Evaluating the German (New Keynesian) Phillips Curve
Rolf Scheufele
IWH Discussion Papers,
No. 10,
2008
Abstract
This paper evaluates the New Keynesian Phillips Curve (NKPC) and its hybrid
variant within a limited information framework for Germany. The main interest rests on the average frequency of price re-optimization of firms. We use the labor income share as the driving variable and consider a source of real rigidity by allowing for a fixed firm-specific capital stock. A GMM estimation strategy is employed as well as an identification robust method that is based upon the Anderson-Rubin statistic. We find out that the German Phillips Curve is purely forward looking. Moreover, our point estimates are consistent with the view that firms re-optimize prices every two to three quarters. While these estimates seem plausible from an economic point of view, the uncertainties around these estimates are very large and also consistent with perfect nominal price rigidity where firms never re-optimize prices. This analysis also offers some explanations why previous results for the German NKPC based on GMM differ considerably. First, standard GMM results are very sensitive to the way how orthogonality conditions are formulated. Additionally, model misspecifications may be left undetected by conventional J tests. Taken together, this analysis points out
the need for identification robust methods to get reliable estimates for the NKPC.
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Determinants of International Fragmentation of Production in the European Union
Götz Zeddies
IWH Discussion Papers,
No. 15,
2007
Abstract
The last decades were characterized by large increases in world trade, not only in absolute terms, but also in relation to world GDP. This was in large parts caused by increasing exchanges of parts and components between countries as a consequence of international fragmentation of production. Apparently, greater competition especially from the Newly Industrializing and Post-Communist Economies prompted firms in ‘high-wage’ countries to exploit international factor price differences in order to increase their international competitiveness. However, theory predicts that, beside factor price differences, vertical disintegration of production should be driven by a multitude of additional factors. Against this background, the present paper reveals empirical evidence on parts and components trade as an indicator for international fragmentation of production in the European Union. On the basis of a panel data approach, the main explanatory factors for international fragmentation of production are determined. The results show that, although their influence can not be neglected, factor price differences are only one out of many causes for shifting production to or sourcing components from foreign countries.
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Lower Firm-Specific Productivity Levels in East Germany and East European Industrial Branches: The Role of Managerial Factors
Johannes Stephan
Germany’s Economic Performance: From Unification to Euroization,
2007
Abstract
During the socialist era, companies in East Germany became much weaker than firms in West Germany in terms of technology and competitiveness. In large part, this may be rooted in the different incentive structures of the two systems: whereas in the West, the criterion for companies’ success was their ability to remain in business and generate income in a contestable market environment, firms in the East were required to fulfil a plan to which they were subjected without having their opinions considered.
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Investment and Internal Finance: Asymmetric Information or Managerial Discretion?
Hans Degryse, Abe de Jong
International Journal of Industrial Organization,
No. 1,
2006
Abstract
This paper examines the investment-cash flow sensitivity of publicly listed firms in The Netherlands. Investment-cash flow sensitivities can be attributed to overinvestment resulting from the abuse of managerial discretion, but also to underinvestment due to information problems. The Dutch corporate governance structure presents a number of distinctive features, in particular the limited influence of shareholders, the presence of large blockholders, and the importance of bank ties. We expect that in The Netherlands, the managerial discretion problem is more important than the asymmetric information problem. We use Tobin's Q to discriminate between firms with these problems, where LOW Q firms face the managerial discretion problem and HIGH Q firms the asymmetric information problem. As hypothesized, we find substantially larger investment-cash flow sensitivity for LOW Q firms. Moreover, specifically in the LOW Q sample, we find that firms with higher (bank) debt have lower investment-cash flow sensitivity. This finding shows that leverage, and particularly bank debt, is a key disciplinary mechanism which reduces the managerial discretion problem.
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Distance, Lending Relationships, and Competition
Hans Degryse, Steven Ongena
Journal of Finance,
No. 1,
2005
Abstract
We study the effect on loan conditions of geographical distance between firms, the lending bank, and all other banks in the vicinity. For our study, we employ detailed contract information from more than 15,000 bank loans to small firms comprising the entire loan portfolio of a large Belgian bank. We report the first comprehensive evidence on the occurrence of spatial price discrimination in bank lending. Loan rates decrease with the distance between the firm and the lending bank and increase with the distance between the firm and competing banks. Transportation costs cause the spatial price discrimination we observe.
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Determinants and Effects of Foreign Direct Investment: Evidence from German Firm-Level Data
Claudia M. Buch, J. Kleinert, A. Lipponer
Economic Policy,
No. 41,
2005
Abstract
Foreign direct investment is an essential aspect of ‘globalization’ yet its empirical determinants are not well understood. What we do know is based either on poor data for a wide range of nations, or good data for the US and Swedish cases. In this paper, we provide evidence on the determinants of the activities of German multinational firms by using a newly available firm-level data set from the Deutsche Bundesbank. The specific goal of this paper is to demonstrate the relative role of country-level and firm-level determinants of foreign direct investment. We focus on three main questions: First, what are the main driving forces of German firms’ multinational activities? Second, is there evidence that sector-level and firm-level factors shape internationalization patterns? Third, is there evidence of agglomeration effects in the foreign activities of German firms? We find that the market access motive for internationalization dominates. Firms move abroad mainly to gain better access to large foreign markets. Cost-saving motives, however, are important for some manufacturing sectors. Our results strongly suggest that firm-level heterogeneity has an important influence on internationalization patterns – as stressed by recent models of international trade. We also find positive agglomeration effects for the activities of German firms that stem from the number of other German firms that are active on a given foreign market. In terms of lessons for economic policy, our results show that lowering barriers to the integration of markets and encouraging the formation of human capital can promote the activities of multinational firms. However, our results related to the heterogeneity of firms and agglomeration tendencies show that it might be difficult to fine-tune policies directed at the exploitation of synergies and at the creation of clusters of foreign firms.
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Local Taxes and Capital Structure Choice
Reint E. Gropp
International Tax and Public Finance,
No. 1,
2002
Abstract
This paper investigates the question of taxation and capital structure choice in Germany. Germany represents an excellent case study for investigating the question of whether and to what extent taxes influence the debt-equity decision of firms, because the relative tax burdens on debt and equity vary greatly across communities. German communities levy local taxes on profits and long-term debt payments in addition to personal and corporate taxes on the federal level. A stylized model is presented incorporating these taxes. The model shows that local taxes create substantial incentives for firms to use debt financing. Furthermore, the paper empirically investigates the effect of local business taxes on the share of debt used to finance incremental investments by German firms. I find that local taxes significantly influence the capital structure choice of firms, controlling for a large number of other factors. In an extensive sensitivity analysis the tax effect are found to be robust across several different specifications.
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