Conference Brief 2
Structural Change in Investment and Consumption: A Unified Approach
The keynote speech given by Prof. Akos Valentinyi from University of Manchester on the afternoon of August 6th was based on his paper “Structural Change in Investment and Consumption: A Unified Approach”.
He pointed out that existing models of structural change typically assume that all of investment is produced in manufacturing. However, this assumption is not consistent with the facts. According to his research, the share of service value added in investment expenditure has been steadily growing in the postwar US and its share has now exceeded 50%.
Motivated by such stylized facts, this paper introduced a novel model that takes a unified approach to structural change in investment and consumption. The model is based on two-by-two-by-two settings: two factors in production (capital and labor), two sectors producing value added (goods and service), and two final expenditure in each sector (investment and consumption). This unified approach provides three new insights: Firstly, the technological change is endogenously investment specific; secondly, balanced growth with structural change requires non–constant total factor productivity (TFP) growth in at least one sector; thirdly, the sector with the slowest TFP takes over the economy asymptotically. He also provided empirical support from the postwar US historical data for the three conclusions and did numerical calibration.
Juliana Yu Sun:
Investment-specific Technical Change as a factor of Economic Growth
In the panel session on the afternoon of August 6th, Prof. Juliana Yu Sun gave a presentation based on her paper called “Investment-specific Technical Change as a Factor of Economic Growth”:
The declines in the relative price of capital are viewed as an important factor of economic growth in the US. However, it is not known the extent to what the relative price of capital declines in other countries. In addition, it is not known whether trends in the price of capital around the world can be given a technological interpretation, such as investment specific technical change (ISTC).
The paper documented extensive variations around the world in the rate at which the relative price of capital changes over time. In addition, they found that the median growth rate of the price of capital is around zero -- i.e. the price of capital increases in as many places as it decreases. This indicates that, if there is a technological explanation for this phenomenon, technical progress in capital relative to other sectors must vary widely around the world.
According to that, they employed a canonical multi-industry growth model. In the model, the structure of the economy evolves as a result of changes in prices of different goods or services that agents consume, as well as changes in the prices of different capital goods. They found that the model based on constant productivity growth rates across countries but varied composition delivers a close match to the rate of change in the relative price of capital.
In a statistical sense, the model can account for the entirety of the magnitude of variation of the growth rate of the relative price of capital over the period 1991-2011, simply based on industry TFP growth rate differences and on differences in economic structure.
She concluded that differences in the relative price of capital around the world can be interpreted as a technological phenomenon -- ISTC -- and that a key factor behind these differences is economic structure. However, the model does not capture most of the cross-country variation in rates of economic growth. there is widespread divergence in the rate of ISTC around the world, but that variation in country-level productivity growth rates (rather than ISTC) is the main factor of variation in economic growth around the world.
Low Interest Rates, Market Power, and Productivity Growth
Dr. Ernest Liu`s lecture started from introducing an endogenous growth model built by him and his collaborators.
They built this model to show how low interest rates can increase market power and lower aggregate productivity growth. The model delivered both a traditional expansion in productivity growth in response to lower interest rates, and a slowdown in productivity growth from an increase in market power.
They found that when interest rates fall to low levels, the strategic competition effect dominates: the distance between a market leader and a follower increases which reduces investments in productivity by both.
The model predicts that very low interest rates lead to an increase in market concentration and mark-ups, a decline in creative destruction and firm entry, a widening productivity-gap between the leader and followers within an industry, and ultimately a decline in productivity growth. He provided empirical evidence in support of these predictions.
Cyclical Dynamics of Trade Credit with Production Networks
The last speaker in the panel session on the afternoon of August 6th was Prof. Junjie Xia. He brought his paper accomplished by himself and two co-authors to us:
In this paper he showed that in production and trade networks that characterize the Chinese economy, there is an externality that inefficiently reduces the supply of trade credit from upstream firms to downstream firms.
Because the externality becomes more severe in recessions, the response of trade credit to shocks displays excess sensitivity and amplifies macroeconomic shocks.
The paper also studies policy that encourages bank lending and finds that these policies may not be effective in stimulating the real sector of the economy.