This PDF is a selectin frm a published vlume frm the Natinal Bureau f Ecnmic Research Vlume Title: NBER Internatinal Seminar n Macrecnmics 2006 Vlume Authr/Editr: Lucrezia Reichlin and Kenneth West, rganizers Vlume Publisher: University f Chicag Press Vlume ISBN: 978-0-226-70742-6 Vlume URL: http://www.nber.rg/bks/reic08-1 Cnference Date: June 16-17, 2006 Publicatin Date: July 2008 Title: Prductivity, External Balance, and Exchange Rates: Evidence n the Transmissin Mechanism amng G7 Cuntries Authr: Giancarl Crsetti, Luca Dedla, Sylvain Leduc URL: http://www.nber.rg/chapters/c7036
Cmment Rbert Kllmann, ECARES, Universite Libre de Bruxelles, Universite Paris XII and CEPR Intrductin What are the effects f technlgy shcks n the exchange rate, the trade balance, and n dmestic and freign real activity? The Crsetti, Dedla, and Leduc (CDL) chapter is the first paper (t my knwledge) that addresses this empirical questin using Vectr Autregressin (VAR) techniques. The paper thus fills an imprtant gap in the literature. 1 CDL use quarterly pst-brettn Wds data fr the United States, Japan, Germany, United Kingdm, and Italy. They fcus n shcks that imprve the technlgy f a cuntry's manufacturing sectr, relative t the technlgy f freign (rest f the wrld, RW) manufacturing. CDL find that a cuntry-specific psitive manufacturing technlgy shck raises dmestic manufacturing utput and labr prductivity, as well as private cnsumptin (relative t RW variables), but that it lwers net exprts. CDL's baseline VAR mdel suggests that, in the United Kingdm and Italy, a psitive technlgy shck triggers a real exchange rate (RER) depreciatin; in the United States and Japan, by cntrast, a psitive technlgy shck triggers a RER appreciatin. CDL cnsider three measures f the RER, namely measures based n cnsumer price indices (CPIs), n manufacturing prducer price indices (PPIs), and n exprt prices. Fr a given cuntry, the reprted respnses f the three RER measures are qualitatively similar. The estimated respnses f utput, cnsumptin, and net exprts are cnsistent with standard ecnmic thery. Fr example, the increase in (relative) cnsumptin can be ratinalized by mdels with limited internatinal risk sharing and/r cnsumptin hme bias (Kllmann 1996,2001). Intuitively, an exgenus increase in a cuntry's supply f manufactured gds is expected t lwer the relative price f thse gds.
Cmment 187 Hence, CDL's finding that (in the United States and Japan) a psitive manufacturing technlgy shck triggers a rise f the relative price f dmestic manufactured gds cmpared t freign manufactured gds (appreciatin f the RER measures based n manufacturing PPIs and n exprt prices) challenges cnventinal wisdm. By cntrast, standard thery is cnsistent with the idea that a psitive tradable gd (manufacturing) supply shck may appreciate the CPI based RER, due t an increase in the relative price f dmestic nn-tradables (Balassa- Samuelsn effect). Rbustness f Results In what fllws, the rbustness f CDL's results will be investigated. I use the same ecnmetric methd as CDL, but cnsider annual data fr a larger set f thirteen ECD cuntries (see table 3C2.1). 2 The sample perid is 1973-2003. A VAR in first differenced variables is separately fitted t each cuntry (see CDL's equatin (2)). 3 In the baseline specificatin used here, the vectr f first differenced variables used fr the cuntry/var is: Z* ( = [A In x. t, A In Y- t, A In C ; t, ANX ; t, A In RERJJ, where x jt,y jt, and C jt, are manufacturing utput per hur wrked, manufacturing utput, and private cnsumptin in cuntry /, (respectively) expressed as ratis f crrespnding RW aggregates; NX j t isj's net exprt divided by j's GDP; RER^t (with k = C, X) is j's real exchange rate (vis-a-vis RW); and a rise in RER^t represents an appreciatin. I cnsider tw real exchange rate measures: a CPI based measure (RER c t), and a measure based n exprt prices (RER* t ). 4 Nte that the baseline specificatin here includes the same variables as CDL's VAR with the fllwing exceptins: n PPI/CPI ratis and n PPI-based RER measures are used here, due t gaps in the PPI series (fr several cuntries). The results belw are based n VARs f rder ne. 5 The data are described in the Appendix. Fr each cuntry, the tables belw reprt median respnses t a psitive ne standard deviatin cuntry-specific innvatin t manufacturing technlgy. The median respnses are based n ne thusand draws frm the psterir distributin f the VAR parameters, btained using CDL's Bayesian apprach. Fr each variable, the psterir prbability is als shwn that the respnse f that variable is psitive (see figures in parentheses).
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192 Kllman Table 3C2.1 reprts results fr the baseline VAR. Due t space cnstraints, nly impact respnses, as well as respnses tw and ten years after the shck, are reprted. In all thirteen cuntries, a psitive cuntryspecific manufacturing technlgy shck triggers a psitive (median) respnse f manufacturing labr prductivity (relative t RW prductivity). n impact, the (median) respnse f manufacturing utput is psitive in nine f the thirteen cuntries; ten years after the shck, twelve cuntries exhibit a (median) rise in relative utput. Relative cnsumptin exhibits a psitive (median) respnse in ten cuntries, althugh cnsumptin increases are mstly less significant than utput increases. The utput and cnsumptin respnses in table 3C2.1 are, thus, qualitatively cnsistent with thse reprted by CDL. Fr three f the five cuntries cnsidered by CDL, table 3C2.1 reprts a (median) fall f net exprts, in respnse t a psitive technlgy shck which is likewise cnsistent with CDL. Hwever, fr the ther cuntries in the present sample f thirteen cuntries, net exprts tend t rise. verall, the (median) respnse f net exprts is negative in nly abut half f the thirteen cuntries. n impact, a psitive manufacturing technlgy shcks triggers a (median) depreciatin f the CPI based RER (RER C ), in six f the thirteen cuntries; tw and ten years after the shck, a (median) RER C depreciatin is reprted fr eight cuntries. n impact, the exprt-prices-based RER (RER X ) shws a (median) depreciatin in ten cuntries; tw and ten years after the shck, a (median) RER X depreciatin ccurs in nine cuntries. It has t be nted that the variance f the psterir distributin f the RER C and RER X respnses is ften high. Table 3C2.2 reprts results fr alternative VAR mdels. Panel (a) cnsiders bivariate VARs in first differences f (relative) prductivity and f the RER: Z\ t = [A In x jt, A In RER k jt\. The bivariate VARs suggest that a psitive technlgy shck generates (median) RER C and RER X depreciatins, in ten r mre f the thirteen cuntries (n impact), as well as tw and ten years after the shck. In all cuntries, labr prductivity respnds psitively t the shck (nt shwn in table 3C2.2). CDL study a VAR mdel that nly cmprises real variables. Panel (b) f table 3C2.2 cnsiders a five-variable VAR that includes a cuntry's CPI inflatin differential vis-a-vis the RW (A In CPI t), i.e. an indicatr f the cuntry's (relative) mnetary plicy stance. The VAR als includes a fiscal plicy measure: the lg grwth rate f relative (real) gvernment purchases (G jt ), specifically the vectr f variables used fr cuntry; is Z k jt = [A \nx jt,mny jt, AlnCPI ;f, AlnG ;(/ AlnRER^]. It appears that a ps-
Cmment 193 itive cuntry-specific manufacturing technlgy shck raises (relative) gvernment purchases, and that it lwers the (relative) CPI in eight f the cuntries (nt shwn in the table). Panel (b) shws that, n impact, the shck induces a (median) RER C depreciatin in eight cuntries, and a (median) RER X depreciatin in ten cuntries; ten years after the shck, RER C and RER X bth shw (median) depreciatins in ten cuntries. Under the VAR specificatin in table 3C2.1, the evidence that a psitive technlgy shck triggers a RER depreciatin is strngest fr the Eurpean cuntries. By cntrast, Table 3C2.2 suggests a RER depreciatin, fr bth Eurpean and nn-eurpean cuntries. Nte especially that table 3C2.1 suggests that a U.S. technlgy shck triggers a U.S. RER appreciatin cnsistent with CDL's findings. Hwever, table 3C2.2 seems mre suggestive f a U.S. RER depreciatin; eg, under the fivevariable VAR in panel (b) f table 3C2.2, the psterir prbability that a RER X depreciatin ccurs tw years and ten years after a psitive U.S. prductivity shck is 80 percent. It als seems ntewrthy that, by cntrast t CDL, all specificatins here suggest that (in Japan) a cuntry specific technlgy shck induces a RER depreciatin. Summary The results here supprt the finding that a psitive cuntry-specific technlgy shck raises a cuntry's labr prductivity, utput, and private cnsumptin (relative t rest f the wrld aggregates). Fr the larger sample f thirteen cuntries here, there is less evidence (than in the sample used by Crsetti, Dedla, and Leduc) that a psitive technlgy shcks triggers a fall f net exprts. Mst imprtantly, the results here seem mre cnsistent than thse f CDL with the view that a psitive cuntry-specific technlgy shck induces a real exchange rate depreciatin; this hlds especially fr the exprt-prices-based real exchange rate. verall, the evidence here supprts the cnventinal view that an exgenus increase in a cuntry's supply f traded gds wrsens its terms f trade. Data Surces The data n manufacturing utput, and n manufacturing labr prductivity (per hur wrked) were dwnladed frm the U.S. Bureau f Labr Statistics website. The remaining data were taken frm the IMF's Internatinal Financial Statistics database. "Rest f the wrld" (RW)
194 Kllman prductivity, utput and cnsumptin, frm cuntry j's viewpint, are weighted gemetric averages f variables f the remaining twelve cuntries included in the sample. Cuntry j's real exchange rate (RER) is a trade-weighted gemetric average f bilateral RERs between / and the remaining cuntries in the sample. Trade weights cmputed by the Bank f Internatinal Settlements (dwnladed frm the BIS web site) were used. The BIS weighting matrix is based n trade data fr the perid 1990-92; it includes a larger number f cuntries than the study here. The cuntries that are nt included here were drpped frm the weighting matrix, and the matrix was nrmalized t ensure that weights sum t unity. Ntes 1. Several recent papers have used VARs t estimate the effect f technlgy shcks, n dmestic variables (Gali 1999; Dedla and Neri 2004). 2. N quarterly series fr the measure f manufacturing labr prductivity used here (utput per hur wrked) seem t exist fr the entire set f cuntries. 3. Augmented Dickey-Fuller tests (nt reprted due t space cnstraints) fail t reject the hypthesis that the variables (in levels) fllw unit rt prcesses. 4. Fr each cuntry, I estimate a VAR in Zf t, and a VAR in Z* (NB Z, [Zf t \ is the vectr f variables that includes the CPI based [exprt prices based] RER). Respnses f x jt, Y jt, C jt and NX ]it are very similar acrss thse VARs. The respnses f x jt, Y jt, C /f, NX jt,rerf t, reprted belw are based n the VAR in Z c (; the respnses f RER* t are based n the VAR inz*. 5. I experimented with VARs f rder zer, ne, tw, three, and fur. The results d nt depend n the rder f the VAR. References Dedla, Luca, and Stefan Neri. 2004. What des a technlgy shck d: A VAR analysis with mdel-based sign restrictins. CEPR discussin paper 4537. Lndn: Centre fr Ecnmic Plicy Research. Gali, Jrdi. 1999. Technlgy, emplyment, and the business cycle: D technlgy shcks explain aggregate fluctuatins. American Ecnmic Review 89 (1): 249-271. Kllmann, Rbert. 1996. Incmplete asset markets and the crss cuntry cnsumptin crrelatin puzzle. Jurnal f Ecnmic Dynamics and Cntrl 20 (5): 945-961.. 2001. Explaining internatinal cmvements f utput and asset returns: The rle f mney and nminal rigidities. Jurnal f Ecnmic Dynamics and Cntrl 25 (10): 1547-1583.