Browsing by Author "Peretto, Pietro"

This dissertation presents two essays on endogenous growth and renewable resources.

The first essay explores the role of renewable resources in a tractable

model of endogenous growth driven by horizontal and vertical innovation in the closed economy.

The model is tractable in that it yields a complete, analytical characterization

of the path of utility and the associated welfare level. This property

is exploited to compare two cases of renewable resource management:

open access and full property rights. The first case involves a common

property problem in which agents ignore the long-term resource viability;

the second fully internalizes the dynamics of the resource stock.

Analysis shows that if the natural regeneration rate of the renewable

resource is too low, the tragedy of the commons occurs. If, instead,

the natural regeneration rate is sufficiently high, the steady-state

growth rate of the economy is identical across the two management

regimes. The reason is because there is no scale effect; that is,

the steady-state growth rate of the economy does not depend on the

labor or the resource endowment. However, the development path on

which the economy transits from the developing stage (no R\&D activity)

to the developed stage (positive R\&D activity) depends on the resource

management regime. In particular, a developing economy under full

property rights will cross its development threshold prior to one

under open access. This threshold depends on the size of the manufacturing

firms. When it becomes sufficiently large as a result of the decline

in the number of firms over time, there will be an incentive for the

remaining firms to conduct R\&D. Given the same number of manufacturing

firms, the firm size is larger under full property rights than under

open access due to higher nominal expenditure per capita. Therefore,

the development threshold will be reached sooner under full property

rights. In other words, the economy will start engaging in R\&D activities

sooner and more quickly accumulate knowledge, which is the source

of long-run growth. Moreover, switching from full property rights

to open access is welfare reducing due to two effects. The first is

through the price of the harvest good. Although the economy initially

enjoys a lower price of harvest good, the price gradually increases

as the resource becomes scarcer. Secondly, the competitive household

instantaneously loses the resource income and thus spends less on

manufacturing goods. This decreases the incentive for manufacturing

firms to conduct R\&D and results in a temporary deceleration of the

growth rate of TFP relative to the baseline case of full property

rights. The economy therefore experiences a cumulative loss of TFP

relative to the baseline, which is the novel feature of our model

of endogenous innovation. This mechanism has interesting and wide-ranging

implications for the role of resources in development and growth

The second essay extends the model of endogenous growth and renewable

resources into the open economy framework. The paper examines the effect of trade liberalization on resource-rich

countries, based on a two-country model in which the difference in

endowment of a renewable resource leads to asymmetric trade. In this

model, the resource-rich economy trades its harvest good and final

good for the final good from the resource-poor economy. Furthermore,

the renewable resource is considered to be under open access, where

there is no clear ownership over the resource, leading to overexploitation.

Long-term productivity, in this case, stems from endogenously-determined

knowledge accumulation. Under these circumstances, analysis shows

that the resource-rich country will lose from trade due to two effects.

The first effect is the instantaneous loss of income. Higher demand

for the harvest good, from the combined domestic and international

demand, diverts labor away from the production of technological goods

to the harvest sector, where rent is zero. The second effect is a

scarcity effect, which becomes more severe when trade results in a

greater demand for the harvest good. Overexploitation of the renewable

resource today leads to falling resource stock in the future, which

is then reflected in the higher price of harvest good, other things

being constant. Since the harvest good is an essential input to produce

the final good, given the same amount of the other inputs, the amount

of final good produced will also fall in the long run.

This dissertation consists of two essays on monetary/fiscal policy mix. In the first essay, I study an impact of transfer payments on macroeconomic activity of the US economy during the Great Inflation and Great Moderation periods. In a standard structural VAR, there is a positive statistically significant response of output and inflation to a transfer payments shock in the pre-Volcker sample. However, the impact becomes insignificant in the post-Volcker sample. In a quantitative model, a switch from a non-Ricardian regime, where inflation moves to stabilize government debt, to a Ricardian where the Central Bank controls inflation, explains this difference in multipliers. This indicates that the US economy did experience a change in the monetary/fiscal policy mix in the early 80s. In the second essay, I analyze output and welfare multipliers of government spending under different monetary and fiscal policy interaction regimes between the Central Bank and Treasury. In a quantitative macroeconomic model government spending has larger output multiplier in a passive monetary/active fiscal policy regime. However, welfare multiplier of government spending is bigger in the active monetary/passive fiscal policy regime. Therefore, policymakers should distinguish between output and welfare effects of the fiscal program when choosing a policy regime to finance it.

This dissertation consists of two self-contained essays on economic growth. Chapter 2, "Large firms and long-run growth" studies the effect of the rise in the market share of large firms on long and medium run productivity growth. The market share of large firms in the U.S. has been on the rise in the past three decades. This paper quantifies the effects of this change on labor productivity growth. It develops a tractable endogenous growth model with both large and small firms, and shows that as the market share of large firms increases, productivity growth first increases and then declines. This is due to the change in the incentive of large firms to do research and development (R&D). To validate this relationship, the paper uses a panel of U.S. industries and documents that the industry level R&D-intensity has an inverted-U relationship with the market share of large firms. To explore the macro implications of this mechanism, the paper calibrates the model to match the aggregate moments of the U.S. economy. The exercise shows that as the market share of large firms increased, productivity growth increased until the late nineties and then declined. An important implication of the model is that as the economy becomes more concentrated, recessions become deeper and recoveries become slower.

Chapter 3, "Implications of tax Policy for innovation and aggregate productivity growth" studies the effect of corporate and individual taxes on productivity growth. The quantitative implications of income taxation for innovation and aggregate productivity growth are evaluated in the context of a Schumpeterian model of innovation-led growth. In the model, innovation comes from entrant firms creating new products and from incumbent firms improving own existing products. The model embodies key features of the U.S. government sector: (i) an individual income (labor income, dividends, and capital gains) and (ii) corporate tax; (iii) a consumption tax; and (iv) government purchases. The model is further restricted to fit observations for the post-war U.S. economy. The results suggest that endogenous movements in TFP constitute a quantitatively important channel for the transmission of tax policy to real GDP growth. Endogenous market structure plays a key role in the propagation of tax shocks.

In the first chapter of my dissertation I analyze the effect of migration and remittances on a small, open, migrant-sending country in the context of an endogenous growth model with technology transfers. I demonstrate that, due to a dynamic feedback effect from economic conditions to migration and from migration to economic development in an economy exposed to migration, initial conditions can determine its long-run steady state, leading to the rise of vicious or virtuous circles of development. Countries with a low level of technological development may end up in a poverty trap, in which a low level of development results in low wage rates and consequently high migration rates. The high migration and loss of manpower in a general equilibrium setting generates less demand for the adoption of leading technologies, reducing incentives to invest into new technologies. This reduced incentive effect in turn leads to low output and low wages and even higher migration in future periods. Potentially, as in the case of depopulated countries and regions the economy diverges from the world's growth rate and eventually ends up being emptied out. In addition, I show, that altruistic remittances as an important by-product of migration allow people to share the benefits of technological advances developed elsewhere and dampen the negative impact of migration. In particular, remittances remove the limiting case of emptying out of the economy and reduce the chances of ending up in a poverty trap.

In the second chapter of my dissertation, I study the implications of migration and remittances for an economy with financial frictions. I introduce migration and remittances into Schumpeterian endogenous growth model with financial constraints and derive the conditions under which migration and remittances can have positive or negative impacts on the country's growth and convergence. I show that the results depend on the degree of the country's financial development and its distance to the technological frontier. Importantly, I show that if the financial constraint is strong, so that the economy is diverging from the world's growth path, then migration and remittances can have growth effects and can increase the steady state growth rate of the country as well as the likelihood that the country will converge to the world's growth path.

My third chapter uses a new household-level panel dataset from Kyrgyzstan to study the determinants and implications of remittances and inter-household transfers in general in Kyrgyzstan. We find that remittances in Kyrgyzstan are positively correlated with the income of the receiving households and that the remittance-receiving households have a higher probability of purchasing durable goods then households not receiving remittances.

Our study quantifies the impact of research and development (R&D) spending on technological progress, and hence on economic growth following the hypothesis that the second-generation growth theory best describes the data generation process of knowledge accumulation in the economy. Understanding the relationship between R&D and productivity is important for policy design geared toward enhancing economic growth.

In order to estimate the long-run relationship between total factor productivity (TFP) and R&D activity, this study estimates an error correction model to test for transitional dynamics and long-run dynamics among productivity, investment in R&D and spillovers. To achieve this, we apply the econometric methods proposed by Pesaran and Smith (1995), Pesaran (1997) and Pesaran et al. (1999), the pooled mean group (PMG) estimators, to estimate the relationship among TFP investment in R&D and spillovers using an annual dataset for 21 OECD countries from 1965 to 2015. The advantage of using this estimator is that it uses the information in the data to estimate both the long-run and the short-run dynamics simultaneously.

As independent variables, we have constructed stocks for R&D expenditure as a percentage of GDP, also known as R&D intensity, which is a measure defined as a firm’s R&D expenditure divided by its sales. R&D intensity varies according to a firm's industry, product knowledge, manufacturing, and technology, and is a metric that can be used to gauge the level of a firm's investment to enhance productivity. The aim of R&D expenditures, ultimately, is to increase productivity. R&D intensity at the country level is defined as its R&D expenditure as a percentage of gross domestic product (GDP). This is an indicator that reflects the level and structure of the efforts undertaken by countries in the field of science and technology. In the second-generation growth models R&D intensity is also referred to as a measure that captures R&D adjusted by product proliferation (Young, 1998; Madsen, 2008).

We find that R&D has a large effect on a country’s TFP in the long-run. The elasticity of TFP with respect to own-R&D adjusted by product proliferation at the country level ranges from 0.571 to 1.510, implying marginal returns to country TFP from R&D spending adjusted by product proliferation that range from 19% to 462%. There are also positive R&D spillovers; the elasticity of TFP with respect to R&D adjusted by product proliferation performed outside the country ranges from 0.194 to 0.533, implying marginal return spillovers that range from 8.2% to 25.6% with a maximum of 0.43% of the total returns accruing to spillovers.

Regarding the short-run dynamics, the error correction estimates are statistically significant and do not differ significantly among different specifications. The range for the speed of adjustment ranges between -0.0881 and -0.0695, which implies that half of the time that would take for a 1% deviation of TFP from the long-run relationship to close will be approximately of 5 years.

We find empirical evidence that there is a structural break in the long-run relationship between TFP and R&D in 2002. We can infer that the use of a common currency in the Eurozone improved the mechanisms whereby knowledge was transmitted among the countries in our sample. The productivity increase after 2002 can be explained by the conclusion of Coe and Helpman (1995) that trade increases productivity by the mechanism of international technological spillovers; therefore, an increase in trade would enhance productivity among trading partners. Frankel (2008) conducted a survey on the impact of the European Monetary Union (EMU) on bilateral trade and found a positive effect on bilateral trade where the positive effects of a common currency range between 10% and 15% for the first years of the entry in force of the EMU.

The three robustness checks that we have conducted validate our baseline estimates. The estimates of the robustness checks in addition to being statistically significant show similar features. First, the higher the depreciation rate used to compute the R&D stocks adjusted by product proliferation, the larger the long-run coefficients. Second, the higher the depreciation rate used to estimate the R&D stocks adjusted by product proliferation, the lower the error correction term in absolute terms. Finally, the spillover ratio and the spillover fraction vary little with respect to the depreciation rate used to compute R&D stocks adjusted by product proliferation.

From the forecasts performed based on the baseline and VAR estimations we arrive to the following conclusion. Since the forecasts for the growth rates of the own-R&D stock are constant for the representative country composed by all the countries in our sample, all the variation of total factor productivity has to be explained from the behavior of the R&D performed by other countries.

On one hand, for the representative country composed by all the countries in our sample, the decreasing forecasted TFP growth rates are accompanied by an increase in the forecasted R&D performed by other countries growth rates. This would imply that growth for the representative country conformed by the 21 countries in our sample would be explained in part by spillovers.

On the other hand, for the representative country composed by the G7 countries, the sizeable increase in forecasted growth rates in TFP goes hand with hand with relatively constant forecasted growth rates of R&D performed by other countries and an increasing trend in within-country R&D investment. These results would suggest that G7 countries’ R&D activity spills over the rest of the countries in the sample. Moreover, the G7 countries have greater incentives to keep performing R&D activity than the rest of the countries in the sample; and the benefits in productivity are greater for G7 countries than for rest of the countries in our sample.