Research Papers
Does Employment Protection Help Immigrants? Evidence from European Labor Markets
IZA Discussion Paper, No. 3414, March 2008
High levels of employment protection reduce hiring and firing and have a theoretically ambiguous effect on the employment level. Immigrants, being new to the labor market, may be less aware of employment protection regulations and less likely to claim their rights, which may create a gap between the costs for employers of hiring a native relative to hiring an immigrant. This paper tests that hypothesis drawing on evidence for the EU and on two natural experiments for Spain and Italy. The results suggest that strict Employment Protection Legislation (EPL) gives immigrants a comparative advantage relative to natives. Stricter EPL is found to reduce employment and reduce hiring and firing rates for natives. By contrast, stricter EPL has no effect on most immigrants and may even increase employment rates for those who have been in the country for a longer time.
The Geographical Composition of National External Balance Sheets: 1980-2005
with Chris Kubelec, Bank of England
This paper constructs a dataset on cross-border assets and liabilities for a group of 18 countries, including both developed and emerging economies. The data covers the years 1980 to 2005 and distinguishes between four asset classes: FDI, equity, debt, and foreign exchange reserves. A number of stylized facts emerge from the dataset. In particular, the findings indicate that bilateral financial linkages are organized in three tiers of financial centers. The first tier is composed of the US, the UK, Singapore, and Hong Kong; the second of Japan, France, Germany, Australia and Canada; with the third composed of the remaining countries. This contrasts with the pattern of bilateral trade, which is predominantly intra-continental and is organized in three clusters: a European cluster (centered on Germany), an Asian cluster (centered on China), and an American cluster (centered on the US).
Financial Globalization and Cross-Country Spillovers
with Chris Kubelec, Bank of England
We analyse cross-border spillovers to GDP growth for a set of 18 advanced and emerging market countries from across Europe, the Americas and Asia from 1980 to 2005. Changes in the structure of the world economy over recent years raise the possibility that the pattern and magnitude of spillovers may have changed significantly. Using a new dataset on bilateral financial linkages, we construct empirical measures of spillovers that vary over time as bilateral linkages evolve. We find that spillovers to industrialized countries have increased significantly since the mid 1990s as a result of the increase in cross-border financial linkages. In contrast, spillovers to EMEs have been broadly constant and are very large, with almost 100% of the variation in GDP growth being explained by shocks from abroad. We find that geographical proximity is not a key determinant of the size of spillovers and that the main source of spillovers to growth in the global economy is the US. There is no evidence that the Asian economies included in the sample have decoupled from the US, with the exception of China. A possible interpretation is that accumulation of reserve assets by China has provided a hedge against spillovers from the US. Spillovers to the UK are large and have increased over time. They are originated mostly in the US and European neighbours.
The Macroeconomic Implications of Sovereign Wealth Funds
with Francesca Viani, European University Institute
Sovereign Wealth Funds (SWFs) are expected to manage an increasing share of foreign exchange reserves in the near future. Compared to central banks, SWFs have higher risk tolerance and invest less in US dollar assets. Their growth may have implications for the US net debt and the dollar. To study these implications, we use a dynamic general equilibrium model with two countries (the US and the rest of the world), and two asset classes (equities and bonds). The model is characterized by imperfect substitutability between assets and allows for endogenous adjustment in interest rates and asset prices. Therefore, it accounts for capital gains arising from equity price movements, in addition to valuation effects stemming from exchange rate changes. The model is used to simulate what will happen if ‘excess’ reserves held by Emerging Markets are transferred from central banks to SWFs. We look separately at two diversification paths: one in which SWFs keep the same allocation across bonds and equities as central banks, but move away from dollar assets (path 1); and another in which they choose the same currency composition as central banks, but shift from US bonds to US equities (path 2). In path 1, the dollar depreciates and US net debt falls on impact and increases in the long run. In path 2, the dollar depreciates and US net debt increases in the long run. In both cases, there is a reduction in the ‘exorbitant privilege’, i.e., the excess return the US receives on its assets over what it pays on its liabilities.