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Working Papers
Global Networks, Monetary Policy and Trade
We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and […]
We develop a novel framework to study the interaction between monetary policy and trade. Our New Keynesian open economy model incorporates international production networks, sectoral heterogeneity in price rigidities, and trade distortions. We decompose the general equilibrium response to trade shocks into distinct channels that account for demand shifts, policy effects, exchange rate adjustments, expectations, price stickiness, and input–output linkages. Tariffs act simultaneously as demand and supply shocks, leading to endogenous fragmentation through changes in trade and production network linkages. We show that the net impact of tariffs on domestic inflation, output, employment, and the dollar depends on the endogenous monetary policy response in both the tariff-imposing and tariff-exposed countries, within a global general equilibrium framework. Our quantitative exercise replicates the observed effects of the 2018 tariffs on the U.S. economy and predicts a 1.6 pp decline in U.S. output, a 0.8 pp rise in inflation, and a 4.8% appreciation of the dollar in response to a retaliatory trade war linked to tariffs announced on “Liberation Day.” Tariff threats, even in the absence of actual implementation, are self-defeating— leading to a 4.1% appreciation of the dollar, 0.6% deflation, and a 0.7 pp decline in output, as agents re-optimize in anticipation of future distortions. Dollar appreciates less or even can depreciate under retaliation, tariff threats, and increased global uncertainty.
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Working Papers
Global Imbalances in International Trade, Dynamics of Debt and Finance: Causes and Mitigation Measures
Global imbalances have been building up in the world economy for decades and have reached critical levels, giving rise to tariff confrontations, trade wars, and geopolitical tensions. This paper presents […]Global imbalances have been building up in the world economy for decades and have reached critical levels, giving rise to tariff confrontations, trade wars, and geopolitical tensions. This paper presents our systemic analysis of three global imbalances: international trade, debt dynamics, and finance. Based on our new systemic concept of global imbalances and analysis of a large body of historical and latest financial and economic data in various countries and the world economy, we have concluded that these three global imbalances are closely interconnected and mutually influence each other through different channels and nonlinear feedback mechanisms that we describe. These three global imbalances are interrelated symptoms of deep structural problems in the global economy that require corrective measures both at the level of individual countries, especially the US and China, and at the global coordinated efforts by key countries within the G7 and G20. We highlight the key structural problems in the global economy, suggest a modern interpretation of the Triffin dilemma through the prism of equilibrium levels of exchange rates, and suggest possible measures to mitigate the global imbalances.
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Working Papers
Tackling Discrepancies in Trade Data: The Harvard Growth Lab International Trade Datasets
Bilateral trade data informs foreign and domestic policy decisions, serves as a growth indicator, determines tariffs, and is the basis for financial and investment decisions for corporations. Accurate trade data […]Bilateral trade data informs foreign and domestic policy decisions, serves as a growth indicator, determines tariffs, and is the basis for financial and investment decisions for corporations. Accurate trade data translates into better decision-making. However, the raw bilateral trade data reported by UN Comtrade suffer from two structural problems: reporting differences between country partners and countries reporting in different product classification systems, which require product-level harmonization to compare data across countries. In this paper, we address these challenges by combining a mirroring technique and a data-driven concordance method. Mirroring reconciles importer and exporter differences by imputing country reliability scores and applying a weighted country-pair average to calculate the estimated trade value. We harmonize product classifications across vintages by calculating conversion weights that reflect a product’s market share. The resulting publicly available datasets mitigate issues in raw trade statistics, reducing reporting inconsistencies while maintaining product-level granularity across six decades.
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Working Papers
Serving From Hermosillo: Opportunities in Cross-Border Trade of Services
Technological advances have increased the general tradability of services, leading international trade in services to outpace trade in goods, especially after the global financial crisis and the COVID-19 pandemic. Services […]Technological advances have increased the general tradability of services, leading international trade in services to outpace trade in goods, especially after the global financial crisis and the COVID-19 pandemic. Services once considered less tradable due to the necessity of physical proximity between consumer and provider are now increasingly digitized and delivered remotely. Cross-border services now represent 79% of all internationally traded services, and digitally deliverable activities like engineering, accounting, database and other information services are experiencing yearly U.S. imports growth rates over 15%. This report analyzes how Mexico has been capitalizing on some of these trends over the past five years using the most granular data available. Then, we analyze opportunities from the perspective of Hermosillo.
Hermosillo is poised to benefit from this global expansion due to its comparative advantages and existing productive capabilities in potentially tradeable services. We estimate the revealed comparative advantage of Hermosillo in each tradeable service category and find that the city is better positioned than similarly rich and complex cities in Mexico to take advantage of several of these opportunities. This is because Hermosillo is currently intensive in these opportunities, and also because Hermosillo has other industries that are similar to the opportunities in terms of their occupational structure (which could potentially supply additional labor in case tradeable service industries were to expand rapidly). Moreover, Hermosillo’s wage differentials compared to the U.S. are significant for most industries and occupations, including all tradable service industries and teleworkable occupations. This provides a cost advantage for foreign firms seeking to outsource part of their operations. Hermosillo also boasts a well-educated workforce with high levels of schooling and a strong emphasis on STEM fields, positioning it well to meet a potential expansion in educated labor demand.
Some tradable services represent bigger opportunities for Hermosillo, but the city will need to develop new capabilities in cross-border service provision in order to take advantage of them. In particular, engineering services, database and other information services, business and management consulting, research and development, education, and accounting services require attention and further research to inform effective strategies. To realize these opportunities, local firms may need to overcome sector-specific challenges related to internationalization. Policymakers can play a pivotal role by fostering strategic partnerships, attracting multinational service providers to bring in knowhow, and creating supportive enabling environments for teleworking and digital service provision.
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Working Papers
Japan’s Economic Puzzle
This paper examines Japan’s economic performance in recent years, uncovering a narrative that challenges conventional views. Despite slow productivity growth, Japan maintains the highest economic complexity globally due to its […]This paper examines Japan’s economic performance in recent years, uncovering a narrative that challenges conventional views. Despite slow productivity growth, Japan maintains the highest economic complexity globally due to its sophisticated export portfolio. The study reveals that while Japan has been experiencing a decline in goods export market shares it has had a rise in services exports, particularly in R&D licensing. Furthermore, Japan has significantly increased its net foreign assets and direct investments abroad, resulting in abnormal high returns. These results put together suggest that Japanese firms —perhaps in reaction to a stagnant domestic labor force—are leveraging their extensive knowledge capital by investing and redeploying resources internationally, which are generating these higher returns. The increasing wealth generated abroad results, we show, in an expansion of non-tradable activities which are less productive, driving down aggregate productivity growth. The paper also highlights concerns over declining innovation quality, posing risks to Japan’s future economic performance and its ability to redeploy its accumulated knowledge to enjoy from unusually high returns from their foreign investments. The findings emphasize the need for policy reforms to enhance innovation quality to sustain Japan’s productivity of non-tradable activities and with an immigration policy that may change the downward trend in labor supply.
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Book Chapter
Economic Costs of Friend-shoring
Geoeconomic Fragmentation: The Economic Risks from a Fractured World Economy, 29-38.
The nature of international trade has changed significantly since the early 1990s: the liberalisation of cross-border transactions, advances in information and communication technology, reductions in transport costs, and innovations in […]
The nature of international trade has changed significantly since the early 1990s: the liberalisation of cross-border transactions, advances in information and communication technology, reductions in transport costs, and innovations in logistics have given firms greater incentives to break up the production process and locate its various stages across many countries. As a result, global supply chains have become very common, accounting for around a half of global trade in 2020 (World Bank 2020).
The prevalence of global value chains has been underpinned by the well-functioning international trade rule enshrined in the General Agreement on Tariffs and Trade (GATT) and later the WTO, as well as regional agreements. However, geopolitical tensions and disruptions to global value chains – ranging from cyber-threats, the US-China trade war (Fajgelbaum et al. 2022), and the Russian invasion of Ukraine to systemic issues such as the Covid-19 pandemic and the climate crisis – have led policymakers to re-evaluate their approach to globalisation. Many countries are considering ‘friend-shoring’ – trading primarily with countries sharing similar values (such as democratic institutions or maintaining peace) – as a way of minimising exposure to weaponisation of trade and securing access to critical inputs, particularly those required for green transition (Arjona et al. 2023, Attinasi et al. 2023).
In contrast to optimisation under free trade, friend-shoring – by imposing constraints – is likely to be less efficient. But how high is the price that needs to be paid for the alleged insurance benefits brought about by friend-shoring? To shed some light on this question, this chapter assesses the economic costs of friend-shoring, with a focus on broadly defined emerging Europe and European neighbourhood economies. We make three main points. First, we show that, in the medium run, friend-shoring is bad for most economies and generally leads to real output losses globally. Second, only countries that manage to remain non-aligned may see real output gains, but these gains are much smaller than the losses incurred by other countries and not guaranteed. Third, economic costs of friend-shoring are higher than the economic costs of sanctions imposed on Russia after its invasion of Ukraine.
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Journal Articles
Refugees, Trade, and FDI
Oxford Review of Economic Policy, 38, 487-513.
Humanitarian policies aimed at welcoming forced migrants may yield unexpected economic dividends. This article focuses on the trade and investment links forged by refugees between their countries of resettlement and […]
Humanitarian policies aimed at welcoming forced migrants may yield unexpected economic dividends. This article focuses on the trade and investment links forged by refugees between their countries of resettlement and the origins they fled. We document how such immigrant-links differ in the case of refugees, focusing on why their opportunity sets might differ and the difficulties in establishing economic connections against a backdrop of civil conflict and political unrest. We conclude by discussing a range of policies aimed at engaging refugee diasporas to foster development at refugees’ origins. -
Reports
Accelerating Growth in Albania through Targeted Investment Promotion
The investment promotion process in Albania is underperforming versus its potential. Between 2014 and 2018, the Albanian economy saw accelerating growth and transformation, which has been tied to the arrival […]The investment promotion process in Albania is underperforming versus its potential. Between 2014 and 2018, the Albanian economy saw accelerating growth and transformation, which has been tied to the arrival of foreign companies. However, Albania has the potential to realize much more and more diversified foreign direct investment (FDI), which will be critical to accelerating growth in the period of global recovery from the COVID-19 pandemic. As the Albanian economy weathers the storm of COVID-19, it is critical to look to the future by enhancing the investment promotion process to be more targeted and proactive such that Albania can attract transformative global companies aligned with the country’s comparative advantages. This is not only a critical step toward faster and more resilient economic growth in Albania; it also happens to have very high returns in comparison to the limited fiscal spending required to implement the actions required.
The targeted investment promotion approach discussed in this note would capitalize on Albania’s many existing comparative advantages for attracting efficiency-seeking FDI. It would not displace Albania’s Strategic Investment Law nor the activities of the Albanian Investment Corporation (AIC), which aim to expand the country’s comparative advantages. Efficiency-seeking FDI — global companies that expand into Albania to serve global markets because it makes them more productive — do not need extensive tax incentives, regulatory exemptions, or other subsidies. In fact, an overreliance on these approaches can crowd out firms that do not want or need to rely on government support. Adding targeted investment promotion to Albania’s growth strategy would lead to more jobs, better quality jobs, more inclusive job growth, faster convergence with the income levels of the rest of Europe, and ultimately less outmigration.
This note summarizes the Growth Lab’s observations of the investment promotion process in Albania, over the last year in particular, and lays out recommendations to capture widespread opportunities for economic transformation that have been missed to date. The recommendations provided at the end of this note provide a roadmap for building an enhanced network for targeted investment promotion that is specific to Albania’s context. These recommendations recognize the current constraints that the COVID-19 pandemic creates but also look past the pandemic to prepare for opportunities that will emerge during the global recovery.
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Working Papers
What Will It Take for Jordan to Grow?
This report aims to answer the critical but difficult question: “What will it take for Jordan to grow?” Though Jordan has numerous active growth and reform strategies in place, they […]This report aims to answer the critical but difficult question: “What will it take for Jordan to grow?” Though Jordan has numerous active growth and reform strategies in place, they do not clearly answer this fundamental question. The Jordanian economy has experienced more than a decade of slow growth. Per capita income today is lower than it was prior to the Global Financial Crisis as Jordan has experienced a refugee-driven population increase. Jordan’s comparative advantages have narrowed over time as external shocks and responses to these shocks have changed the productive structure of Jordan’s economy. This was a problem well before the country faced the COVID-19 pandemic. The Jordanian economy has lost productivity, market access, and, critically, the ability to afford high levels of imports as a share of GDP. Significant efforts toward fiscal consolidation have further constrained aggregate demand, which has slowed non-tradable activity and the ability of the economy to create jobs. Labor market outcomes have worsened over time and are especially bad for women and youth. Looking ahead, this report identifies clear and significant opportunities for Jordan to strengthen new engines of export growth that would enable better overall job creation and resilience, even amidst the continued unpredictability of the pandemic. This report argues that there is need for a paradigm shift in Jordan’s growth strategy to focus more direct attention and resources on activating “agents of change” to accelerate the emergence of key growth opportunities, and that there are novel roles that donor countries can play in support of this. -
Reports
Recommendations for Trade Adjustment Assistance in Sri Lanka
Sri Lanka has an excessively complex tariff structure that distorts the structure of the economy in important ways. It is a priority for the Government of Sri Lanka (GoSL) to […]Sri Lanka has an excessively complex tariff structure that distorts the structure of the economy in important ways. It is a priority for the Government of Sri Lanka (GoSL) to rationalize the system in order to facilitate a transition to greater economic diversification, stronger export growth, and the emergence of new, higher paying jobs. Sri Lanka’s New Trade Policy makes this tariff rationalization a priority. It also recognizes that tariff rationalization should go hand in hand with new trade adjustment assistance measures to support the adjustment of firms and of people. The New Trade Policy outlines the basic contours of tariff rationalization and trade adjustment assistance measures but does not provide a detailed roadmap.
This discussion paper was prepared at the invitation of the Ministry of Development Strategies and International Trade (MoDSIT) as part of the Center for International Development’s research project on sustainable and inclusive economic growth in Sri Lanka. The aim of the paper is to study policy tools that the GoSL could use to structure trade adjustment assistance in the context of tariff rationalization. In order to accomplish this aim, we begin by outlining the type of tariff rationalization that needs to take place in order to address key constraints to growth in a way that is sensitive to both government revenue needs and political economy considerations. We stress that tariff rationalization must be approached in a holistic way that treats the various tariffs and para-tariffs as interrelated, rather than an approach that attempts to address one part of the system at a time. A holistic approach would provide many degrees of freedom to solve the underlying problems in the system while increasing revenues and potentially generating strong public support. Critically, a holistic approach would allow for a single tariff rationalization plan to be phased in over a period of years in a predictable way, whereas attempts to rationalize the system one part at a time would lead to extreme uncertainty.
With the principles of smart tariff rationalization in place, we draw upon international lessons and Sri Lanka’s own institutional capabilities to recommend a two-tiered approach to helping industries and workers adjust. In each case, the first tier represents low-cost measures that can begin in the short term to help industries and workers, regardless of whether they will be negatively impacted by tariff rationalization, while the second tier of assistance applies only to trade-affected industries and workers and can be developed in the medium term. For industries, Tier 1 support involves the use of an innovative process of public-private problem solving of industry-specific constraints, and Tier 2 support involves the use of special safeguard measures to provide an objective and transparent process for determining which industries require longer phase out periods for tariff reductions versus the tariff rationalization plan. For workers, Tier 1 support involves improved access labor market information and training opportunities through the development of regional (or local) job centers. Tier 2 support provides government funding for training and job placement services. We conclude that this package of trade adjustment assistance measures could be used to complement a holistic tariff rationalization plan. But we caution that attempts to rush the implementation of these measures without careful design and communication could deeply undermine the potential for the reforms to work in solving underlying economic problems.