Conferences: Spring, 2005

06/30/2005

Featured in print Reporter

IASE: New Perspectives on Economic History

The NBER and El Colegio de Mexico jointly sponsored a meeting of the Inter-American Seminar on Economics in Mexico City on December 3 and 4. This Seminar focused on "New Perspectives in Economic History." NBER Research Associate Sebastian Edwards of University of California, Los Angeles, and Gerardo Esquivel and Graciela Marquez of El Colegio de Mexico, organized the following program:

Michael D. Bordo, NBER and Rutgers University, and Christopher M. Meissner, NBER and King's College, "Financial Crises, 1880-1913: The Role of Foreign Currency Debt"
Discussant: Carlos Marichal, El Colegio de Mexico
Luis Catao, International Monetary Fund, "Sudden Stops and Currency Crises: The Periphery in the Classical Gold Standard"
Discussant: Lorenza Martinez, Banco de Mexico
Noel Maurer, Harvard Business School, and Stephen Haber, NBER and Stanford University, "Related Lending and Economic Performance: Evidence from Mexico"
Discussant: Enrique Cardenas, Secretaria de la Funcion
Gerardo della Paolera and Martin Grandes, The American University of Paris, "The True Measure of Country Risk: A Primer on the Interrelations between Solvency and the Polity Structure of Emerging Markets: Argentina 1886-92"
Discussant: Aldo Mussachio, Harvard Business School
Kenneth L. Sokoloff, NBER and University of California, Los Angeles, and Eric M. Zolt, University of California, Los Angeles, "Inequality and the Evolution of Institutions of Taxation: Evidence from the Americas"
Discussant: Fausto Hernandez-Trillo, CIDE
Sebastian Edwards, "Establishing Credibility: The Role of Foreign Advisors in Chile's 1955-8 Stabilization Program"
Discussant: Nora Lustig, Universidad de las Americas-Puebla
Leandro Prados de la Escosura, Universidad Carlos III Madrid, "International Inequality in OECD Countries and Latin America, 1870-1990"
Discussant: Luis Felipe Lopez-Calva, ITESM
Pedro Lains, Universidade de Lisboa, "Growth in a Protected Environment: Portugal 1870-1950"
Discussant: Carlos Ponzio, Harvard University
Aurora Gomez-Galvarriato, CIDE, "The Political Economy of Protectionism: The Evolution of Labor Productivity, International Competitiveness, and Tariffs in the Mexican Textile Industry, 1900-50"
Discussant: Daniel Lederman, The World Bank
Gerardo Esquivel and Graciela Marquez, "The Economic Effects of Closing the Economy. The Mexican Experience in the Mid-Twentieth Century"
Discussant: Gustavo Del Angel, CIDE

Bordo and Meissner assemble data on nearly 30 countries from 1880 to 1913 and examine debt crises, currency crises, banking crises, and twin crises. They pay special attention to the role of foreign currency and gold clause debt, currency mismatches, and debt intolerance. The authors uncover fairly robust evidence that more foreign currency debt leads to a higher chance of having a debt crisis or a banking crisis. However, they also find that countries with noticeably different backgrounds and strong institutions -- such as Australia, Canada, New Zealand, Norway, and the United States -- deftly managed their exposure to hard currency debt, generally avoided having too many crises, and never had severe financial meltdowns. Moreover, a strong reserve position seems to be correlated with a lower likelihood of a debt crisis, currency crisis, or a banking crisis. Thus it appears that foreign currency debt is dangerous when mismanaged. Bordo and Meissner also observe that countries with previous default histories seem prone to debt crises even at seemingly low debt-to-revenue ratios.

While the pre-1914 gold standard typically is viewed as a successful system of fixed exchange rates, several countries in the system's periphery experienced dramatic exchange rate adjustments. Catao relates this phenomenon to a combination of sudden stops in international capital flows along with domestic financial imperfections that heightened the pro-cyclicality of the monetary transmission mechanism. He shows that while all net capital importers during the period occasionally faced such "sudden stops," the higher elasticity of monetary expansion to capital inflows, and disincentives to reserve accumulation in a subset of these countries, made them more prone to currency crashes.

Maurer and Haber argue that neither looting nor credit misallocation are necessary outcomes of related lending. On the contrary, related lending often exists as a response by bankers to high costs of information and contract enforcement. The authors examine a banking system in which there was widespread related lending, but in which the institutions were constructed so as to give bank directors strong incentives to monitor one another in order to protect their capital and reputations: Mexico from 1888 to 1913. They find little evidence, during this 25-year period, of tunneling or credit misallocation. In fact, the banking system was remarkably stable, and manufacturing enterprises that received related loans performed at least as well as their competitors.

Della Paolera and Grandes construct the true measure of country risk for Argentina over the important 1886-92 period, at the end of which occurred the first widespread emerging-market capital and debt crisis. This risk measure, computed as a weighted average of sovereign and sub-sovereign default risk premiums, acknowledges the importance of the political structure of an emerging market economy in determining its degree of participation and its strategies in international debt markets. The lessons learned here are key to understanding the recent build up of debt that drove the surprising collapse of the Argentine currency board and the financial system in early 2002. Moreover, this research informs policymakers and investors about the "correct" way to assess country risk in federal countries where sub-sovereign entities are fiscally interdependent and potential time inconsistencies and sovereign moral hazards exist. Incidentally, the true measure of country risks differs from the typical sovereign risk spread by 200 to 350 basis points when liquidity crunches and political upheaval in Argentina after July 1890 had taken place.

Sokoloff and Zolt turn to history to gain a better perspective on how and why tax systems vary. They focus on the societies of the Americas over the nineteenth and twentieth centuries, for two major reasons. First, despite this region having the most extreme inequality in the world, the tax structures of Latin America generally are recognized as among the most regressive, even by developing country standards. Second, as has come to be widely appreciated, the colonization and development of the Americas constitute a natural experiment of sorts: beginning more than 500 years ago, a small number of European countries established colonies in diverse environments across the hemisphere; the different circumstances meant that largely exogenous differences existed across these societies, not only in national heritage, but also in the extent of inequality. How did this inequality influence the design and implementation of tax systems? Several salient patterns emerge. The United States and Canada (like Britain, France, Germany, and even Spain) were much more inclined to tax both wealth and income during their early stages of growth, and into the twentieth century, than developing countries are today. Although the U.S. and Canadian federal governments were similar to those of their counterparts in Latin America in relying primarily on the taxation of foreign trade (overwhelmingly tariffs) and the use of excise taxes, the greater success or inclination of state (provincial) and local governments in North America to tax wealth (primarily in the form of property or estate taxes) and income (primarily in the form of business taxes), as well as the much larger relative sizes of these sub-national governments in North America, accounted for a radical divergence in the overall structure of taxation. Tapping these progressive sources of government revenue, state and local governments in the United States and Canada, even before independence, began directing substantial resources toward public schools, improvements in infrastructure involving transportation and health, and other social programs. In contrast, the societies of Latin America, which had come to be characterized soon after initial settlement by rather extreme inequality in wealth, human capital, and political influence, tended to adopt tax structures that were significantly less progressive in incidence and these societies manifested greater reluctance or inability to impose local taxes to fund local public investments and services. Moreover, these patterns persisted, well into the twentieth century - indeed up to the present day. The apparent association between initial inequality and the institutions of taxation and public finance is all the more intriguing in that the authors find corresponding patterns across different regions of the United States and across different countries of Latin America.

Edwards discusses different theoretical views of the role of outside advisors, focusing on an important historical stabilization episode in Chile, one of the countries with the longest history of chronic inflation in the world. Of the many stabilization programs adopted to tackle this problem, the 1955-8 package implemented with the advice of the U.S. consulting firm of Klein-Saks is one of the most interesting. Edwards argues that these foreign advisors gave initial credibility to the stabilization program launched in 1955; they played the role of independent, non-partisan, technocratic arbiters. And, it was precisely because they were foreigners that they could rise above the political fray and suggest a specific program whose main components were rapidly approved by a highly divided Congress. The fact that the program was very similar to one proposed earlier by the government - and rejected by Congress - underscores the view that, while locals are suspect of being excessively partisan, foreigners are often (but not always) seen as independent policy brokers. But providing initial credibility was not enough to ensure success. In spite of supporting trade reform, foreign exchange rate reform, and the de-indexation of wages, Congress failed to act decisively on the fiscal front. Consequently, the fiscal imbalances that had plagued Chile for a long time were reduced, but not eliminated. In 1957 a sharp drop in the international price of copper - the country's main export - resulted in a major decline in fiscal revenue and in an increase in the fiscal deficit. The Klein-Saks Mission recommended a series of belt-tightening measures, but politicians had had enough of orthodoxy. No adjustment was made, and inflationary expectations once again shifted for the worse. By October of 1958 the Mission had left the country, and an opportunity for achieving stability had been lost.

Has the gap between developed countries and Latin America widenved over time? Using the tools of the inequality literature, Prados de la Escosura assesses long-run inter-country inequality in terms of real (purchasing power-adjusted) GDP per head and an "improved" human development index as an indicator of welfare in present-day OECD and Latin America. He observes a long-term rise in income inequality for this sample of countries, with the deepening gap between OECD and Latin America as its main determinant. Contrary to a widespread view, Latin America fell behind in terms of income in the late twentieth century. In terms of human development, inequality has declined over time, but the gap between OECD and Latin America has remained largely unchanged.

From 1870 to 1913, the Portuguese economy expanded slowly and diverged from the European core. In contrast, Portugal achieved higher growth in the interwar period and partially caught up to the levels of labor productivity of Western Europe. According to Lains, higher growth in Portugal after World War I occurred within the framework of protection, increasing state intervention, and capital deepening. Agriculture responded more positively than industry, revealing important changes in its structure that favored output with higher levels of factor productivity. Changes in agriculture also were associated with higher levels of investment in the sector.

Gomez-Galvarriato compares prices, costs, and productivity levels of a Mexican textile mill (Compania Industrial Veracruzana S.A., or CIVSA) circa 1911 with those of mills in the United States and Great Britain and studies the evolution of textile tariff protection. Surprisingly, CIVSA proved to be relatively competitive by 1911. However, its international standing deteriorated after that. Two institutional factors explain why CIVSA's productivity levels lagged behind. First were rigid wage-lists that appeared in 1912 and remained unchanged for several decades, preventing the industry from adopting new technology. Second was a protectionist tariff policy that allowed the status quo imposed by the wage-lists to prevail.

Esquivel and Marquez investigate some of the economic effects of closing the Mexican economy in the mid-twentieth century. They first document the commercial policy that took place between 1930 and 1950 to illustrate the workings of the protectionism that was implemented in those years. Then, using Industrial Census data, they look at three aspects of the economy that could have been affected by this commercial policy: output and employment effects, labor composition effects, and regional dispersion effects. Theory would have predicted some of these effects, particularly those related to labor markets and economic activity. However, the regional dispersion of industrial activity does not seem to have been affected by commercial policy. Instead, patterns of regional dispersion suggest that history matters in terms of industrial location.

The University of Chicago Press plans to publish these papers in an NBER Conference Volume. Its availability will be announced in a future issue of the NBER Reporter. They are also available at "Books in Progress" on the NBER's website.

Enhancing Productivity

The Seventeenth Annual TRIO Confernece, so-named because it is jointly sponsored by the NBER, the Centre for Economic Policy Research (CEPR), and the Tokyo Center for Economic Research (TCER), took place on December 10 and 11 in Tokyo. This year's conference focus was "Enhancing Productivity." Organizers were Takeo Hoshi, NBER and University of California, San Diego; Dale Jorgenson, Harvard University; and Masahiro Kuroda, Keio University and TCER. The program was:

Dale W. Jorgenson, Takeo Hoshi, and Koji Nomura, Keio University, "Information Technology and the Japanese Growth Recovery"
Discussants: Fumio Hayashi, Yosuke Okada, TCER
Dale W. Jorgenson, and Kazuyuki Motohashi, TCER, "Information Technology and the Japanese Economy"
Discussants: Takeo Hoshi, NBER and University of California, San Diego, and Takanobu Nakajima, TCER
Kazushige Shimpo, Keio University, "Structural Change and Economic Growth in Japan: Inter-Industry Effects of Productivity Growth"
Discussants: Tsutomu Miyagawa, TCER, and Franck Portier, CEPR
Jiro Nemoto, TCER, and Mika Goto, Central Research Institute of Electric Power Industry, "Productivity, Efficiency, Scale Economies, and Technical Change: A New Decomposition Analysis of TFP Applied to the Japanese Prefectures"
Discussants: Kazushige Shimpo, Keio University, and Akio Torii, Yokohama National University
Paul Beaudry, NBER and University of British Columbia, and Franck Portier, CEPR and Universite des Sciences Sociales de Toulouse, "Stock Prices, News, and Economic Fluctuations" (NBER Working Paper No. 10548)
Discussants: Sadao Nagaoka, and Jiro Nemoto, TCER
Yosuke Okada, TCER and Hitotsubashi, "Competition, R&D and Productivity in Japanese Manufacturing Industries"
Discussant: Hiroki Kawai, Keio University, and Kazuyuki Motohashi, TCER and University of Tokyo

After discussing the specific relationship between information technology (IT) and Japan's growth recovery, Jorgenson and his co-author Motohashi describe the broader effect of IT on the entire Japanese economy. They compare sources of economic growth in Japan and the United States from 1975 through 2002, focusing on the role of IT. Having adjusted the Japanese data to conform to U.S. definitions, in order to provide a rigorous comparison between the two economies, they find that the share of the Japanese gross domestic product devoted to investment in computers, telecommunications equipment, and software rose sharply, and the rate of total factor productivity growth increased, after 1995. The contribution of IT to economic growth was almost the same in the two countries. However, the contributions of labor input and other sources of growth in Japan lagged far behind those in the United States.

Nemoto and Goto propose a new analysis of decomposing productivity change into technical advance, efficiency change, and scale effects. Their approach, based on the Hicks-Moorsteen-Bjurek productivity index, can be regarded as a synthesis of the Törnqvist and Malmquist productivity indexes that have been widely used in literature. To prove its effectiveness, the authors apply the proposed analysis to an examination of the productivity of the Japanese economy using data on 47 prefectures from 1980-2000. Their results reveal that both supply and demand shocks drove procyclical productivity, and that their relative importance was mixed.

Beaudry and Portier show that the joint behavior of stock prices and total factor productivity favors a view of business cycles driven largely by a shock that does not affect productivity in the short run - and therefore does not look like a standard technology shock - but rather affects productivity with substantial delay, and therefore does not look like a monetary shock. One structural interpretation for this shock is that it represents news about future technological opportunities which is first captured in stock prices. The authors show that this shock causes a boom in consumption, investment, and hours worked that precedes productivity growth by a few years. Moreover, this shock explains about 50 percent of business cycle fluctuations.

Using newly available panel data on around 10,000 firms in Japanese manufacturing for the years 1994-2000, Okada provides some empirical evidence that competition, as measured by lower levels of industrial mark-ups, enhances productivity growth, controlling for R and D and other industrial characteristics. R and D competition, as measured by increased numbers of R and D doers, is also positively associated with a higher rate of productivity growth. Moreover, market power, as measured by either market share or price-cost margin, has a negative impact on productivity levels for R and D-performing firms.

The papers presented at the TRIO conference will be published in the Journal of the Japanese and International Economies.

International Capital Flows

Research Associate Sebastian Edwards of University of California, Los Angeles, organized an NBER Conference on International Capital Flows that took place in California on December 16-18. The following papers were discussed:

Nicolas Magud, University of Oregon, and Carmen M. Reinhart, NBER and University of Maryland, "Controls on International Borrowing: An Evaluation of Alternative Methods Used to Restrict Capital Inflows"
Discussant: Martin Feldstein, NBER and Harvard University
Laura Alfaro, Harvard University, and Sebnem Kalemli-Ozcan and Vadym Volosovych, University of Houston, "Capital Flows in a Globalized World: The Role of Policies and Institutions"
Discussant: Gerd Haeusler, International Monetary Fund
Kristin J. Forbes, NBER and MIT, "The Microeconomic Evidence on Capital Controls: No Free Lunch"
Discussant: Charles Calomiris, NBER and Columbia University
Ilan Goldfajn, PUC-Rio, and Andre Minella, Central Bank of Brazil, "Capital Flows and Controls in Brazil: What Have We Learned?"
Discussant: Peter Garber, NBER and Brown University
Simon Johnson and Natalia Tamirisa, International Monetary Fund, "Malaysian Capital Controls: An Assessment"
Discussant: Peter Henry, NBER and Stanford University
Kathryn M. E. Dominguez and Linda M. Tesar, NBER and University of Michigan, "International Borrowing and Macroeconomic Performance in Argentina"
Discussant: Nicolas Magud
Basant K. Kapur, National University of Singapore, "Capital Flows and Exchange Rate Volatility: Singapore's Experience"
Discussant: Anusha Chari, University of Michigan
Sebastian Edwards, "Capital Controls, Sudden Stops, and Current Account Reversals"
Discussant: Alan Taylor, NBER and University of California, Davis
Barry Eichengreen, NBER and University of California, Berkeley; Ricardo Hausman, Harvard University; and Ugo Panizza, Interamerican Development Bank, "Currency Mismatches, Debt Intolerance, and Original Sin: Why They Are Not the Same and Why it Matters" (NBER Working Paper No. 10036)
Discussant: Joshua Aizenman, NBER and University of California, Santa Cruz
Linda Goldberg, Federal Reserve Bank of New York, "The International Exposure of U.S. Banks"
Discussant: Matias Braun, NBER and University of California Los Angeles
Eswar Prasad and Shang-Jin Wei, International Monetary Fund, "The Chinese Approach to Capital Flows"
Discussant: Michael Dooley, NBER and University of California, Santa Cruz
Marcus Noland, Institute for International Economics, "South Korea's Experience with International Capital Flows"
Discussant: Gita Gopinath, University of Chicago
Kevin Cowan, Inter-American Development Bank, and Jose de Gregorio, Central Bank of Chile, "International Borrowing, Capital Controls, and the Exchange Rate: The Chilean Experience"
Discussant: Aaron Tornell, NBER and University of California
Ila Patnaik, Indian Express, and Ajay Shah, Ministry of Finance, New Delhi, "India's Experience with Capital Flows"
Discussant: Takatoshi Ito, NBER and University of Tokyo

The literature on capital controls has (at least) four very serious apples-to-oranges problems: 1) There is no unified theoretical framework (say, as in the currency crisis literature) to analyze the macroeconomic consequences of controls; 2) there is significant heterogeneity across countries and time in the capital control measures implemented; 3) there are multiple definitions of what constitutes a "success" (capital controls are a single policy instrument - but there are many policy objectives); and 4) the empirical studies lack a common methodology - furthermore these are significantly "overweighted" by a couple of country cases (Chile and Malaysia). Magud and Reinhart attempt to address some of these shortcomings by: being very explicit about what measures are construed as capital controls - they not only document the more drastic differences across countries/wepisodes between controls on inflows and outflows but also the more subtle differences in types of inflow or outflow controls. Also, given that success is measured so differently across studies, they "standardize" (where possible) the results of over 30 empirical studies summarized in the paper. They also bring to bear the experiences of less well-known episodes than those of Chile and Malaysia. The standardization is accomplished by constructing two indexes of capital controls: Capital Controls Effectiveness Index (CCE Index) and Weighted Capital Control Effectiveness Index (WCCE Index). The difference between them lies only in that the WCCE controls for the differentiated degree of methodological rigor applied to drawing conclusions in each of the papers considered. With these indexes, the results are: Capital controls on inflows seem to make monetary policy more independent, to alter the composition of capital flows, and to reduce real exchange rate pressures (evidence more controversial). Capital controls on inflows do not seem to reduce the volume of net flows (hence, the current account balance). Finally, in Malaysia, controls reduce outflows, and may leave room for more independent monetary policy; in other countries, there is little systematic evidence of "success" (however, defined).

Alfaro, Kalemli-Ozcan, and Volosovych describe the patterns of international capital flows during 1970-2000. Then they examine the determinants of capital flows and capital flow volatility in this period. They find that institutional quality is an important determinant of capital flows. Historical determinants of institutional quality have a direct effect on today's foreign investment. Policy has a significant role in explaining the increase in the level of capital flows and their volatility. Local financial structure, measured as the share of bank credit in total, is associated with high volatility of capital flows.

Macroeconomic analyses of capital controls face a number of imposing challenges and have yielded mixed results to date. Forbes takes a different approach and surveys an emerging literature that evaluates various microeconomic effects of capital controls and capital account liberalization. Several key themes emerge. First, capital controls tend to reduce the supply of capital, raise the cost of financing, and increase financial constraints - especially for smaller firms, firms without access to international capital markets, and firms without access to preferential lending. Second, capital controls can reduce market discipline in financial markets and the government, leading to a more inefficient allocation of capital and resources. Third, capital controls significantly distort decisionmaking by firms and individuals, as they attempt to minimize the costs of the controls or even evade them outright. Fourth, the effects of capital controls can vary across different types of firms and countries, reflecting different pre-existing economic distortions. Finally, capital controls can be difficult and costly to enforce, even in countries with sound institutions and low levels of corruption. This microeconomic evidence on capital controls suggests that they have pervasive effects and often generate unexpected costs. Capital controls are no free lunch.

Goldfajn and Minella provide stylized facts about the balance of payments (current account cycles, capital flows cycles, composition, and debt accumulation) in Brazil over the last three decades. They examine the volatility of capital flows, both in general and during financial crises, and they estimate the relationship between capital flows and macroeconomic performance. Finally, they describe the evolution of capital controls in Brazil and evaluates the benefits and costs of further capital account liberalization.

Johnson and Tamirisa assess the capital controls imposed in Malaysia in September 1998. They find no evidence that Malaysia is a clear case of successful application of capital controls: both benefits and costs of controls appear small. Imposed late in the crisis and untested by any serious pressure, controls do not appear to have been essential for Malaysia's recovery or for financial and corporate sector restructuring. Their political economy role also is difficult to ascertain. Although the stock market initially interpreted the capital controls as favoring firms connected to the Prime Minister, it could not subsequently discern to what extent such firms actually received special advantages. It remains to be seen if the episode was associated with a broader weakening of institutions and of investors' perceptions of Malaysia as a desirable destination for investment.

Dominguez and Tesar provide an overview of the major economic events in Argentina from the adoption of the convertibility plan in 1991 to the collapse of the exchange rate regime in 2001. They review the key components of the Convertibility Plan and the responses of financial markets and the macroeconomy to the economic and financial reforms embodied in the Plan. They also describe the impact of external shocks that buffeted the economy between 1991 and 1999 and the sequence of policy decisions and reforms that took place over that period. Finally, they discuss the eventual collapse of the currency board and the response of the economy to the re-imposition of capital controls.

Singapore's experience with international capital flows over the past two decades or so has been rather benign because of strong fundamentals and generally well-conceived macroeconomic policies. Kapur begins by briefly discussing the 1998 experience of Hong Kong, another city-state with a well developed banking system and equities market, which operates on a Currency Board (CB) system (although with some differences from Singapore's CB system). The discussion serves to identify some "areas of vulnerability" in the Hong Kong set-up at that time. Next Kapur discusses Singapore's policy background and early experience, and in the light of Hong Kong's experience is better able to appreciate how Singapore's policy framework served to circumvent or minimize important vulnerabilities. Particular attention is paid to Singapore's exchange-rate policy, and its policy of non-internationalization of the Singapore dollar. Then Kapur shows how Singapore emerged relatively unscathed from the 1997 Asian Crisis. Finally, he discusses Singapore's debt markets and shows how, under the imperative of promoting the development of its bond markets, the non-internationalization policy has been progressively relaxed, while key safeguards have been retained.

Edwards uses a broad multi-country dataset to analyze the relationship between restrictions to capital mobility and external crises. His analysis focuses on two manifestations of external crises: sudden stops of capital inflows; and current account reversals. Edwards deals with two important policy-related issues: First, does the extent of capital mobility affect countries' degree of vulnerability to external crises; and second, does the extent of capital mobility determine the depth of external crises - as measured by the decline in growth - once the crises occur? Overall, his results cast some doubts on the assertion that increased capital mobility has caused heightened macroeconomic vulnerabilities. He finds no systematic evidence suggesting that countries with higher capital mobility tend to have a higher incidence of crises, or tend to face a higher probability of having a crisis, than countries with lower mobility. These results do suggest, however, that once a crisis occurs, countries with higher capital mobility tend to face a higher cost, in terms of growth decline.

Recent years have seen the development of a large literature on balance-sheet factors in emerging-market financial crises. Eichengreen, Hausmann, and Panizza discuss three concepts widely used in this literature. Two of them - "original sin" and "debt intolerance" - seek to explain the same phenomenon, namely, the volatility of emerging-market economies and the difficulty these countries have in servicing and repaying their debts. The debt-intolerance school traces the problem to institutional weaknesses of emerging-market economies that lead to weak and unreliable policies, while the original-sin school traces the problem instead to the structure of global portfolios and international financial markets. The literature on currency mismatches, in contrast, is concerned with the consequences of these problems and with how they are managed by the macroeconomic and financial authorities. Thus, the hypotheses and problems to which these three terms refer are analytically distinct. The tendency to use them synonymously has been an unnecessary source of confusion.

Using rich data on individual U.S. bank exposures to foreign countries, Goldberg documents the changing international exposures of U.S. bank balance sheets since the mid-1980s, and through 2004. U.S. banks continue to have positions that are heavily concentrated in Europe, with more volatile flows to other regions of the world. While U.S. bank exposure to Europe has remained high, in recent years some claims on Latin American countries have declined. Goldberg explores the composition of these declines, by type of flow and type of U.S. bank extending international claims. Claims from larger banks with foreign exposures tend to be less volatile than claims from smaller banks, as local claims tend to be more table than cross-border flows. Portfolio motives, as captured by GDP growth rates and interest rates, appear differentially important for claims on Europe versus Latin America, and this importance has changed over time.

Prasad and Wei systematically examine the evolution of capital inflows into China, both in terms of volumes and composition and from a cross-country perspective. They then discuss these developments in the context of a burgeoning literature on financial globalization and analyze the relative importance of various determinants of the composition of China's capital inflows. Finally, they provide a detailed analysis of the reasons for the dominance of FDI in China's capital inflows.

Noland describes the South Korea case, which is unique in its unparalleled combination of sustained prosperity, capital controls, and financial crisis. Over a period of several decades, South Korea experienced rapid sustained growth in the presence of capital controls. These controls, and the de-linking of domestic and international financial markets, were an essential component of the country's state-led development strategy. As the country developed, opportunities for easy technological catch-up eroded, requiring more sophisticated corporate and financial sector decisionmaking. But decades of financial repression had bequeathed a bureaucratized financial system and a formidable constellation of incumbent stakeholders opposed to transition to a more market-oriented development model. The liberalization undertaken in the early-1990s was less a product of textbook economic analysis than of parochial politicking. Though systemic risk was sufficiently high that South Korea might well have experienced a financial crisis regardless of capital account liberalization, the capital account liberalization program affected the timing, magnitude, and particulars of the 1997-8 crisis. Despite considerable reforms undertaken in the wake of the crisis, there is still concern about both South Korean lending culture and the capacity of South Korean authorities to successfully regulate the more complex financial system. The main lesson of the South Korean case appears to be that while the state-led model may deliver impressive gains, transitioning out of this approach once it has run its course presents an exceedingly complex challenge of political economy.

Cowan and Gregorio analyze the Chilean experience with capital flows, discussing the role played by capital controls, financial regulations, and the exchange rate regime. Their focus is on the period after 1990, when Chile returned to international capital markets. The authors also discuss the early 1980s, when a currency collapse triggered a financial crisis despite stricter capital controls on inflows than in the 1990s and stricter currency matching requirements on banking. Cowan and Gregorio conclude that financial regulation and the exchange rate regime are at the center of capital inflow experiences and financial vulnerabilities. Rigid exchange rates induce vulnerabilities, which may lead to sharp capital account reversals. They also discuss two important characteristics of the Chilean experience since the 1990s: first, the fact that most international borrowing is done directly by corporations and is not intermediated by the banking system; second, the implications of the free trade agreements of Chile and the United States regarding capital controls.

Patnaik and Shah note that from the early 1990s onwards, India has engaged in policies involving trade liberalization, strong controls on debt flows, and encouragement for portfolio flows and FDI. While relatively little FDI has come to the country, substantial portfolio flows have occurred. Gross portfolio flows amounted to as much as 7 percent of GDP in 2003-4. These new policies of opening up to portfolio flows and FDI were accompanied by a pegged exchange rate. From 2001 to 2004, there has been tension between capital flows and the pegged exchange rate regime. Pegging led to a substantial reserves accumulation, and a current account surplus. In April 2004, when the costs of sterilized intervention became more transparent, the currency regime appears to have changed with a doubling of the nominal rupee-dollar returns volatility. The goal of the early 1990s -- finding a sustainable way to augment investment using current account deficits -- has not been achieved.

These papers will be published by the University of Chicago Press in an NBER Conference Volume. They are also available at "Books in Progress" on the NBER's website.

Sixth Annual Conference in India

On January 14-18, 2005 the NBER and India's National Council for Applied Economic Research (NCAER) again brought together a group of NBER economists and about forty economists from Indian universities, research institutions, and government departments for their sixth annual conference in India. Mihir A. Desai and Martin S. Feldstein, NBER and Harvard University, organized the conference jointly with Suman Bery and Shashanka Bide of NCAER.

The U.S. participants were: Richard Clarida, NBER and Columbia University; Angus Deaton, NBER and Princeton University; Mihir A. Desai, Martin S. Feldstein, and Kenneth Rogoff, NBER and Harvard University; Esther Duflo, NBER and MIT; Robert Feenstra, NBER and University of California, Davis; Robert J. Gordon, NBER and Northwestern University; Alan Gustman, NBER and Dartmouth College; Ann Harrison, NBER and University of California, Berkeley; Anne O. Krueger, on leave from the NBER at the IMF; and Karthik Muralidharan, Harvard University.

After introductory remarks about the U.S. and Indian economies by NBER President Feldstein and Bimal Jalan of NCAER, the participants discussed: international and domestic finance; trade and capital flows; growth; poverty and rural development; outsourcing; and social security reforms.

Conference on Mexican Immigration

An NBER Conference on Mexican Immigration, organized by George J. Borjas, NBER and Harvard University, was held in Cambridge on February 11 and 12. The following papers were discussed:

David Card, NBER and University of California, Berkeley, and Ethan Lewis, Federal Reserve Bank of Philadelphia, "The Diffusion of Mexican Immigrants During the 1990s: Explanations and Impacts"
Discussant: George Johnson, University of Michigan
Francine D. Blau, NBER and Cornell University, and Lawrence M. Kahn, Cornell University, "Gender and Assimilation Among Mexican Americans"
Discussant: Joseph G. Altonji, NBER and Yale University
Gordon H. Hanson, NBER and University of California, San Diego, "Emigration, Labor Supply, and Earnings in Mexico"
Discussant: David Autor, NBER and MIT
George J. Borjas and Lawrence F. Katz, NBER and Harvard University, "The Evolution of the Mexican-Born Workforce in the United States"
Discussant: Jeffrey Grogger, NBER and University of Chicago
Edward P. Lazear, NBER and Stanford University, "The Slow Assimilation of Mexicans in the United States"
Discussant: Charles C. Brown, NBER and University of Michigan
Robert Fairlie, University of California, Santa Cruz, and Christopher Woodruff, University of California, San Diego, "Mexican Entrepreneurship: A Comparison of Self-Employment in Mexico and the United States"
Discussant: David Neumark, NBER and Public Policy Institute of California
Susan Richter and J. Edward Taylor, University of California, Davis; and Antonio Yunez-Naude, El Colegio de Mexico, "Impacts of Policy Reforms on Labor Migration from Rural Mexico to the United States"
Discussant: David Jaeger, College of William and Mary
Kurt Unger, CIDE, "Economic Development and Mexican Out-Migration"
Discussant: Chinhui Juhn, NBER and University of Houston
Pablo Ibarraran, Inter-American Development Bank, and Darren Lubotsky, University of Illinois, Urbana-Champaign, "Mexican Immigration and Self-Selection: New Evidence from the 2000 Mexican Census"
Discussant: Cordella Reimers, Hunter College - CUNY
Brian Duncan, University of Colorado at Denver, and Stephen Trejo, University of Texas at Austin, "Ethnic Identification, Intermarriage, and Unmeasured Progress by Mexican Americans"
Discussant: Harry Holzer, Georgetown University

Card and Lewis present some simple evidence on the causes and consequences of the widening geographic diffusion of Mexican immigrants. A combination of demand-pull and supply-push factors explains 85 percent of the variation across major cities in the rate of Mexican inflows during the 1990s, and helps illuminate the single most important trend in the destination choices of new Mexican immigrants: the move away from Los Angeles. Like their predecessors, recent Mexican immigrants have relatively low levels of education. Card and Lewis show that inflows of Mexican immigrants lead to systematic shifts in the relative supply of low-education labor in a city, opening up the question of how different local labor markets are adopting to substantial differences in relative supply. The authors also find that most of the differences across cities in the relative supply of low-education labor (or Mexican labor) are absorbed by changes in skill intensity within narrow industries. Such adjustments could be explained readily if Mexican immigrant inflows had large effects on the relative wage structures of different cities. But this analysis suggests that relative wage adjustments are small.

Blau and Kahn use 1994-2003 CPS data to examine gender and assimilation of Mexican Americans, both within and across generations. They find that source country patterns, particularly the more traditional gender division of labor in the family in Mexico, strongly influence the outcomes and behavior of Mexican immigrants on arrival in the United States. Both male and female immigrants have much lower levels of education than the third-generation, nonhispanic white reference group. Gender differences in educational attainment among immigrants are minimal. Controlling for education and other characteristics, upon arrival in the United States, immigrant women are more likely to be married with a spouse present, have higher fertility, and to supply much less labor than the reference group. Male immigrants are somewhat likelier to be working. Ceteris paribus wage differences between female immigrants and nonhispanic whites, upon arrival, are less marked than labor supply differences, and they tend to be smaller than comparable wage gaps for men, although both show a deteriorating wage position of immigrants beginning in the 1980s. After twenty years, the large initial immigrant hours shortfall for women has been virtually eliminated, but there is no evidence of positive wage assimilation for women. As a less educated group, immigrants of both sexes experience substantial shortfalls in hours (especially for women) and wages relative to nonhispanic whites (when education is not controlled for). For both men and women, rising educational attainment in the second generation contributes to a considerable narrowing of the gaps in raw labor supply (again especially for women) and wages with nonhispanic whites, but there is no evidence of intergenerational convergence in education, labor supply, or wages beyond the second generation. Even over time in the United States, immigrant women and men remain more likely to be married. This changes by the second and third generation. In contrast, Mexican immigrant women's higher fertility actually tends to increase with time in the United States. And, while the size of the Mexican American-nonhispanic white fertility differential declines across generations, it is not eliminated.

Hanson examines changes in labor supply and earnings across regions of Mexico during the 1990s. He focuses on individuals born in states with either high-exposure or low-exposure to emigration, as measured by historical data on state migration to the United States. During the 1990s, rates of external migration and interval migration were higher among individuals born in high-migration states. Consistent with positive selection of emigrants in terms of skill, emigration rates appear to be highest among individuals with earnings in the top half of the wage distribution. Controlling for regional differences in the distribution of observable characteristics and for initial regional differences in earnings, the distribution of male earnings in high-migration states shifted to the right relative to low-migration states. Over the decade, average hourly earnings in low-migration states fell relative to high-migration states by 6-9 percent.

Borjas and Katz use data from 1900 through 2000 to document the evolution of the Mexican-born workforce in the U.S. labor market. Interestingly, the share of Mexican immigrants in the U.S. workforce declined steadily beginning in the 1920s before beginning to rise in the 1960s; it was not until 1980 that the relative number of Mexican immigrants in the U.S. workforce was at the 1920 level. Borjas and Katz find that Mexican immigrants have much less educational attainment than either native-born workers or non-Mexican immigrants. These differences account for nearly three-quarters of the very large wage disadvantage suffered by Mexican immigrants in recent decades. Second, although the earnings of non-Mexican immigrants converge to those of their native-born counterparts as the immigrants accumulate work experience in the U.S. labor market, this type of wage convergence has been much weaker on average for Mexican immigrants than for other immigrant groups. Third, although native-born workers of Mexican ancestry have levels of human capital and earnings that far exceed those of Mexican immigrants, the economic performance of these native-born workers lags behind that of native workers who are not of Mexican ancestry. Much of the wage gap between the two groups of native-born workers can be explained by the large difference in educational attainment between the two groups. Fourth, the large Mexican influx in recent decades widened the U.S. wage structure by adversely affecting the earnings of less-educated native workers and improving the earnings of college graduates. These wage effects in turn, have lowered the prices of non-traded goods and services that are low-skill labor intensive.

By almost any measure, immigrants from Mexico have performed worse and become assimilated more slowly than immigrants from other countries. But Mexico is a huge country, with many high ability people who could fare very well in the United States. Why have Mexicans done so badly? According to Lazear, the answer is primarily immigration policy. The United States lets in far more immigrants from Mexico than from any other country. As a result, there are large Mexican enclaves in the United States. Theory and evidence suggests that those who live in highly concentrated communities do not assimilate as quickly, have lower wages, and poorer educational attainment. The fact that Mexicans live in highly concentrated communities explains some, but not all of the difference between their performance and that of other immigrants. The rest may be a result of immigration policy, through which the bulk of Mexicans enter the United States on the basis of family ties, rather than job skills.

Fairlie and Woodruff start with the large difference between self-employment rates in Mexico and among Mexican immigrants in the United States and examine the separate components of this difference. The male and female self-employment rates in Mexico are 25.8 and 17.0 percent, respectively. In comparison, male and female Mexican immigrants in the United States have self-employment rates of only 6.0 and 6.1 percent, respectively. For males, 22.1 percent of the nonagricultural labor force in Mexico is self employed, compared with only 6.2 percent of the immigrant nonagricultural labor force in the United States. None of this difference is explained by the sectoral composition of the non-agricultural labor force. Rather, the difference is explained by higher rates of self employment within sectors in Mexico compared to the United States. The authors go on to compare the determinants of self-employment in the two countries and find some interesting differences. For example, the positive relationship between self-employment and age is stronger in Mexico than in the United States. Also, there are large gaps between levels of self-employment in Mexico and the United States which are entirely due to differences in the structures of the economy and would be even larger if not for the favorable characteristics of the U.S. population - mainly being older and more educated on average. These differences may be attributable to country-level differences in institutions, production technologies, tax rates, and other economic factors between the two countries. The authors conclude that roughly the entire Mexican immigrant/U.S. total gap in levels of self-employment is explained by differences in measurable characteristics. Also, there is some evidence suggesting that, for both men and women, Mexican immigrant self-employment rates may be higher for those who reside in the United States legally and are fluent in English, and for men, among those who live in ethnic enclaves.

Using new survey data from Mexico, Richter, Taylor, and Yunez-Naude estimate a dynamic econometric model to test the effect of policy changes on the flow of migrant labor from rural Mexico to the United States and to test for differential effects of policy changes on male and female migration. They find that both IRCA and NAFTA reduced the share of rural Mexicans working in the United States. Increased U.S. border enforcement had the opposite effect. The impacts of these policy variables are small compared with those of macroeconomic variables. The influence of policy and macroeconomic variables is small compared with that of migration networks, as reflected in past migration by villagers to the United States. The effects of all of these variables on migration propensities differ, quantitatively and in some cases qualitatively, by gender.

Unger describes migratory activity from Mexican communities, associating its intensity with local economic development. He highlights three main characteristics of migration: First, about 96 percent of the municipalities in Mexico have migratory activity, and 509 of them at a high intensity. Second, the number of urban communities engaged in migration is larger than the rural group. Third, migration originating from the traditional states of migration in the past, those in the Central Western region (Zacatecas, Michoacan, Guanajuato, Durango, Aguascalientes, Jalisco, and San Luis Potosi), remains very high. Unger goes on to estimate the differentiated impact of out-migration in relation to the size, wealth, wages, and productivity figures of each municipality. He finds a negative and significant effect of size for all the municipalities, as well as for when urban and rural municipalities are treated separately. For urban municipalities, there is a negative relation between wages and migratory intensity, indicating that migration occurs from small communities where economic conditions are worst. For urban, rural municipalities in the Southern region, there is a positive relation between income and migratory intensity, suggesting a "poverty trap" where there is not the minimum wealth for migration to occur. Other indicators are only significant for urban communities, indicating that migration takes place from the poorest municipalities with lower wages, and that individuals prefer to migrate in order to receive higher salaries than if they stayed at home. Finally, Unger observes convergence in per capita income among rich and poor communities over time. On the whole, his results suggest that migration contributes to the catching up of poorer communities.

Ibarraran and Lubotsky use data from the 2000 Mexican Census to examine how the education and socioeconomic status of Mexican immigrants to the United States compares to that of non-migrants in Mexico. The primary conclusion here is that migrants tend to be less educated than non-migrants. This finding is consistent with the idea that the return to education is higher in Mexico than in the United States, and thus the wage gain to migrating is proportionately smaller for high-educated Mexicans than it is for lower-educated Mexicans. The authors also find that the degree of negative selection of migrants is stronger in Mexican counties that have a higher return to education.

Using Census and CPS data, Duncan and Trejo show that U.S.-born Mexican Americans who marry non-Mexicans are substantially more educated and proficient in English, on average, than those who marry co-ethnics (whether they be Mexican Americans or Mexican immigrants). The non-Mexican spouses of intermarried Mexican Americans also possess relatively high levels of schooling and English proficiency, compared to the spouses of endogamously married Mexicans. The human capital selectivity of Mexican-American intermarriage generates corresponding differences in the employment and earnings of Mexican Americans and their spouses. Moreover, the children of intermarried Mexican Americans are much less likely to be identified as Mexican than are the children of endogamous Mexican marriages. These forces combine to produce strong negative correlations between education, English proficiency, employment, and earnings of Mexican-American parents and the chances that their children retain a Mexican ethnicity. Such findings raise the possibility that selective ethnic "attrition" might bias observed measures of intergenerational progress for Mexican Americans.

These papers will appear in a volume published by the University of Chicago Press. They can also be found at "Books in Progress" on the NBER's website.

Academic Science and Entrepreneurship: Dual Engines of Growth?

The NBER's Working Group on Entrepreneurship and the Innovation Policy and the Economy group will be holding a series of conferences on entrepreneurship and the economy, with generous support form the Ewing Marion Kauffman Foundation. The first conference, which took place on April 1 and 2, 2005, focused on academic science and entrepreneurship. The idea that academic science is an engine of growth, creating technological opportunities for industrial innovation as well as future scientific research, is well known and studied. However, little is known about the role of academic entrepreneurship, faculty participation in commercialization of their inventions, and new firm creation in the innovation process. The papers presented in this conference covered a broad array of issues related to the real impacts of academic entrepreneurship, including the effectiveness of different mechanisms for transferring technology, the profile of participants, and the role of public and institutional policies in framing their incentives. NBER Research Associates Adam B. Jaffe of Brandeis University, Joshua Lerner of the Harvard Business School, Scott Stern of the Kellogg School of Management, and Marie C. Thursby of Georgia State University, organized the conference. The following papers were discussed:

Daniel W. Elfenbein, University of California, Berkeley, "Publications, Patents, and the Market for University Inventions"
Discussant: Ashish Arora, Carnegie Mellon University
Dirk Czarnitzki, Katholieke Universiteit Leuven, and Andrew A. Toole, Rutgers University, "Biomedical Academic Entrepreneurship through the SBIR Program"
Discussant: Wesley M. Cohen, NBER and Duke University
Richard A. Jensen and Celestine O. Chukumba, University of Notre Dame, "University Invention, Entrepreneurship, and Start-Ups"
Discussant: Suzanne Scotchmer, NBER and University of California, Berkeley
Scott Shane, Case Western Reserve University, and Deepak Somaya, University of Maryland, "The Effects of Patent Litigation on University Licensing Efforts"
Discussant: Stuart Graham, Georgia Institute of Technology
Thomas Hellmann, University of British Columbia, "The Role of Patents for Bridging the Science to Market Gap"
Discussant: Arvids Ziedonis, University of Michigan
Jeffrey L. Furman, NBER and Boston University, and Megan MacGarvie, Boston University, "Early Academic Science and the Birth of Industrial Research Laboratories in the U.S. Pharmaceutical Industry"
Discussant: Kenneth L. Sokoloff, NBER and University of California, Los Angeles
Jinyoung Kim and Sangjoon Lee, SUNY Buffalo, and Gerald Marschke, SUNY Albany, "The Influence of University Research on Industrial Innovation"
Discussant: Adam B. Jaffe
Pierre Azoulay, NBER and Columbia University; Waverly Ding, University of California, Berkeley; and Toby Stuart, Columbia University, "The Determinants of Faculty Patenting Behavior: Demographics or Opportunities?"
Discussant: Iain M. Cockburn, NBER and Boston University
Swastika Mukherjee, Georgia Institute of Technology; Jerry Thursby, Emory University; and Marie Thursby, "Are There Real Effects of Licensing on Academic Research? A Life Cycle View"
Discussant: Joshua Lerner
Fiona Murray, MIT, and Scott Stern, "Do Formal Intellectual Property Rights Hinder the Free Flow of Scientific Knowledge? An Empirical Test of the Anti-Commons Hypothesis"
Discussant: Paula Stephan, Georgia State University

Taking as the unit of analysis the disclosure of an invention by a faculty member to the university technology transfer office, Elfenbein examines the factors that lead some inventions to be sold while others are not. In particular, he analyzes the degree to which inventors' academic publications, their experience with disclosure and licensing, and the patent status of the invention are correlated with the likelihood that the invention will be purchased by a commercial buyer and the terms of the deal that result. Elfenbein finds that an inventor's prior experience with, and success in, commercialization is positively correlated with the likelihood of finding a commercial buyer and with the levels of non-contingent payments in the resulting licenses. Controlling for prior experience, inventions made by inventors with more extensive publication records are more likely to find commercial buyers, and the publication records of these inventors are positively correlated with the resulting non-contingent payments but are not correlated with the contingent payment structure of the licensing contracts. Although the majority of inventions are licensed prior to patent awards, the receipt of a patent significantly increases the likelihood that the invention will be licensed. Inventors' publications and experience matter more in the absence of patent awards; conversely, patent awards are critical only when inventors' commercialization experience is limited. Overall, these findings paint a complex picture about the process whereby inventions are matched with buyers and the role of different types of information in enabling potential buyers to form valuations of the given invention.

Toole and Czarnitzki describe the U.S. Small Business Innovation Research (SBIR) program, a policy that fosters academic entrepreneurship. They highlight the two main characteristics of the program that make it attractive as an entrepreneurship policy: early-stage financing and scientist involvement in commercialization. Using unique data on NIH-supported biomedical researchers, the authors trace the incidence of biomedical entrepreneurship through SBIR and describe some of the characteristics of these individuals. To explore the importance of early-stage financing and scientist involvement, they complement their individual-level data with information on scientist linked and non-linked SBIR firms.

Chukumba and Jensen examine the question of when commercialization of university inventions occurs in start-up firms instead of established firms. The authors construct a theoretical model that predicts that start-ups are more likely if their opportunity cost of development and commercialization is lower, because of less profitable alternatives, or if the university's technology transfer officer's (TTO) opportunity cost of searching for a partner among established firms is greater. Using data from the Association of University Technology Managers, the National Venture Capital Association Yearbook for 1993-2002, and the National Research Council, the authors find that inventor quality and TTO experience have a positive impact on start-ups and licenses to established firms. They find too that venture capital spending and equity performance, as measured by the S&P 500, are positively related to start-ups. Also, there is evidence that capital costs have a negative influence on startups.

One of the effects of increased patenting by universities over the past 20 years has been a rise in the use of lawsuits by universities to enforce their patent rights. Shane and Somaya thus ask: "What effects does patent litigation have on university efforts to license technology?" They conduct interviews with directors of technology licensing offices (TLOs) at 13 Carnegie I research universities and empirically analyze licensing data for 116 Carnegie I research universities from 1991 through 2000. The authors find that patent litigation has an adverse effect on overall university licensing activity. Their interviews with TLO directors suggest that this adverse effect occurs because litigation takes the time and attention of licensing officers away from marketing technologies and establishing licenses. Given the adverse effects of litigation on licensing, why do universities litigate? The qualitative evidence suggests that universities litigate when they believe that they can overcome the perceived risks and financial and organizational demands of litigation. Specifically, they litigate when university TLOs are less reliant on industry funding and can take a more aggressive posture towards private firms; when they have a stronger financial base of royalty income; when they have more licensing and litigation experience; and when they license less exclusively. Hellmann examines an ex-post rationale for patenting scientific discoveries. In his model, scientists do not know which firms can use their discoveries, and firms do not know which scientific discoveries might be useful for them. To bridge this gap, either or both sides need to engage in costly search activities. Patents determine the appropriability of scientific discoveries, which affects the scientists' and firms' willingness to engage in search. Patents increase (decrease) dissemination when scientists' (firms') search is sufficiently elastic. Hellman's model also examines the role of universities. Patents facilitate the delegation of search activities to the universities' technology transfer offices, which enables efficient specialization. Rather than distracting scientists from doing research, patenting may be a complement to doing research.

MacGarvie and Furman investigate the rise of industrial research laboratories in the U.S. pharmaceutical industry between 1927 and 1946. Their evidence suggests that institutional factors, namely the presence of universities dedicated to research, played a crucial role in the establishment and diffusion of private pharmaceutical research laboratories. Specifically, the authors show that the establishment of industrial pharmaceutical laboratories between 1927 and 1946 is positively and significantly correlated with the extent of local university research (as measured by the number of science and chemistry PhDs, while controlling for other observable factors likely to influence the geographic distribution of industrial research). These core results are robust to a number of specifications and to correcting for the simultaneous influence of private firms on university programs. Both historical anecdotal evidence and analyses of the birth of chemical engineering programs suggest that private firms also played important roles in shaping the development and extent of terms university research agendas. Supplementing these core results with case histories that are illustrative of early university-industry interaction and an examination of the determinants of university-industry research cooperation, the authors find that while the presence of industrial facilities helped shape the direction of university research programs, there was a significant, positive, and causal effect running from university research to the growth of industrial research laboratories in the first half of the twentieth century in the United States.

Kim, Lee, and Marschke use U.S. patent records to examine the role of research personnel as a pathway for the diffusion of ideas from university to industry. By examining an inventor's patenting history contained in the patent data, the authors can determine whether an inventor on a firm's patent had appeared previously as an inventor on a patent assigned to a university. Appearing on a patent assigned to a university is evidence that the inventor had exposure to university research, either directly as a university researcher or through some form of collaboration with university researchers. The authors also use data from the Dissertation Abstracts to establish whether the inventor has an advanced degree (doctorate or masters), another measure of exposure to university research. They find a steady increase in university influence in both measures over the period 1979-97. Moreover, in their analysis of the pharmaceutical and semiconductor industries over the decade of the 1990s, they find: 1) the pharmaceutical industry makes greater use of inventors with university backgrounds than the semiconductor industry; 2) the percentage of patents assigned to firms that involved inventors with a university background increased substantially in both industries; and 3) large and highly capitalized firms in both industries and young firms in the pharmaceutical industry are disproportionately active in the diffusion of ideas from the university sector.

Azoulay, Ding, and Stuart examine the individual, contextual, and institutional determinants of faculty patenting behavior in a panel dataset spanning the careers of 3,884 academic life scientists. Using a combination of discrete time hazard rate models and fixed effects logistic models, the authors find that that patenting events are preceded by a flurry of publications, even holding constant time-invariant scientific talent and the latent patentability of a scientist's research. Moreover, the magnitude of the effect of this flurry is influenced by context, such as the presence of coauthors who patent and the patent stock of the scientist's university. Whereas previous research emphasized that academic patenters are more accomplished on average than their non-patenting counterparts, these findings suggest that patenting behavior is also a function of scientific opportunities. This has important implications for the public policy debate surrounding academic patenting.

A prominent issue in the debates over faculty involvement in university licensing is whether financial incentives associated with licensing have diverted faculty from basic toward applied research (Stephan and Levin, 1996). In their paper, Thursby, Thursby, and Mukherjee present a life cycle model of faculty research that allows them to examine this and related issues. In the model, the faculty member can engage in applied and/or basic research and can earn income both as current salary and as license income. Both types of research have consumption value and both contribute to income, because publications are rewarded in salary. Thus, as in Levin and Stephan (1991), there is a consumption motive for research that does not decline over the life cycle and a financial motive that does. In this case, however, there is an additional motive for applied research, which does not decline over the life cycle. Applied work that is licensed provides a future income stream that continues regardless of work effort.

While the potential for intellectual property rights to inhibit the diffusion of scientific knowledge is at the heart of several contemporary policy debates, evidence for the "anticommons effects" has been anecdotal. A central issue in this debate is how intellectual property rights over a given piece of knowledge affect the propensity of future researchers to draw upon that knowledge in their own scientific research activities. Murray and Stern develop and implement an empirical approach to uncover this effect, exploiting two key aspects of the process of disclosing and protecting scientific knowledge: scientific knowledge receiving formal IP often also appears in the form of scientific research articles (a phenomena they refer to as a "patent-paper pair"); and patents are granted with a substantial lag, often many years after the knowledge is initially disclosed through paper publication. The knowledge associated with a patent-paper pair therefore diffuses within two distinct intellectual property environments: one associated with the pre-grant period and another after formal IP rights are granted. Relative to the expected citation pattern for publications with a given quality level, anticommons theory predicts that the citation rate to a scientific publication should fall after formal IP rights associated with that publication are granted. Employing a differences-in-differences estimator for 169 patent-paper pairs (and including a control group of other publications from the same journal for which no patent is granted), the authors find evidence for a modest anticommons effect. While publications linked to patent grants are associated with a higher overall citation rate, the citation rate after the patent grant declines by between 9 and 17 percent. This decline becomes more pronounced with the number of years elapsed since the date of the patent grant, and is particularly salient for articles whose authors do research within the public sector.

These papers will be published in the Journal of Economic Behavior and Organization.

Twentieth Annual Conference on Macroeconomics

The NBER's Twentieth Annual Conference on Macroeconomics took place in Cambridge on April 8 and 9. Mark Gertler, NBER and New York University, and Kenneth S. Rogoff, NBER and Harvard University, organized this program:

Andrew T. Levin, Federal Reserve Board; Alexai Onatski, Columbia University; John C. Williams, Federal Reserve Bank of San Francisco; and Noah Williams, NBER and Princeton University, "Monetary Policy Under Uncertainty in Micro-Founded Macroeconomic Models"
Discussants: Giorgio Primaceri, NBER and Northwestern University, and Carl Walsh, University of California, Santa Cruz
Thomas Lubik, Johns Hopkins University, and Frank Schorfeide, University of Pennsylvania, "A Bayesian Look at the New Open Economy Macroeconomics"
Discussants: Paolo Pesenti, Federal Reserve Bank of New York, and Chris Sims, NBER and Princeton University
Diego Comin and Thomas Philippon, NBER and New York University, "The Rise in Firm-Level Volatility: Causes and Consequences"
Discussants: Daron Acemoglu, NBER and MIT, and Jan Eberly, NBER and Northwestern University
Alberto Alesina and Edward Glaeser, NBER and Harvard University, and Bruce Sacerdote, NBER and Dartmouth College, "Work and Leisure in the U.S. and Europe: Why So Different?"
Discussants: Lars Ljungqvist, Stockholm School of Economics, and Richard Rogerson, NBER and Arizona State University
Stephanie Schmitt-Grohe and Martin Uribe, NBER and Duke University, "Optimal Fiscal and Monetary Policy in a Medium Scale Macroeconomic Models"
Discussants: Jesus Fernandez-Villaverde, University of Pennsylvania, and Michael Woodford, NBER and Columbia University
Robert E. Hall, NBER and Stanford University, "Job Loss, Job Finding, and Unemployment in the U.S. Economy over the Past 50 Years"
Discussants: Steven Davis, NBER and University of Chicago, and John Kennan, NBER and University of Wisconsin

Levin, Onatski, Williams, and Williams estimate a second-generation micro-founded model of the U.S. economy using Bayesian methods. They examine the characteristics of optimal monetary policy in the model, where the policy objective is the maximization of welfare of the representative household. Their results point to the central role of labor markets and wage setting in affecting welfare and the design of monetary policy. The authors show that a parsimonious implementable rule targeting wage inflation closely mimics the outcomes of the fully optimal Ramsey policy. Finally, they examine the impact of parameter uncertainty as measured by their estimated sampling variation, and find that their simple rule is robust to this uncertainty.

Lubik and Schorfheide develop a small-scale two-country model following the New Open Economy Macroeconomics (NOEM) paradigm. Under autarky the model specializes to the familiar three-equation New Keynesian dynamic stochastic general equilibrium (DSGE) model. The authors discuss three challenges to successful estimation of DSGE models: potential model misspecification, identification problems, and model size. They argue that prior distributions and Bayesian estimation techniques are useful for coping with these challenges. They apply these techniques to the two-country model and fit it to data from the United States and the Euro Area. They then compare parameter estimates from closed and open economy specifications, study the sensitivity of parameter estimates to the choice of prior distribution, examine the propagation of monetary policy shocks, and assess the model's ability to explain exchange rate movements. Most notably, they find that the estimated nominal rigidity in the United States is smaller in the open economy version of the model than in the closed economy model. Moreover, 20 percent of the exchange rate fluctuations can be explained by structural shocks. According to their estimates, monetary policy shocks do not play an important role for exchange rate fluctuations.

Comin and Philippon document that the recent decline in aggregate volatility has been accompanied by a large increase in firm-level risk. The negative relationship between firm and aggregate risk seems to be present across industries in the United States and across OECD countries. Firm volatility increases after deregulation, and is linked to research and development spending as well as to access to external financing. Further, R and D intensity is associated with a lower correlation of sectoral growth with the rest of the economy.

Americans average 25.1 working hours per person of working age per week, but the Germans average 18.6 hours. The average American works 46.2 weeks per year, while the average French person works 40 weeks per year. Why do western Europeans work so much less than Americans? Recent work argues that these differences result from higher European tax rates, but the vast empirical labor supply literature suggests that tax rates can explain only a small amount of the differences in hours between the United States and Europe. Another popular view is that long-standing European "culture" can explain these differences, but Europeans worked more than Americans as late as the 1960s. Alesina, Glaeser, and Sacerdote argue that European labor market regulations, advocated by unions in declining European industries who argued "work less, work all," explain the bulk of the difference between the United States and Europe. These policies do not seem to have increased employment, but they may have had a more society-wide influence on leisure patterns because of a social multiplier by which the returns to leisure increase as more people are taking longer vacations.

Schmitt-Grohe and Uribe study Ramsey-optimal fiscal and monetary policy in a medium-scale model of the U.S. business cycle. The model features a rich array of real and nominal rigidities that have been identified in the recent empirical literature as salient in explaining observed aggregate fluctuations. The main result of the paper is that price stability appears to be a central goal of optimal monetary policy. Under an income tax regime, the optimal inflation rate is 0.5 percent per year with 1.1 percent volatility. This result is surprising because the model features a number of frictions which, in isolation, would call for a volatile rate of inflation: in particular, non-state-contingent nominal public debt, no lump-sum taxes, and sticky wages. Under an income tax regime, the income tax rate is quite stable, with a mean of 30 percent and a standard deviation of 1.1 percent. Simple monetary and fiscal rules implement a competitive equilibrium that mimics well the one induced by the Ramsey policy. When the fiscal authority is allowed to tax capital and labor income at different rates, optimal fiscal policy is characterized by a large and volatile subsidy on capital.

New data compel a new view of events in the labor market during a recession. Unemployment rises entirely because jobs become harder to find. Recessions involve no increases in the flow of workers out of jobs. Another important finding from new data is that a large fraction of workers departing jobs move to new jobs without intervening unemployment. Hall estimates separation rates and job-finding rates for the past 50 years, using historical data informed by detailed recent data. The separation rate is nearly constant while the job-finding rate shows high volatility at business cycle and lower frequencies. Hall reviews modern theories of fluctuations in the job-finding rate. The challenge to these theories is to identify mechanisms in the labor market that amplify small changes in driving forces into fluctuations in the job-finding rate of the (high) magnitude actually observed. In the standard theory developed over the past two decades, the wage moves to offset driving forces and the predicted magnitude of changes in the job-finding rate is tiny. New models overcome this property by invoking a new form of sticky wages or by introducing information and other frictions into the employment relationship.

These papers and discussions will be published by the MIT Press. The volume's availability will be announced in a future issue of the Reporter.

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