The Chains That Bind: Global Value Chain Integration and Currency Conflict Since the height of currency manipulation amongst manufacturing exporters in the mid-naughts, currency manipulation as a strategy for export-led growth has declined. Between 2000 and 2012, eight exporting countries engaged in the practice, spending over $1 billion per day. By 2018, however, there were no currency manipulators remaining. What explains this disappearance of currency manipulation as a strategy for export-led growth? In this book, I argue that the cross-border trade of intermediate inputs decreases the political andeconomic benefits of running a depreciated currency, while the costs remain high. The book investigates how further global value chain integration may act as a bulwark against future currency conflicts. At a time when governments are putting up trade barriers to stifle competition and promote domestic production, further integration may be the optimal policy choice, given its binding effects on governments seeking competitive gains.
This study uses a county-level difference-in-difference framework to estimate the share of re-enrollment into the Conservation Reserve Program (CRP) in response to local ethanol production capacity after the Renewable Fuels Standard (RFS). Relatively more land remained in CRP in ethanol-intensive areas after the RFS. This seemingly counter-intuitive result can be explained by post-RFS changes to the CRP that favored ethanol-intensive areas. Both CRP design changes and production trends correlated with ethanol plant location pose challenges for empirical strategies that use ethanol plant location to study production or land use decisions. Changes to CRP policies can play an important role in participation and land use decisions.
The End of Currency Manipulation? Global Production Networks and Exchange Rate Politics. (Prepared for special issue of Economics & Politics, "Firms, States, and Global Production")
How do global supply chain linkages affect the exchange rate preferences of firms? Are these linkages empirically important determinants of exchange rate valuations within countries? To address these questions, I model the exchange rate preferences of exporting firms as a function of (i) their reliance on imported inputs and (ii) the distributional effects of exchange rate movements. I demonstrate that global supply chain linkages, in particular the share of foreign inputs in total exports, weaken the traditional preferences among exporting firms for an undervalued exchange rate. Supply chain integration decreases the benefit of maintaining an undervalued currency beyond its cost, thus constraining governments from manipulating their currencies for competitive gain. Utilizing cross-sectional time-series data covering 62 advanced and emerging market economies over the period 1995-2014, I find strong evidence that supply chain linkages bind governments from engaging in competitive exchange rate policies, pushing undervalued currencies towards their equilibrium levels. Indeed, global supply chains seem to bind governments from engaging in exchange rate depreciation as a strategy for export-led growth. These results are supported with firm-level cross-sectional survey data that directly measures firm preferences on exchange rates.
How durable is the European Union? Scholars have long feared that regional economic specialization, fostered by freer trade, would make the EU vulnerable to economic shocks. The most acute concerns surround the adoption of the common currency. The Euro is feared to raise the risk of asymmetric shocks, rendering the EU less of an "optimum currency area." The Great Recession of 2008-09 presents the perfect context to assess these predictions. We systematically test them using a novel dataset that covers all of the EU’s subnational regions and major sectors of the economy. We find that the EU’s most specialized regions actually fared better during the crisis. Specialized regions fared worse only within states outside the Eurozone. The heightened vulnerability of non-Eurozone states cannot be attributed to any failure of monetary, fiscal, or social policy on their part. Rather, our results suggest the common currency may have helped Eurozone members share risk. Despite growing political tensions within and among member states, our results bode well for the resiliency of the European Union.
Predicting Revealed Trade Preferences: A Factor Content Approach. (paper draft available upon request)
The field of international political economy has relied upon the Heckscher-Ohlin model of factor endowments to predict individual trade-policy preferences for several decades. However, prior work in the field of economics has shown that a country’s factor endowment only correctly predicts the direction of trade 50% of the time. In this paper I include a critical assumption from the Heckscher-Ohlin model in my empirical strategy, which provides a better fit to the data than all prior studies on individual trade preferences. Instead of assuming that the abundant factor in an economy is used intensively in the production of export goods, I include the factor intensity and the direction of trade for each individual’s industry of employment. I show that this factor content of trade approach better fits the data than a simple factor endowment approach. Moreover, although low-skilled labor exhibits consistent anti-trade preferences, the individual preferences of high-skilled labor depends largely upon the factor intensity of the individual’s industry of employment.
Trade liberalization, scholars have long recognized, improves the general welfare of an economy by increasing consumption opportunities due to increased competition. In the long term, however, as firms become more productive and squeeze smaller firms out of the marketplace, trade liberalization may actually have anti-competitive effects. This paper tests predictions on the behavior of aggregate prices, markups and productivity in response to trade liberalization derived from the Melitz and Ottaviano (2008) model of international trade with heterogeneous firms. Following an approach by Chen, Imbs and Scott (2009), the model’s equilibrium conditions for the short- and long-run distribution of the aggregate variables are amended to yield regression equations that identify the effects of tariffs and trade openness on domestic competition in the marketplace. Further to this, model predictions on the effects of third-country openness to trade are tested and information on industry market structure is used to separately test the model’s short- and long run predictions. Our framework is estimated on a dataset covering nine manufacturing industries at the two-digit level in the NAFTA member countries Canada, Mexico and the USA from 1994 to 2006. Consistent with the theoretical predictions, we find that in the short–term there are competitive effects of trade openness on prices, markups, and productivity, whereas in the long–term some of these effects are reversed. Third-country effects, however, run contrary to theoretical predictions and direct tests of short- and long-run industry reactions remain inconclusive.
Measuring Central Bank Independence Using Speech. (with Christopher Lucas. Work in progress.)
In measuring the independence of a central bank from political influence, scholars tend to rely on aggregate outcome variables (inflation, interest rates, exchange rates) and characteristics of the bank and its members (turnover and the appointment process). Missing from these analyses is one of the main tools with which central banks also affect policy: what is known as ``forward guidance,'' or simply, speech. We propose a measure of central bank independence that captures the variation in speech, which can be used in real time to determine political influence on monetary policy outcomes. Utilizing a model of audio and speech structure (Knox and Lucas, 2019), we apply this new measure to test the independence of US Federal Reserve Chair Jerome Powell under President Trump, both before and after Trump's demands for more accommodative monetary policy in 2018 and 2019. We compare this to speeches by Arthur Burns, the Fed chair under Richard Nixon, who infamously accommodated the president before the 1972 re-election campaign. This novel measure provides IPE scholars with an alternative approach to analyzing central bank independence. Moreover, the application to the case of Trump and the US Fed addresses a current puzzle in political economy: are central banks losing their independence, and ultimately, credibility, in this current era of populism?