This paper explores the trade effects of industrial policy (IP), focusing on the role of preferential trade agreements (PTAs). The analysis uses data on product-level bilateral trade, industrial policy announcements, and rules on subsidies in different PTAs. The introduction of a new IP measure in a destination market reduces export growth to that market by about 0.28 percent. However, exports from fellow members of PTAs are not adversely affected and may be positively affected if the agreements have deep disciplines on subsidies. These findings suggest that PTAs have a shielding effect against the trade distorting effects of industrial policies.

Using monthly data on temporary trade barriers (TTBs), we esti-mate the dynamic employment effects of protectionism through ver-tical production linkages. First, exploiting high-frequency data and TTB procedural details, we identify trade policy shocks exogenous to economic fundamentals. We then use input-output tables to construct measures of protectionism affecting downstream producers. Finally, we estimate panel local projections using the identified trade policy shocks. Protectionism has small and insignificant beneficial effects in protected industries. The effects in downstream industries are neg-ative, sizable, and significant. The employment decline follows an increase in intermediate input and final goods prices and a decline in stock market returns. (JEL E24, F13, F14, F16, G14, L14)

We study the short-run, dynamic employment effects of natural disasters. We exploit monthly data for 70 3-digits NAICS industries and 78 Puerto Rican counties over the period 1995–2019. Our exogenous measure of exposure to natural disasters is computed using the maximum wind speed recorded in each county during each hurricane. Using panel local projections, we find that after the “average” hurricane, employment falls by 0.5% on average. Across industries, we find substantial heterogeneity in the employment responses. Employment increases in some industries while in others employment decreases after a hurricane. This heterogeneity can be partly explained by input–output linkages.

We estimate the effects of government spending along the supply chain using disaggregated U.S. government procurement data. We first identify sectoral public spending shocks and combine them with input-output tables to measure upstream and downstream exposure through the production network. We then estimate panel local projections and find that sector-specific government purchases have sizable effects both in industries that receive procurement contracts and industries across the supply chain. Employment increases significantly in recipient industries and in sectors supplying intermediate inputs to these industries, while employment decreases downstream. The response of prices and wages suggest higher intermediate-input demand by recipient industries translates into higher intermediate-input prices across the network, accounting for the crowding out of downstream employment. We then estimate the aggregate implications of sectoral shocks and the influence of sectoral heterogeneity using a granular instrumental variable approach. Consistent with existing models, we find that aggregate effects are higher when recipient sectors are more downstream, have stickier prices, and when the government accounts for most of the recipient's total sales.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

I propose asymmetric trade liberalizations as a new potential determinant of current account dynamics. I focus on South Korea, which experienced a rise and fall of its current account in the period from 2010 to 2018, when it signed preferential trade agreements (PTAs) with its main trading partners. First, I develop a model where the current account depends on the timing of present and future relative changes of trade costs. Second, I provide empirical evidence supporting the key predictions of the model using the Canada-Korea PTA. PTAs provide predictable, potentially asymmetric, future tariff paths on many products. I use information for over 2,500 HS-6 products to build relative trade liberalization measures, and show that current (future) high relative trade liberalizations tend to decrease (increase) the trade balance, consistent with the model. Finally, I propose a quantitative investigation of the Korean surplus based on the asymmetric dynamics of trade costs between South Korea and its main trading partners. I develop a two-country international real business cycle model augmented with trade costs. When fed with the actual asymmetric trends found in the data, the model generates a current account surplus of about 2.15% of GDP, roughly 66% of what was observed in the Korean data.

Banks’ funding sources have changed significantly during the last two decades. The share of non-core funding (NCF) was high before the 2008 crisis but declined substantially after the crisis. We propose a general equilibrium model where NCF provides insurance against idiosyncratic risks faced by banks. Insurance makes leverage and investment more attractive, but it also increases the vulnerability of the banking sector to crises. We show that learning about the likelihood of a crisis could have been important for generating the observed dynamics of NCF and leverage, which in turn affected the dynamics of the macro-economy.

We study the consequences of protectionism for macroeconomic fluctuations. First, using high-frequency trade policy data, we present fresh evidence on the dynamic effects of temporary trade barriers. Estimates from country-level and panel VARs show that protectionism acts as a supply shock, causing output to fall and inflation to rise in the short run. Moreover, protectionism has at best a small positive effect on the trade balance. Second, we build a small open economy model with firm heterogeneity, endogenous selection into trade, and nominal rigidity to study the channels through which protectionism affects aggregate fluctuations. The model successfully reproduces the VAR evidence and highlights the importance of aggregate investment dynamics and micro-level reallocations for the contractionary effects of tariffs. We then use the model to study scenarios where temporary trade barriers have been advocated as potentially beneficial, including recessions with binding constraints on monetary policy easing or in the presence of a fixed exchange rate. Our main conclusion is that, in all the scenarios we consider, protectionism is not an effective tool for macroeconomic stimulus.

We propose a measure of the extent to which a financial institution is connected to the real economy. The Share of Core Assets (SCA) is a measure of the composition of assets - namely, the share of credit to the non-financial sectors (households, firms, and governments) out of total credit market instruments. We construct the SCA for more than 3700 U.S. bank holding companies. An asset weighted average of the SCA declines by 20 percentage points in the period 1995:1 to 2012:4 (from 76% to 56%); it then increases by about 10 percentage points in the period 2013:1 to 2016:4. We explore the extent to which risk-sharing among banks and efficiency of capital allocation can explain the cross-sectional dispersion of our measure, and we find that these two motives account for between 6% and 10% of the cross-sectional variation of the SCA, depending on the sample used. Finally, using a vector autoregression model (VAR), we find that an increase in the average connection between banks and the real economy increases the growth rate of the GDP.

This Appendix gathers supplementary material to Barattieri, Cacciatore, and Ghironi (2019). ∗ESG UQAM. Mail: Case Postale 8888, sucursale Centre-ville Montreal (Quebec) H3C 3P8. E-mail: barattieri.alessandro@uqam.ca URL: https://www.sites.google.com/site/barattierialessandro/. †Institute of Applied Economics, HEC Montréal, 3000, chemin de la Côte-Sainte-Catherine, Montréal (Québec), Canada. E-mail: matteo.cacciatore@hec.ca. URL: http://www.hec.ca/en/profs/matteo.cacciatore.html. ‡Department of Economics, University of Washington, Savery Hall, Box 353330, Seattle, WA 98195, U.S.A. E-mail: ghiro@uw.edu. URL: http://faculty.washington.edu/ghiro. A Data Description Here we describe in detail the variables used in Section 2 of the main paper as well as in Appendix B below. Antidumping Initiatives. Our baseline measure of antidumping initiatives is the number of HS-6 products affected by new antidumping investigations in a given quarter or month. The data come from the Global Antidumping Database (Bown, 2016). We match the date of each anti-dumping investigation recorded in the GAD to the number of HS-6 products covered by each investigation. Tariffs. In the panel VAR, we use data from the UN-WITS Database. We aggregate HS-2 product-level applied tariff rates using an import-weighted average of tariffs for each country and year. In our baseline specification, we use constant weights (using imports data for the year 1999). We linearly detrend the tariff measure for each country. Real GDP. In the quarterly VAR, we use data from the OECD quarterly national account database. We use the measure VPVOBARSA (U.S. dollars, volume estimates, fixed PPPs, OECD reference year 2010, annual levels, seasonally adjusted). In the panel VAR, we use data from the World Bank World Developing Indicators. Annual GDP is measured in 2010 USD. Inflation. For the quarterly and monthly VARs, we use the Core CPI Inflation series (“All Items, Less Food and Energy”) provided by the OECD prices database for Turkey and Canada. For India, only CPI Inflation (“All Items”) is available. Since these series are not seasonally adjusted, we deseasonalize each series by regressing the inflation rate on quarterly (monthly) dummies. Moreover, in Turkey, there is a clear regime shift before and after 2004 (Turkey announced the adoption of inflation targeting in 2002). We therefore use a regime-specific demeaned series for Turkey. In the panel VAR, we use annual CPI inflation data coming from the World Bank World Development Indicators. Real Net Exports. In the quarterly VAR, exports and imports of good and services are from the OECD quarterly national account database. We use the measure VPVOBARSA (U.S. dollars, volume estimates, fixed PPPs, OECD reference year 2010, annual levels, seasonally adjusted). In the monthly VAR, we use data on exports and imports of goods from the OECD main indicator database. The data are reported in USD Billions. Thus, we deflate each series using country-specific CPI indexes. Since Indian net exports dynamics feature clear time trends, we linearly detrend the series. In the panel VAR, we construct net exports over GDP using data on exports and imports

We present a stylized model that illustrates how interbank trading can reduce the sensitivity of lending to entrepreneurs' net worth, thus affecting the transmission mechanism of monetary policy through the credit channel. We build a model-consistent measure of interconnectedness and document that, in the United States, this measure has increased substantially during the period 1952–2016. Finally, interacting the measure of interconnectedness in a structural vector autoregression and a factor-augmented vector autoregression for the US economy, we find that the impulse responses of several real and financial variables to monetary policy shocks are dampened as interconnectedness increases. We confirm the same result using data from 10 Euro area countries for the period 1999–2016.

We show that higher interconnectivity among financial intermediaries induces banks to choose more leverage. Although this leads to higher investment growth, the banking sector becomes more vulnerable to aggregate shocks (crises). We also show that learning about the likelihood of a crisis could have played an important role in generating the high interconnectivity and leverage before the 2008 crisis and the drastic reversal after the crisis. Using balance sheet data for over 14,000 financial intermediaries in 30 OECD countries we find that there is a strong positive correlation between our proxy for interconnectivity and leverage, consistent with the model. JEL classification: E32, G11, G21

Calls for market reforms to help improve economic performance have become a mantra in European policy discussions. In the recent years, fears of a new wave of protectionism reopened the debate on the macroeconomic effects of raising tariff and non-tariff barriers. In this policy paper, we evaluate the consequences of such policy options for economies in a liquidity trap i.e. at times of major slack and binding constraints on monetary policy easing (such as when the zero lower bound on nominal interest rates is binding). First, we analyse the consequences of protectionism through the lens of a benchmark business cycle model. We show that raising trade barriers has contractionary effects both domestically and abroad. Such detrimental effects are larger in a liquidity trap. We conclude that Europe should not engage in protectionism, even in response to an increase in the level of tariffs imposed by a major trading partner (such as the U.S.). We then review recent trends in product and labor market regulation across the European Union members. Using results from the academic literature, we argue that market reforms in Europe are unlikely to induce significant deflationary effects, suggesting that the inability of monetary policy to deliver interest rate cuts might not be a relevant obstacle to reform. While coordinated structural reforms across the EU members would maximise shortand long-term gains, legal considerations of the implementation of reforms across countries pose challenges to the harmonisation process. JEL Classification: F10, F40, E20, L60.

Calls for market reforms to help improve economic performance have become a mantra in European policy discussions. In the recent years, fears of a new wave of protectionism reopened the debate on the macroeconomic effects of raising tariff and non-tariff barriers. In this policy paper, we evaluate the consequences of such policy options for economies in a liquidity trap - i.e. at times of major slack and binding constraints on monetary policy easing (such as when the zero lower bound on nominal interest rates is binding). First, we analyse the consequences of protectionism through the lens of a benchmark business cycle model. We show that raising trade barriers has contractionary effects both domestically and abroad. Such detrimental effects are larger in a liquidity trap. We conclude that Europe should not engage in protectionism, even in response to an increase in the level of tariffs imposed by a major trading partner (such as the U.S.). We then review recent trends in product and labor market regulation across the European Union members. Using results from the academic literature, we argue that market reforms in Europe are unlikely to induce significant deflationary effects, suggesting that the inability of monetary policy to deliver interest rate cuts might not be a relevant obstacle to reform. While coordinated structural reforms across the EU members would maximise short- and long-term gains, legal considerations of the implementation of reforms across countries pose challenges to the harmonisation process.

In this paper, I show a strong positive correlation between the value-added share of manufacturing in 2000 and current account balances in 2007 for the Euro area countries. I propose asymmetries in the timing of trade liberalizations as a new mechanism affecting the dynamics of the current account. I build intuition using a simple model. Then, I use an international business cycle model to show how the asymmetric dynamics of trade costs in manufacturing and services in 2000-2007 can partially explain the rise in the German surplus. Lastly, I provide broad empirical support for the key predictions of the theory.

This paper explores the role of policy and economic structure in determining international mergers and acquisitions (M&A) in services sectors. The analysis is based on bilateral sectoral M&A flow data and detailed information on policy barriers from a new database. Restrictive investment policies are found to reduce the probability of M&A inflows, controlling for bilateral frictions such as geography. This negative effect, however, is mitigated in countries with relatively large shares of manufacturing and (to a lesser extent) services in GDP. The same result holds for the number of M&A deals concluded. Findings are robust to accounting for the potential endogeneity of policy restrictiveness. The evidence suggests that the impact of policy is state-dependent and related to the composition of GDP in the target economy.

In the period that preceded the 2008 crisis, USfi nancial intermediaries have become more leveraged (measured as the ratio of assets over equity) and interconnected (measured as the share of liabilities held by other financial intermediaries). This upward trend in leverage and interconnectivity sharply reversed after the crisis. To understand the factors that could have caused this dynamic, we develop a model where banks make risky investments in the non-financial sector and sell part of their investments to other banks (diversifi cation). The model predicts a positive correlation between leverage and interconnectivity which we explore empirically using balance sheet data for over 14,000 financial intermediaries in 32 OECD countries. We enrich the theoretical model by allowing for Bayesian learning about the likelihood of a bank crisis (aggregate risk) and show that the model can capture the dynamics of leverage and interconnectivity observed in the data.

We present new survey evidence on pricing behavior for more than 14,000 European firms, and study its macroeconomic implications. Among firms that are price setters, roughly 75% respond that their prices are set as a markup on total costs, a business practice termed "full cost pricing". Only 25% set prices as markups over variable or marginal costs. Moreover, using industry data for the U.S., we find that the correlation between changes in output prices and changes in variable input prices is significantly lower when fixed costs are likely to be more important.Since our results are similar to the findings in the classic and controversial paper of Hall and Hitch (1939) and subsequent survey evidence, we believe it worth studying the implications of full cost pricing for macroeconomics. We first propose a problem for the firm where full cost pricing can arise as optimizing behavior. We embed this problem, featuring an occasionally binding constraint, into a simple general equilibrium model. We show that when the model is hit by a shock that makes the constraint binding, the response of endogenous variables is amplified significantly more than it would be under the unconstrained regime. (C) 2015 Elsevier B.V. All rights reserved.