Global shocks in the US economy: Effects on output and real exchange rate (with David Meenagh and Patrick Minford)

Economic Modelling, R&R.

This paper studies the effects of global shocks, relative to productivity, mark-up, and demand shocks, in accounting for US business cycle fluctuations. We do this by developing and estimating a two-sector open economy dynamic stochastic general equilibrium model that features several real frictions and structural shocks. The central finding from the estimated model is that global shocks are the main driver of movements in many US macroeconomic aggregates. Particularly, we find that they explain around 40% of the variations in output and real exchange rate. This important quantitative contribution is achieved by using indirect inference estimation techniques to test the model. We identify exogenous world demand, oil price shocks, preference for exported energy-intensive goods, and the price of imported energy-intensive goods as the global shocks most prominent in causing the largest variations in economic outcomes. By contrast, preference for aggregate exported goods is found to be a bystander.

Current version

A cross-country analysis of the roles of border openness, human capital and legal institutions in explaining economic development

The Journal of International Trade & Economic Development, R&R.

This paper studies the income effect of three specific policy variables: border openness to migration, accumulation of human capital, represented by the education level of the adult population, and the strength of legal institutions, captured by the confidence of a country's citizens to abide by its laws. Using cross-country data covering all regions of the world, and employing instrumental variables for migration, education, and law, we establish that all three policy measures have a robust, positive, and strong association with income. This paper then considers whether there are any germane complementarities between migration, education, and law in explaining income per capita. Our findings show that the effect of improving the education outcomes of countries on their economic performance appears to be similar, regardless on their levels of immigration and law, but that the income effects of border openness and legal institutions can be substantially raised with appropriate institutional and educational policy reforms.

Current version

Life may be unfair, but do democracies make it any less burdensome?

Using a large panel of countries, this paper studies whether, or not, democracies can disproportionately produce better economic outcomes for the poor than non-democracies. To deal with the endogeneity of democracy and inequality, a regional democratisation wave is used to isolate the exogenous variation in country-level democracy. Our main finding is that the exogenous component of democracy significantly and robustly decreased inequality, after controlling for key inequality determinants. We identify that two potential mechanisms through which democracy affects inequality are structural transformation and middle-class bias channels.

Current version

Democracy and the poor reassessed

By using life expectancy as our core indicator of a country's health status, this paper empirically reassesses the political foundations of human biological development. Our overarching question is: does democracy drive the health of nations? To investigate this, we use both the level and change measures of democracy in our regressions. Our overriding discovery can be summarised as follows: accounting for the various country and time features, a one standard deviation increase in the level of democracy is associated with a 0.11 standard deviation increase in life expectancy. This is an increase in life expectancy of around 5 years for a country initially with a mean life expectancy of 54 years. These results are robust to employing alternative model specifications, to using different subsamples of the data, and to alternative estimation techniques. We, therefore, conclude that the material role of democratic institutions in promoting human welfare is of first-order relevance.

Current version

How resilient is the U.S. economy to foreign disturbances?

We assess the relative importance of domestic and foreign disturbances in explaining fluctuations in key macroeconomic variables and find that both types of shocks are equally important. We reach this conclusion within a constructed two-sector open economy DSGE model context, where we isolate the relative contributions of each group of disturbances to post-WWII U.S. business cycles. Our approach is to apply indirect inference method to test the model’s fit against a four-equation VAR(1) of output, real exchange rate, energy use and consumption. Our main result is that foreign disturbances are pivotal to driving movements in these home variables; accounting for 38% of the variability in aggregate output, 73% of the variation in the real exchange rate, 45% of the variance of energy use, and 84% of the volatility of consumption. Further, foreign disturbances are also identified to be crucial for some other home macroeconomic variables, explaining larger fractions in changes to investment, labour hours, and real interest rate. However, the U.S. economy appears to be resilient to foreign disturbances with respect to certain macroeconomic variables; in particular, exports, imports, real wages, and domestic absorption.

Current version