored these questions in a post-crisis context. In this paper, we replicate and extend their work, paying close attention to the period 2005-2014. Our analysis yields three key results. First, the financial depth threshold above which countries can benefit from financial globalization increases from 66% to 81% when we consider the extended period. Second, the proportion of countries with depth levels above this threshold declines over time. Finally, the coefficients are smaller in absolute value over the period 1975-2014. Taken together, these results imply a breakdown in the relationship between financial depth, openness and growth since the Great Recession. Financial deepening on its own can no longer ensure positive growth effects of financial integration.
In the paper, we examine two periods 1975-2004 and 1975-2014 and test for threshold effects in three variables, financial depth, institutional quality and trade openness. This paper is unique in its inclusion of the years immediately before and following the Great Recession. Following a surge in international financial integration between 2005 and 2007, financial openness plummeted with the onset of the crisis in 2007. This effect was most pronounced in advanced economies. As economic growth rates declined, countries turned their backs on financial globalization. Financial flows have since rebounded, albeit not to their pre-crisis levels. The effect of this volatility on the relationship between financial openness and economic growth however is not well understood.
We analyze changes in the financial depth threshold over time as well as changes in the proportion of countries with depth levels above this threshold over time. We present three key findings. We first document an increase in the threshold level of financial depth from 66% to 81% when we extend the period to 2014. It follows that the proportion of countries with levels of depth above this threshold decreases over time. Our estimate of 66% for the period 1975-2004 is remarkably close to that of Kose et al. Secondly, the coefficient estimates are smaller and less significant which points to a breakdown in the relationship between financial openness and growth in the post-crisis period. Finally, we identify significant threshold effects of institutional quality.
Together these results point to a weaker relationship between financial openness and growth in the post-crisis period. Our estimates suggest that once a country reaches the threshold level of financial depth, further improvements in depth stop being important quite rapidly. It is now more difficult for countries to attain the benefits of financial integration, not just because the threshold of financial depth is higher but because financial depth alone may no longer be sufficient to ensure growth. The trade-off that further financial deepening can generate between higher growth and a higher risk of crisis needs to be addressed. The Great Recession was a reminder that financial depth and financial stability need not go hand in hand. The risks of financial deepening are more evident than before. Focusing only on the long run growth view overlooks this trade-off. In order to conduct policy relevant research, a new approach that realistically accounts for both the growth and crisis effects of financial deepening is required.
Economics master project by Oriol González, Marko Irisarri, Santiago Iglesias, Asier Beristain and Manuel Cabado ’19
Editor’s note: This post is part of a series showcasing Barcelona GSE master projects. The project is a required component of all Master’s programs at the Barcelona GSE.
Weak identification is known to yield unreliable standard instrumental variables (IV) inference. A large literature has focused on addressing this issue by proposing methods to detect weak instruments, mainly through the first-stage F-statistic. Our paper evaluates the weak identification in two leading empirical analyses by using the novel alternative approach developed by Ganics, Inoue and Rossi (2018), who base their tests on confidence intervals for the bias of the two-stage least squares estimator, and the size distortion of the associated Wald test. We illustrate the behavior of the tests in empirical settings, and compare how the conclusions differ to those using the standard tests. Our findings suggest that, in our empirical application, the results obtained using this approach are in line with those using previous tests in the literature, confirming it to be a robust alternative. An R package to directly compute these novel tests is also presented.
The contribution of our paper is mainly twofold. On the one hand, we aim at motivating the usefulness of the novel approach developed by Ganics et al. (2018) to evaluate the robustness of empirical analyses to the potential presence of weak instruments. On the other hand, we make these tests accessible to researchers via the proposed R function. The paper shows how recent tests applied to previous literature unveil new interesting information about the results obtained and hence the conclusions drawn from them. We highlight the consequences of IV estimates displaying both high sampling uncertainty and high specification uncertainty, as minor specification changes can lead to very different estimates, which is in line with current findings in the IV literature (see Yogo, 2004; Kleibergen and Mavroeidis, 2009; Mavroeidis, 2010; Mavroeidis et al., 2014; Ganics, 2017; or Barnichon and Mesters, 2019). Another remarkable issue that arises, mirroring the recent findings in Young (2019), is the importance of the baseline assumptions on the structure of the error variance to correctly interpret the estimation results.
Barnichon, R. and Mesters, G. (2019), ‘Identifying modern macro equations with old shocks’, Barcelona GSE Working Paper Series (Working Paper n◦1097).
Ganics, G. (2017), Essays in macroeconometrics, PhD thesis, Universitat Pompeu Fabra.
Ganics, G., Inoue, A. and Rossi, B. (2018), ‘Conﬁdence intervals for bias and size distortion in IV and local projections-IV models’, Banco de España Working Paper.
Kleibergen, F. and Mavroeidis, S. (2009), ‘Weak instrument robust tests in gmm and the new keynesian phillips curve’, Journal of Business & Economic Statistics 27(3), 293-311.
Mavroeidis, S. (2010), ‘Monetary policy rules and macroeconomic stability: some new evidence’, American Economic Review 100(1), 491-503.
Mavroeidis, S., Plagborg-Møller, M. and Stock, J. H. (2014), ‘Empirical evidence on inﬂation expectations in the new keynesian phillips curve’, Journal of Economic Literature 52(1), 124-88.
Yogo, M. (2004), ‘Estimating the elasticity of intertemporal substitution when instru- ments are weak’, Review of Economics and Statistics 86(3), 797-810.
Young, A. (2019), ‘Consistency without inference: Instrumental variables in practical application’, Unpublished manuscript.
Forthcoming publication by Federico Lubello ’12 (Economics)
My paper, “Bank Assets, Liquidity and Credit Cycles” with Ivan Petrella (Warwick and CEPR) and Emiliano Santoro (University of Copenhagen) has been accepted at the Journal of Economic Dynamics and Control. In the paper, we uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
We study how bank collateral assets and their pledgeability affect the amplitude of credit cycles. To this end, we develop a tractable model where bankers intermediate funds between savers and borrowers. If bankers default, savers acquire the right to liquidate bankers’ assets. However, due to the vertically integrated structure of our credit economy, savers anticipate that liquidating financial assets (i.e., loans) is conditional on borrowers being solvent on their debt obligations. This friction limits the collateralization of bankers’ financial assets beyond that of real assets (i.e., capital). In this context, increasing the pledgeability of financial assets eases more credit and reduces the spread between the loan and the deposit rate, thus attenuating capital misallocation as it typically emerges in credit economies à la Kiyotaki and Moore (1997). We uncover a close connection between the collateralization of bank loans, macroeconomic amplification and the degree of procyclicality of bank leverage.
IDB publication co-authored by Miguel Angel Santos (ITFD ’11, Economics ’12)
After a lengthy review process we are proud to announce that our book “City Design, Planning, Policy Innovations: The Case of Hermosillo” is published and available for download from the Inter-American Development Bank. Cutting edge research on cities featuring my work with Douglas Barrios, my colleague at the Center for International Development’s Growth Lab at the Harvard Kennedy School. Thanks to Andreina Seijas and Diego Arcia for the superb coordination and editing work.
About the book
This publication summarizes the outcomes and lessons learned from the Fall 2017 course titled “Emergent Urbanism: Planning and Design Visions for the City of Hermosillo, Mexico” (ADV-9146). Taught by professors Diane Davis and Felipe Vera, this course asked a group of 12 students to design a set of projects that could lay the groundwork for a sustainable future for the city of Hermosillo—an emerging city located in northwest Mexico and the capital of the state of Sonora. Part of a larger initiative funded by the Inter-American Development Bank and the North-American Development Bank in partnership with Harvard University, ideas developed for this class were the product of collaboration between faculty and students at the Graduate School of Design, the Kennedy School’s Center for International Development and the T.H. Chan School of Public Health.
Speech by Gavin Jackson ’12 (Economics) to the Oxford Economics Society
This June, Gavin Jackson ’12 (Economics) returned to his undergrad alma mater, University of Oxford, and gave a talk to the Oxford Economics Society about the slowdown in productivity in the United Kingdom and where productivity in the UK might be headed.
He listed five contributing factors to the slowdown: “changes in financial regulation, the patent cliff, mismeasurement of telecommunications, attempts to cope with climate change, and the troubles with getting more oil out of the North Sea.”
Looking ahead, he remarked, “I don’t think we can or should go back to the past. We do not want to go back on environmental on financial regulation, as the US is doing right now. But what we can do as a society is try to be open to new opportunities and technologies that are coming along and that means investing in the basics of education, infrastructure and research to make sure that we are able to make the most of things like e-commerce and working out what to do about those who lose out from these transitions.”
Master’s students Analía García ’19 (ITFD) and Lorena Franco ’19 (Economics) organized the seminar to highlight research by female PhD students and professors
This May, BGSE Master’s students Analía García ’19 (ITFD) and Lorena Franco ’19 (Economics) organized the Women in Economics two-day seminar, which meant to highlight female PhD students and faculty members’ research.
Three students and four Barcelona GSE Affiliated Professors presented their work, which varied from family economics to political economics and experimental economics. More information of the speakers and their topics below.
These efforts, nonetheless, started over two months ago when both students, who are from Latin America and the Caribbean, organized an open forum on International Women’s Day. Having prior work experience and noting the clear lack of female representation in economics and academia, they wanted to expand the conversations on the topic and discuss what we could do to potentially “make it better” within their parameters. The Women in Economics seminar was born from the conversations during the first and second open forums, and thanks to the ideas of Marta Morazzoni and Claudia Meza, both PhD students at GPEFM (UPF and Barcelona GSE).
Putting this together was a challenge given this had not been done at BGSE before, but the organizers hope this was insightful for all those who attended.
More female and racial diversity in economics and academia, please!
The speakers and the titles of the work were the following (listed alphabetically):
Marta Morazzoni“Family Dynamics in Macroeconomics: when the representative household does not represent us anymore”
Marta Santamaría“The Gains from Reshaping Infrastructure: Evidence from the Division of Germany”
Alina Velias“When to Tie Odysseus to the Mast: Costly Commitment Under Biased Expactations”
Enriqueta Aragonés“Stability of a Multi-level Government: A Catalonia in Spain”
Rosa Ferrer“Consumers’ Costly Responses to Product-Harm Crises” and “Gender Gaps in Performance: Evidence from Young Lawyers”
Ada Ferrer-i-Carbonell“Relative Deprivation in Tanzania”
Rosemarie Nagel“Regularities in the Lab, Brain, and Field: A Cognitive Reasoning Model”
Publication by Orestis Vravosinos ’18 (Economics) with Kyriakos Konstantinou
A paper by Orestis Vravosinos (Economics ’18, UPF MRes in Economics ’19) and Kyriakos Konstantinou (LSE) has just been published in the Review of Behavioral Economics. Below is an overview of the paper.
The Ultimatum Game
Given that in experiments ultimatum game outcomes are often significantly different from Nash equilibrium predictions under standard assumptions on preferences, many studies have examined the impact of fairness on players’ considerations and how the effect of the sense of fairness on players’ actions may vary, while other factors change. It has been argued that increased stakes (larger sum of money distributed) can reduce sensitivity to fairness of player 2 making it more likely that she accepts lower shares of the total sum, thus, giving player 1 the opportunity to offer a lower share.
Social distance has also been found to affect fairness. In the existing literature, social distance commonly varies only from players being close relatives or friends to complete strangers, even though negatively-valenced relationships can be important from an economic point of view. Our study aims to fill this gap by introducing negatively-valenced relationships between the players. We argue that altruistic and empathetic behavior of the proposer towards the responder may not vary (increase) as significantly in the region of negative relationships compared to the region of positive relationships. Similarly, social distance effects stemming from reciprocity may vary less in the region of negative relationships. Thus, we hypothesize that in the ultimatum game social distance effects are asymmetric with their magnitude varying more in the spectrum of positively compared to negatively-valenced relationships.
Our experimental results support this hypothesis; in the region of positively-valenced relationships, the proposers increase the percentage they offer as relationship quality increases more drastically compared to when the relationship is negatively-valenced, in which case they appear more invariant to relationship effects. Also, by eliciting a minimum share which the responder is willing to accept out of the total sum, we provide clearer results on the social distance and stakes effects on the latter’s behavior. Last, we find a negative effect of relationship quality on the minimum acceptable share. This contradicts a strand of the literature which suggests that closer-“in-group” individuals may be punished more severely, so that cooperation in a group is maintained.
Economics ’18 master project turned working paper by alumni Mariel Bedoya, Karen Espinoza, Bruno Gonzaga, and Alejandro Herrera Jiménez
What started out as a Barcelona GSE master project has developed into a full-fledged working paper by four alumni of the Master’s in Economics Class of 2018: Mariel Bedoya, Karen Espinoza, Bruno Gonzaga, and Alejandro Herrera Jiménez.
The paper, “Setting an example? Spillover effects of Peruvian Magnet Schools,” is now part of the Development Research Working Paper Series of the Institute for Advanced Development Studies (INESAD), a research center in La Paz, Bolivia.
Mariel explains that the idea to research this topic occurred to her because before doing the master in BGSE, she worked in the Ministry of Education of Peru, in the Impact Evaluation Division.
“The topic was interesting for us because although there is plenty of literature studying these selective schools’ first order effects (that is, effects on the students who directly benefited from the creation of these schools), we found scarce evidence about second-order effects (effects on students who shared environments with the high achieving student previously). Even more, analyzing externalities seemed of importance for a program such as COAR in Peru since the expenditure per student for the program is relatively high,” Mariel says.
The team has presented their research in three seminars so far, two in Peru and one in Bolivia.
“We aim to continue this research project in the near future. We got the opportunity of presenting findings of our research for public servants within the Ministry of Education last year, including the Director of the Division of Specialized Education Services, who is in charge of the COAR Program. This research complements ongoing efforts of the Ministry of Education of evaluating COAR’s first order effects. They seemed keen on helping us, especially because we do not have yet the necessary data to conclude on the mechanisms that may be driving the results we find, and they would like us to tell them more about this point in particular. We hope to have a new version of this paper by the end of the year.”
A good read for all those interested in understanding the extent to which the relationship between the changing nature of work and income inequality is influenced by national labor market institutions.
Recent work in comparative political economy has found that labour market institutions can mitigate the inequality-enhancing effects of the transition to the knowledge economy (Hope and Martelli 2019). While this work enhances our understanding of the role and importance of labour market institutions in the post-industrial era, it cannot tell us much about the underlying mechanisms. This paper aims to fill that gap in the literature by undertaking a micro-level econometric study on Denmark using a unique longitudinal dataset with linked employer-employee data, the Integrated Database for Labour Market Research (IDA). The central analysis in the paper will explore the influence of union membership and collective bargaining on within and between firm inequality in knowledge-intensive sectors. It will also test competing hypotheses as to why labour market institutions have been able to damp down the effects of the transition to the knowledge economy on income inequality.
A couple of takeaways
The transition to the knowledge economy began in earnest after the crisis of Fordism in the 1970s. Figure 1 (below) shows the employment expansion in knowledge-intensive service sectors, such as finance, insurance, business services, and telecommunications, between 1970 and 2006. Growth of knowledge employment was ubiquitous in the advanced democracies over this period; the average employment expansion was close to nine percentage points. The rise of the knowledge economy is clearly demonstrated by this substantial shift in economic structure away from traditional industries and toward ICT-intensive service sectors.
Figure 2 (below) shows that for the income share of the top 1 percent, an increase in knowledge employment is associated with an increase in inequality when wage coordination and collective bargaining coverage are very weak, but has little or no effect when they’re at their highest levels.
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