The Dynamics of Trade and Competition

Transcription

1 The Dynamics of Trade and Competition July 2007 Natalie Chen Warwick & CEPR Jean Imbs HEC Lausanne, SFI & CEPR Andrew Scott LBS & CEPR Globalization and the Macroeconomy, ECB July 2007

2 Romer s Figure I I argue that the most important and most unusual factor supporting worldwide disinflation has been the mutually reinforcing mixture of deregulation and globalization, and the consequent significant decrease in monopoly pricing power. K. Rogoff, 2003 (or 2006)

3 Macroeconomics or Microeconomics Inflation is always and everywhere How does globalization alter monetary policy? Higher Productivity, Lower Markups. But necessarily temporary This paper is about purging Macro to identify Micro channel

4 What this paper is NOT about Identifying permanent changes in the conduct of monetary policy because of openness In theory: Inflation bias of Time-Inconsistent Central Bank precisely proportional to degree of competition in the economy. More competition means (% for %) less inflation (bias). Openness lowers incentive for surprise inflations through cost of depreciations. (Romer 1993) More structural argument in Loungani and Razin (2006): (trade and financial) openness helps achieve fully diversified consumption, and so inefficiencies captured by output gap matter less. Welfare maximizing Central Bank should focus on stabilizing inflation. Coefficient on inflation increases in NKPC (that on marginal costs falls) If competition changes permanently, should not be captured by a model of cyclical inflation. Should compute how steady state inflation is altered, and determine corresponding transition dynamics.??

5 In the data: Cross-country evidence controversial at best. Romer (1993), but Terra (1998) on sampling or Lane (1997). Global component of Inflation (Mojon&Ciccarelli 2005). But could simply reflect convergence in conduct of monetary policy Impact of foreign output gap in domestic Phillips curves. But enough MNCs that price in response to foreign marginal costs? Besides, controversial result (Ihrig, Kamin et al 2007). Has coefficient on inflation in NKPC changed? Probably test with most sound theoretical backing. But significance elusive and cyclical model. For sure, should involve best-practice estimation of NKPC. What are the theoretical predictions on inflation (transition) dynamics in response to a permanent change in markups? Potentially new test.

6 In short: Macro Evidence elusive and controversial Models perhaps not quite adapted to deal with permanent change in market structure Two things the paper DOES Use the estimated (short-run) response of prices to openness to infer some order of magnitude of the globalization-inflation elasticity. BUT: Necessarily temporary inflation? What happens in the long run? Only Manufacturing Prices Differential effects (not absolute) Use the estimated (short-run) response of markups to openness to infer some order of magnitude of the change in market structure. BUT: What happens in the long run? Only Manufacturing Prices Differential effects (not absolute)

7 The MAIN thing the paper does Estimate Microeconomic Channels: The Pro-Competitive Effects of Openness Openness has pro-competitive effects, which (temporarily) limit aggregate price growth via lower margins and higher productivity. In theory: - Culling of lame ducks (Melitz-Ottaviano 2005, Bernard- Jensen-Schott 2006) => Productivity Effect - Profit margins down (Melitz-Ottaviano 2005, Hoekman and Kee 2003) => Competition Effect In the data: o Corbo, de Melo, Tybout (1991) on Chilean trade reforms and efficiency of domestic firms o Clerides, Lach, Tybout (1998) on learning by exporting in Colombian, Mexican and Moroccan firms o Ferreira, Rossi (2003) on increased productivity growth in Brazilian sectors after 1990 trade liberalization. o Van Biesebrock (2003) on increased productivity in Sub- Saharan African firms after they enter export markets o Topalova (2004) or Aghion, Burgess, Redding and Zilibotti (2003) on effects of 1991 Indian trade liberalization. o Bernard, Eaton, Jensen and Kortum (2004): firm-level characteristics of US exporters o Bernard, Jensen and Schott (2005): fall in US sector trade costs and firm-level response of productivity

8 Contribution 1. Theory where openness lowers margins, increases (average) productivity and limits price growth. Inspired from Melitz-Ottaviano (2005). 2. Model-implied difference in differences estimation, (involves model-implied observable variables). 3. Implemented on sectoral data on prices, productivity and markups purges macro, focuses on micro effects. 4. Openness (import penetration) has: negative and significant impact on manufacturing prices positive and significant impact on manufacturing productivity (truncation effect) negative and significant impact on margins (procompetitive effect) 5. Effects sometimes revert in the long run: NONliberalizing country becomes an attractive base camp from which to export to liberalized economy. (Tariff-jumping) 6. The average increase in relative openness in our sample (45%) shaves 8% of yearly manufacturing price inflation and 6% of yearly growth in profit margins. Caveats: manufacturing only, short run only, differential estimates (45% irrealistic)

9 Theory Ingredients: - Imperfect competition with elasticity of demand depending on number of firms [Ottaviano, Tabuchi and Thisse (2002)]. Then mark ups depend on number of firms as well. - Firms with heterogeneous productivity, and fixed cost of entry. Productivity is revealed after cost is paid, and nonproductive firms exit. [Melitz (2003)] Mechanism: - Liberalizing domestic economy lowers tariff. Import share rises as more foreign firms export to domestic market. - Rising import share leads to increase in number of firms. - Immediately lowers mark ups. - Also increases productivity as, with low prices, fewer firms make the cut. - Both channels reduce prices. - In long run, firms can choose where to *locate*. Closed economy attractive, because more protected. Also, has become cheaper to export to domestic market from there. Firms relocate abroad. - Number of firms now falls, with opposite end effects on prices, margins and productivity. Inspiration: Extension of Melitz (2003) and Melitz and Ottaviano (2005).

10 Model Implied Estimations Prices Markups: Productivity:

11 Econometric Issues - Intercepts: Estimation is differences in differences, i.e. international differences in sectoral growth rates. Controls for country pair specific intercepts (i.e. permanent international differences in prices, productivity or markups) Controls for any sector specific component (e.g. technological shocks). In fact, include country pair specific intercepts on growth rates themselves accounts for any pair-specific trend. - Nominal Prices: Model is one of real prices. Control for *aggregate* prices as well, and thus for any (aggregate) influence on nominal prices. Identifying assumption is that aggregate price movements are common across sectors (monetary shocks). Thus a difference in differences in differences estimation. - Lagged Dependent Variables: How long does the short run last? Aren t prices sluggish? Include lagged dependent variables. Not crucially affecting conclusions. (Correct for bias induced by lagged dependent variables with fixed effects using Arellano-Bond) - Stationarity and the Efficiency of Error Correction Model - Endogeneity of import penetration θ and number of firms D

12 Instrumentation 1) Transport costs (CIF / FOB measures) 2) Gravity inspired variable 3) Measure of bulkiness, based on weight to value (but excluding domestic prices from computation of value) 4) Number of anti-trust cases in European Court by country interacted by non-tariff barrier by sector. 5) Dummy for 1992 and Taken together, instruments deliver R 2 above 50%.

13 Data Data cover manufacturing sectors only. 7 countries, 10 sectors, Belgium, Denmark, France, Germany, Italy, the Netherlands, Spain Sectoral PPI from Eurostat Import Penetration from Eurostat Labor productivity (Real Value Added per Worker) from OECD STAN Mark up data from Bank for the Accounts of Companies Harmonized (BACH). Homogeneous layout for balance sheets, profit and loss accounts, investment and depreciation. where Variables Costs = materials, consumables, staff

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21 Robustness - Arellano Bond GMM - Controls for Nominal Exchange Rates - Controls for factor intensity - Specification in deviation from benchmark country, vs. all bilateral pairs - Dsitinguish EU and non-eu imports. No differences.

22 Conclusion Developed simple theory suggesting import shares should affect prices negatively, via increased productivity and lower markups. Showed conjecture is supported by the data. Rising import shares lower prices, because they increase productivity and lower margins. Effects of foreign openness on domestic variables, and of relative numbers of firms are consistent with theory. Reversal sometimes significant in the long run. Sizable short-run effects of (relative) openness on (relative) price and markups in manufacturing sectors. With caveats, may support notion that microeconomic effects of openness have contributed to fall in overall inflation.