Thursday, October 1, 2015

New OxCARRE Research papers: fiscal federations, mining close spillovers, firm selection, and structural transformation

There are new working papers from OxCARRE out, to be found here []

Heterogeneous Vertical Tax Externalities, Capital Mobility, and the Fiscal Advantage of Natural Resources
Fidel Perez-Sebastian (University of Alicante / Hull), Ohad Raveh (OxCARRE) and Yaniv Reingewertz (University of Haifa)
How do state tax rates respond to federal tax shocks? This paper presents a novel mechanism of heterogeneous vertical tax externalities across levels of fiscal advantage, showing that tax increases can be expansionary - even without their reinvestment. States rich with natural resources have a fiscal advantage in the inter-state competition over production factors which allows them to respond better to changes in federal taxes and, consequently, attract capital from other parts of the nation. We add heterogeneity in fiscal advantage levels to an otherwise standard model of vertical tax externalities and horizontal tax competition; the model shows that, irrespective of federal redistribution, the contractionary effect of a federal tax increase can be overturned in states with high fiscal advantage, through an increase in their tax base. Using the case of the U.S., and narrative-based measured federal tax shocks a-la Romer and Romer (2010), we provide empirical evidence for the various aspects of this mechanism. Specifically, our lower-bound estimates indicate that, controlling for federal transfers, a 1% increase in the GDP share of capital-related federal taxes at the beginning of a year increases the growth in the per capita tax base by approximately 1.6% in high fiscal advantage states at the end of it, on average.
available here [pdf,

Mining closure, gender and employment reallocations: the case of UK coal mines
Fernando M. Aragon (Simon Fraser University), Juan Pablo Rud (Royal Holloway) and Gerhard Toews (OxCARRE)

This paper examines the heterogenous effect of mining shocks on local employment, by gender. Using the closure of coal mines in UK starting in mid 1980s, we find evidence of substitution of male for female workers in the manufacturing sector. Mine closures increase number of male manufacturing workers but decrease, in absolute and relative terms, number of female manufacturing workers. We document a similar, though smaller, effect in the service sector. This substitution effect has been overlooked in the debate of local impacts of extractive industries, but it is likely to occur in the context of other male-dominated industries. We also find that mine closures led to persistent reductions in population size and participation rates
available here [pdf,]

The impact of windfalls: Firm selection, trade and welfare
Gry Østenstad (Buskerud and Vestfold University College and University of Oslo) and Wessel N. Vermeulen (OxCARRE)
We ask how a small open economy with heterogeneous firms responds to a resource windfall. A resource windfall boosts demand but also affects wages such that production costs increase. The result is a higher number of firms and renewed selection among firms: New firms at the lower end of the productivity continuum can produce for the domestic market, while only the most productive firms continue to export. While the share of firms that sell traded varieties decreases, the average productivity of exporting firms increases. The increase in the number of varieties following the increase in the number of firms and the inflow of additional imports implies that there is an increase in aggregate welfare over and above the direct windfall gain. We provide analysis in a model with two types of labor. The windfall causes a reallocation of labor types and a change in relative wages, thereby implying different welfare outcomes for each type of labor and the possibility of rising inequality.
available here [pdf,]

Commodity Price Shocks, Growth and Structural Transformation in Low-Income Countries
Thomas McGregor (OxCARRE)
This paper uses a panel-VAR approach to estimate both the dynamic and structural macroeconomic response of resource-rich, low-income countries to global commodity price shocks. I use a Block recursive ordering, as well as a simple Choleski decomposition, to identify structural commodity price shocks for a set of developing countries. The Block recursive identification strategy assumes only that global macroeconomic conditions do not respond to individual low-income country conditions contemporaneously. The results suggest that a one standard deviation increase in commodity prices (around 19% on average) raises per capita income levels, government spending and investment in developing countries by 0.03%-0.05%. Commodity price shocks also result in significant transformation of these economies, with the share of value-added in manufacturing contracting by 0.25 percentage points; although within this, the share of value-added in agricultural manufactures, for example, expands by around 1.5 percentage points. Whilst these effects may appear small, they represent the effect of exogenous commodity price shocks that are not due to changes in aggregate demand or global financial conditions. Taken together, these results present a more nuanced picture of the ’resource curse’ in poor countries. Whilst per capital income levels are positively affected by resource booms, the potential for deindustrialisation, particularly in export oriented manufacturing sectors, does exist. The channel through which this link operates appears to be the real exchange rate, with resource booms leading to appreciation pressures. To illustrate these results, I simulate the impact of the recent oil price collapse on the Nigerian economy.

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