Monday, December 6, 2010

Interesting New Research

. Monday, December 6, 2010

Monday is the day that the NBER releases its working papers for the week, and sometimes there's some interesting stuff. This week, for example. I haven't had the chance to actually, you know, read any of these papers, but here's a few abstracts that caught my eye:

Why Have Economic Reforms in Mexico Not Generated Growth?

Timothy J. Kehoe, Kim J. Ruhl
NBER Working Paper No. 16580

Following its opening to trade and foreign investment in the mid-1980s, Mexico’s economic growth has been modest at best, particularly in comparison with that of China. Comparing these countries and reviewing the literature, we conclude that the relation between openness and growth is not a simple one. Using standard trade theory, we find that Mexico has gained from trade, and by some measures, more so than China. We sketch out a theory in which developing countries can grow faster than the United States by reforming. As a country becomes richer, this sort of catch-up becomes more difficult. Absent continuing reforms, Chinese growth is likely to slow down sharply, perhaps leaving China at a level less than Mexico’s real GDP per working-age person.

This analysis jives with my priors, and also with a lot of things I've been thinking about lately. One point is that we probably expected too much from Mexico, which never had as much room for development as China or the Asian Tigers. Another is that not all development is the same. China has been able to mobilize large factors of production that were essentially idle a generation or so ago. Mexico was not in the same position. Yet another is that we cannot, and should not, expect China's meteoric rise to continue at pace indefinitely. Michael Pettis wrote a good post on this point recently, drawing the obvious analogy to Japan. Mexico has problems with inequality and the environment, but they pale in comparison to China's. Right now China's state is more consolidated than Mexico's, but we should probably expect it to become more sclerotic over time. Mexico's demographics are also much more favorable for future stable economic performance. Obviously comparing the development record of any two countries is problematic, but we should recognize that Mexico has done fairly well over the past generation, and has a good opportunity for sustained growth in the future.

An ungated version of this paper is available from the Minneapolis Fed here.

Classification, Detection and Consequences of Data Error: Evidence from the Human Development Index

Hendrik Wolff, Howard Chong, Maximilian Auffhammer
NBER Working Paper No. 16572

We measure and examine data error in health, education and income statistics used to construct the Human Development Index. We identify three sources of data error which are due to (i) data updating, (ii) formula revisions and (iii) thresholds to classify a country’s development status. We propose a simple statistical framework to calculate country specific measures of data uncertainty and investigate how data error biases rank assignments. We find that up to 34% of countries are misclassified and, by replicating prior studies, we show that key estimated parameters vary by up to 100% due to data error.

Measurement problems with the HDI have been well-known for a long time, but this is the first paper I've seen that tries to reestimate the index after correcting some of these problems. Also note that the 2010 HDI report uses a new methodology than previous reports. Didn't hear much about that? Perhaps it's because the U.S. moved up to #4 (behind only Norway, Australia, and New Zealand) in 2010, from #13 in 2009. I strongly favor using a variety of well-being measures to rank outcomes in countries; GDP is too crude to be used for everything. But other indices have their own problems, among them measurement errors and the necessity of a "philosophy of weights", i.e. how much importance to give what factors in creating the index. These choices are often motivated by normative concerns. A more open and nuanced discussion of these issues is good.

An ungated pdf is here.

Financial Crises, Credit Booms, and External Imbalances: 140 Years of Lessons

Òscar Jordà, Moritz Schularick, Alan M. Taylor
NBER Working Paper No. 16567

Do external imbalances increase the risk of financial crises? In this paper, we study the experience of 14 developed countries over 140 years (1870-2008). We exploit our long-run dataset in a number of different ways. First, we apply new statistical tools to describe the temporal and spatial patterns of crises and identify five episodes of global financial instability in the past 140 years. Second, we study the macroeconomic dynamics before crises and show that credit growth tends to be elevated and natural interest rates depressed in the run-up to global financial crises. Third, we show that recessions associated with crises lead to deeper recessions and stronger turnarounds in imbalances than during normal recessions. Finally, we ask if external imbalances help predict financial crises. Our overall result is that credit growth emerges as the single best predictor of financial instability, but the correlation between lending booms and current account imbalances has grown much tighter in recent decades.

Thomas may find this one interesting. I have a feeling that when I read it I'll be asking for a political explanation for the growth in credit and imbalances pre-crisis. I'll reserve more substantive comment until I've had a better chance to look it over.

An ungated pdf is here.


Interesting New Research




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