Working Papers

Long-Term Growth Effects of Climate Change, with Matthew E. Kahn, Ryan N. C. Ng, M. Hashem Pesaran, Mehdi Raissi, and Jui-Chung Yang (May 2019).

Abstract: We study the long-term impact of climate change on economic growth. Our theoretical growth model postulates that labour productivity is affected by a common technological factor and country-specific climate variables (defined as deviations of temperature and precipitation from their historical norms). Using data on a sample of 174 countries over the years 1960 to 2014, we find that deviations of temperature from its historical norm have a permanent negative effect on real income growth in advanced and developing economies. Our counterfactual analysis suggests that a persistent increase in temperature by 0.01 to 0.04°C per year reduces real GDP per capita by 5.67 to 22.69 percent over a 100--year period. These effects are many times larger than those generally discussed in policy circles. We also argue against the commonly-held view that climate change only affects the economic activity of poor countries by studying the case of the United States. Using data on a sample of 48 U.S. states between 1963 and 2016, we show that climate change has a long-lasting adverse impact on output growth in various states and economic sectors, and on labour productivity and employment. Overall, our findings call for a more forceful policy response to climate change.
JEL Classifications: C33, O40, O44, O51, Q51, Q54.
Key Words: Climate change, economic growth, adaptation, counterfactual analysis.


Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR, with Alexander Chudik and M. Hashem Pesaran (December 2018). 

Abstract: The paper contributes to the growing global VAR (GVAR) literature by showing how global and national shocks can be identified within a GVAR framework. The usefulness of the proposed approach is illustrated in an application to the analysis of the interactions between public debt and real output growth in a multicountry setting, and the results are compared to those obtained from standard single country VAR analysis. We find that on average (across countries) global shocks explain about one third of the long-horizon forecast error variance of output growth, and about one fifth of the long run variance of the rate of change of debt-to-GDP. Evidence on the degree of cross-sectional dependence in these variables and their innovations are exploited to identify the global shocks, and priors are used to identify the national shocks within a Bayesian framework. It is found that posterior median debt elasticity with respect to output is much larger when the rise in output is due to a fiscal policy shock, as compared to when the rise in output is due to a positive technology shock. The cross country average of the median debt elasticity is 1.58 when the rise in output is due to a fiscal expansion as compared to 0.75 when the rise in output follows from a favorable output shock. 
JEL Classifications: C30, E62, H6.
Key Words: Factor-augmented VARs, Global VARs, identification of global and country-specific shocks, Bayesian analysis, public debt and output growth, debt elasticity. 
Supplement: Click here for the online supplement to "Identifying Global and National Output and Fiscal Policy Shocks Using a GVAR".
Dallas Fed Working Paper Version: No. 351.


Illegal Drugs and Public Corruption: Crack Based Evidence from California, with Alessandro Flamini and Babak Jahanshahi (August 2018). 

Abstract: Do illegal drugs foster public corruption? To estimate the causal effect of drugs on public corruption in California, we adopt the synthetic control method and exploit the fact that crack cocaine markets emerged asynchronously across the United States. We focus on California because crack arrived here in 1981, before reaching any other state. Our results show that public corruption more than tripled in California in the first three years following the arrival of crack cocaine. We argue that this resulted from the particular characteristics of illegal drugs: a large trade-off between profits and law enforcement, due to a cheap technology and rigid demand. Such a trade-off fosters a convergence of interests between criminals and corrupted public officials resulting in a positive causal impact of illegal drugs on corruption.
JEL Classifications: C12, D73, K42.
Key Words: Public corruption, crack cocaine, synthetic control method, illegal drugs, and law enforcement. 
CAMA Working Paper Version: No. 39/2018.
Poster: Click here for the poster used at the AEA hosted Poster Session at the 2019 ASSA Annual Meeting.
Interview with the AEA: Alessandro Flamini sat down with the AEA to discuss our paper on how the crack cocaine market fostered public corruption in California during early 1980s. You can watch the interview here.


Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models, with Alexander Chudik, M. Hashem Pesaran, and Mehdi Raissi (November 2013).

Abstract: This paper investigates the long-run effects of public debt and inflation on economic growth. Our contribution is both theoretical and empirical. On the theoretical side, we develop a cross-sectionally augmented distributed lag (CS-DL) approach to the estimation of long-run effects in dynamic heterogeneous panel data models with cross-sectionally dependent errors. The relative merits of the CS-DL approach and other existing approaches in the literature are discussed and illustrated with small sample evidence obtained by means of Monte Carlo simulations. On the empirical side, using data on a sample of 40 countries over the 1965-2010 period, we find significant negative long-run effects of public debt and inflation on growth. Our results indicate that, if the debt to GDP ratio is raised and this increase turns out to be permanent, then it will have negative effects on economic growth in the long run. But if the increase is temporary, then there are no long-run growth effects so long as debt to GDP is brought back to its normal level. We do not find a universally applicable threshold effect in the relationship between public debt and growth. We only find statistically significant threshold effects in the case of countries with rising debt to GDP ratios. 
Arabic Abstract: Click here for the Abstract in Arabic. 
JEL Classifications: C23, E62, F34, H6.
Key Words: Long-run relationships, estimation and inference, large dynamic heterogeneous panels, cross-section dependence, debt, inflation and growth, debt overhang. 
CAFE Research Paper: No. 13.23.
Matlab Codes for the CS-DL Estimators: Click here for the Matlab codes for the cross-sectionally augmented distributed lag (CS-DL) Mean Group and Pooled estimators developed in Chudik et al. (2013).
Data and Stata Do File: Click here for the data as well as the Stata do files needed to transform the data and compute the statistics and results in "Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models".
YouTube Video: Click here for a video recording of a lecture given by M. Hashem Pesaran based on "Debt, Inflation and Growth: Robust Estimation of Long-Run Effects in Dynamic Panel Data Models".


Institutions and the Volatility Curse, with Weishu Leong (July 2011).

Abstract: This paper revisits the resource curse paradox and studies the impact of resource rents and their volatility on economic growth under varying institutional quality. Using five-year non-overlapping observations between 1970 and 2005 for 112 countries, we find that while resource rents enhance real output per capita, their volatility exerts a negative impact on economic growth. Therefore, we argue that volatility, rather than abundance per se, drives the resource curse. However, we also find that higher institutional quality can help offset some of the negative volatility effects of resource rents. Therefore, resource abundance can be a blessing provided that growth and welfare enhancing policies and institutions are adopted.
JEL Classifications: C23, F43, O13, O40.
Key Words: Economic growth, resource curse, institutions, resource rent, and commodity price volatility. 
Cambridge Working Paper Version: CWPE 1145.