WTO-The Impact of Geopolitical Conflicts on Trade,Growth,and Innovation-report (2022-07-06)（英文）行業(yè)資料

WorkingPaperERSD_____________________deOrganizationhandStatisticsDivision_____________________GEOPOLITICALCONFLICTSONTRADEGROWTHANDINNOVATIONsyofCaliforniaSanDiegoManuscriptdate10June2022______________________________________________________________________________sitingscholarsandistheproductofprofessionalresearchsoftheWTOoritsMembersnortheofficialpositionofanystaffmembers.Anyerrorsarethefaultoftheauthor.21IntroductionOpenmarketsandfreetradehavebeenabasictenetoftheinternationalorderemergingoutofWorldWarII.Overthatperiod,alargeconsensusregardingtheneedtoreducetradecostsandprioritizegainsfromtradeledtoacontinuousdeepeningoftheinternationaltraderegime.TheEuropeanUnionenlargedeastwardsandmanycountriesjoinedtheWorldTradeOrganization(WTO),includingRussia,thecenter-of-gravityoftheformerSovietbloc.AtthesametimeChina,displayedspectaculargrowthrates,integratedtoworldmarkets,andwasrecognizedasamarketeconomybyalsojoiningtheinternationaltradesystem.However,thelastdecadehaswitnessedthebeginningofabacklashagainstglobaltradeintegration.PoliticalscientistsconjecturethattheemergenceofChinaasanewsuperpoweragainstanincumbentU.S.mightleadtostrategiccompetitionbetweenthesecountries—oneinwhichgeopoliticalforcesandthedesiretolimitinterdependencetakeprimacyoverwin-wininternationalcooperation1.RisingsupportforpopulistandisolationistpartiesinmanyWesterncountriespointstowardsthesamedirection2.Additionally,the2022WarinUkraineandthesubsequentstrongretaliationoftheEuropeanUnion,theUnitedStates,andtheiralliesagainstRussiasuggestthattheinternationaleconomicorderbasedonopenmarketsandexpandedglobalizationcouldbereplacedbyamorefragmentedinternationaleconomicsystem.Usingthesefactsasmotivation,thispaperaimstodeterminethepotentiale?ectsofincreasedandpersistentlarge-scalegeopoliticalcon?ictsontrade,economicgrowth,andtechnologicalinnovation.Someoftheadversee?ectsarewell-known.Increasedtradebar-riersdecreasedomesticwelfareandgainsfromtradebyshiftingproductionawayfromthemostcost-e?cientproducersandleavinghouseholdswithalowerleveloftotalconsumption.Canonicaltrademodelscapturethisstaticresultthroughthefactthatwelfareispropor-tionaltothedegreeoftradeopenness(Arkolakis,Costinot,andRodr′?guez-Clare2012)3.However,someofthemainconcernsofpolicymakersandpractitionersregardingpo-tentiallydetrimentale?ectsoflimitingtradeareabstractedawayinstandardmodels.Forinstance,thesemodelstypicallyassumea?xedtechnologydistributionfordomestic?rms,therebylimitinggainsfromtradetostaticgains.Thisassumptionrendersitimpossibletoaddressoneofthemostimportantlong-termconsequencesofcontinuedgeopoliticalcon-?ictsorrecedingglobalization—namely,reducedtechnologyandknow-howspilloversthathappenthroughtrade.Inordertorealisticallyassesstheimpactoftradecon?ictsonglobalinnovation,webuildamulti-sectormulti-regiongeneralequilibriummodelwithdynamicsector-speci?cknowledgedi?usion.AsinBueraandOber?eld(2020),wemodelthearrivalofnewideasasalearningprocessofproducersinacertaincountry-sector.Byengagingininternationaltrade,i.e.importingintermediateinputs,domesticinnovatorshaveaccesstonewsourcesofideas,whosequalitydependsontheproductivityofthecountriesandsectorsfromwhichtheysourceintermediates.1SeeWei(2019)andWyne(2020)forareviewofthedebateamongrespectivelyChineseandAmericanscholarsabouttheshiftinforeignpoliciestowardseachother.2Forevidenceoftheimpactoftradeshocksontheriseofpopulistpartiestopower,seeColantoneandStanig(2018).3Thisistrueofallcanonicaltrademodels.AsArkolakis,Costinot,andRodr′?guez-Clare(2012)show,Armington(1969),Krugman(1980),EatonandS.Kortum(2002),andMelitz(2003),albeitdi?erentinmotivation,areisomorphicandsummarizegainsfromtradebysomevariationoftheexpressionGα(πii)e,whereπiiisdomestictradeshareandεistheelasticityoftrade?owswithrespecttotradecosts.3Inourmodel,ideadi?usionismediatedbytheinput-outputstructureofproduction,suchthatbothsectoralintermediateinputcostsharesandimporttradesharescharacterizethesourcedistributionofideas.Innovationissummarizedbydescribingproductivityindi?erentsectorsasevolvingaccordingtoatrade-shareweighted-averageoftrade-partnerssectoralproductivities.Thisprocessiscontrolledbyaparameterwhichdeterminesthespeedofdi?usionofideas,whichwecalibrateusinghistoricaldata.Productivitythusevolvesendogenouslyasaby-productofmicro-foundedmarketdeci-sions—i.e.,anexternalitythatmarketagentsa?ectwiththeirbehaviorbutdonottakeintoaccountwhenmakingdecisions.Inthisframework,theoutbreakoflarge-scaletradecon?ictswillhavespillovere?ectsonthefuturepathofsectoralproductivitiesofallcoun-tries.Changesintradecostsinducetradediversionandcreation,which,inturn,impactproductivitydynamicsinawaythatisnotinternalizedbyagents.Aftercharacterizingthemodel,weuseittoperformpolicyexperimentsinthecontextofheightenedgeopoliticalcon?icts.Weexplorethepotentialimpactofa“decouplingoftheglobaleconomy,”ahypotheticalscenariounderwhichtechnologysystemswoulddivergeintheglobaleconomy.WedividetheglobaleconomyinaWesternblocandanEasternblocbasedondi?erentialscoresforeignpolicysimilarity.First,wesimulateincreasedtradecostsarisingfromgeopoliticalcircumstances,whichincreasefrictionsprohibitivelyifonecountrywantstotradewithanotheroneoutsideitsbloc.Alternatively,wesimulateascenarioofaglobalincreaseintari?s,inwhichallcountriesmovefromcooperativetari?settinginthecontextoftheWTOtonon-cooperativetari?setting.Nicita,Olarreaga,andSilva(2018)estimatetoincreaseglobaltari?s,onaverage,by32percentagepoints.Forsimplicity,weusethisaveragenumberasareferenceandweassumethatcountriesindi?erentblocsraisetari?sagainstcountriesintheotherblocbysuchaverageamount.Ouranalysisleadsto?vemain?ndings.First,amulti-sectorframeworkexacerbatesdi?usionine?cienciesinducedbytradecostsrelativetoasingle-sectorone;weexplorethisissueboththroughtheoryandsimulations4.Second,weshowthattheprojectedwelfarelossesfortheglobaleconomyofadecouplingscenariocanbedrastic,aslargeas12%insomeregions;andarelargestinthelowerincomeregionsastheywouldsu?ermostfromreducedtechnologyspilloversfromricherareas.Third,thedescribedsizeandpatternofwelfaree?ectsarespeci?ctothemodelwithdi?usionofideas.Inadynamicsettingwithdi?usionofideaswelfarelossesarelargeranddisplaymorevariation.Fourth,ifoneofthemiddleincomeregions,LatinAmericaandCaribbean(LAC),wouldswitchfromthehigher-incomeWesternbloctothelowerincomeEasternbloc,itswelfarecostsofdecouplingwouldbesigni?cantlyhigher.Thisexperimentillustratesthatpolicymakersinlow-andmiddle-incomecountrieswouldfacedi?cultdecisionsifdecouplingwouldaggravate.Fifthand?nally,thewelfarecostsofdecouplingonlyinelectronicequipment,thesectorwheredecouplingisalreadytakingplace,wouldbemuchsmallerthanunderfulldecoupling,albeitsizeable,rangingfrom0.4_1.9%.Wemakefourmaincontributionstotheliterature.First,webuildamulti-sectormodeloftheglobaleconomywithBertrandcompetition,pro?ts,andtechnologyspilloverswhichcanbesolvedrecursivelythatpermitsassessingrealistictradepolicyexperiments.Second,wecalibratethestrengthofthedi?usionoftechnologiesthroughtradewithatight?tbetweensimulatedandhistoricalGDPgrowthrates.Third,weexaminethelong-rune?ectsofreal-4Beforeconductingsimulationswiththemulti-sector,multi-regionmodelcalibratedtoreal-worlddata,weexplorethediscrepancybetweenactualandoptimallevelsofideadi?usionThiscomparisonshowsthattomaximizethetotaldi?usionofideas,tradesharesmustbeattheiroptimalpointineverysector.4worldpolicyexperimentsrelatedtothedecouplingoftheglobaleconomy.Last,wedrawinsightsfromthePoliticalScienceliteratureinordertoincorporategeopoliticalcon?ictsintoaworkhorsetrademodel.Ourmodelbuildsontheworkthatevaluatestheimpactoftradeoninnovationandshowsthattradeopennesscanincreasethelevelofdomesticinnovation,particularlyonthesingle-sectormodelofBueraandOber?eld(2020).Comparedtopreviouswork,wepresentarecursivemodelwithintermediatelinkages;calibratethestrengthofthedi?usionofideastotargethistoricalGDPgrowthratesacrossallregions;andexploredi?usionine?cienciesinamulti-sectorsetting.RelatedLiterature.Ourpaperiscloselyrelatedtotheliteraturethataddsdynamicstotrademodelsbyincorporatingknowledgedi?usionchannels.TheearliestexplorationsofthistopicgobacktoEatonandS.Kortum(1999),whodevelopedamulti-countrydynamicmodelinwhich?rmsinnovatebyinvestinginresearchanddevelopment(R&D)andknowledgedi?uses,aftersomelag,toothermarkets.Inthismodel,di?usionhappenedsomewhatmechanically,wasunrelatedtotradeandeventuallyreachedallcountries5.Morerecently,Alvarezetal.(2013)combinedtheEatonandS.Kortum(2002)Ricardianmodeloftradewithanideadi?usionprocess?rstpresentedbyS.S.Kortum(1997).Im-portantly,theauthorsconjecturedthatthedi?usionprocessisproportionaltothequalityofmanagersof?rmswhoseproductreachagivendestinationmarket.Ideas?owfromonemarkettoanotherinproportiontothetradelinkagesbetweenthem.Therefore,impedi-mentstotradehavenotonlystatic,butalsodynamiccosts—astheydecreaseknowledgedi?usion.OurmodelisalsocloselyrelatedtotheonedescribedbySantacreu,Li,andCai(2017),whoextendedtheoriginalmodelbyEatonandS.Kortum(1999)incorporatinglag-di?usiondynamicsintoamulti-sectorframework.Santacreu,Li,andCai(2017)buildamulti-sectormodeloftrade,innovation,andknowledgedi?usion,exploringhowthewelfaregainsfromtradearea?ectedbyknowledgedi?usionthroughtheirimpactonchangesincomparativeadvantage.Theyshowthatthewelfaregainsarelargerwithendogenousknowledgedi?usionbecauseexistingspecializationpatternstendtogetreinforcedbyknowledgedi?usion.Therearethreemaindi?erencesbetweentheirworkandours.First,ourmodelempha-sizesthenexusbetweentradeandideadi?usion,whereasSantacreu,Li,andCai(2017)modeltechnologyspilloversasbeingindependentoftheamountoftrade(orotherendoge-nousvariableslikeFDIormigration).Additionally,whiletheycalibrateknowledgespilloverswithdataonpatentcitation,wecalibratethestrengthofthedi?usionofideasbasedonthe?tbetweenactualandsimulatedhistoricalGDPgrowthrates.Third,thepapershaveadi?erentfocus:wefocusonconcretepolicyquestionsandexplorehowthee?ectofpotentialtradepolicychangesarea?ectedbytheinclusionofideasdi?usioninthemodel;whiletheyhighlighthowpatternsofcomparativeadvantagechangewithtechnologyspillovers.Organization.Thispaperisorganizedasfollows.InSection2wepresentthemodel,detailingproduction,demand,andconsumptionoftheglobaleconomy.Wealsodescribethedynamicevolutionofproductivitiesindi?erentregionsandsectors.InSection3wedecribethediscrepancybetweentheactualandoptimaldi?usionofideasinamulti-sector5Indi?erentiatedvarietiestrademodels,knowledgedi?usionshowsupinpaperslikeRomer(1990),Rivera-BatizandRomer(1991),Rivera-BatizandRomer(1991)andGrossmanandHelpman(1989).Inthetext,wefocusonpapersthatincorporateknowledgedi?usiontoRicardianmodels,whichistheclassofmodelsthatthispaperfallsin.5framework.InSection4wediscussthecalibrationofthemodelandunderpintheexaminedpolicyexperiments.InSection5wepresenttheresultsofourmainpolicyexperimentsandsomealternativesimulations.Finally,weconcludeinSection6summarizingthekey2EnvironmentTimeisdiscreteandindexedbyteT.TherearedeDregionsintheglobaleconomy,whichcovereverypartoftheworldeconomy,eitherasastand-alonecountry,oraregionalaggregateofcountries.Ineachregion,therearemultipleindustriesieI.2.1DemandIneachregiondandeachperiodtarepresentativeagentmaximizesCobb-Douglasprefer-encesoverconsumptionofgoodsindi?erentsectorsieI,q:max)κ{q}i年zs.t.Lκ=1i年zLpq<(1_sd,t)Yd,ti年zYd,t=wd,tyd,t+rd,tkd,t+Td,t+LΠi年z(1)Yd,tisgrossincomedeterminedbywd,t,yd,t,thewageandmeasureofworkers;rd,tkd,t,capitalincome;Td,t,transfers;andΠ,pro?ts.Wesetsd,ttobetheexogenoussavingsrate.Hence,weabstractfromintertemporaloptimizationasdiscussedfurtherbelowinthesubsectiononmarketclearing.Savingsareusedto?nanceinvestmentasdiscussedbelow.ThispreferencestructureimpliesthefollowingdemandfunctionforgoodsinsectorieI:q=Theaggregatepriceindexsatis?es:P,t=K.Πi年z(p)κWithK=Πi年z(κ)去κ,aconstant.(2)(3)2.2ProductionTherearemanyproducersofdi?erentvarietiesωofeachcommodityi.Firmsareendowedwithanidenticaltechnologyandcombinefactorsofproductionf,tandintermediateinputsmtoproducevarietyq,t(ω):q,t(ω)=z,t(ω)|(Ψ)(f,t)pl+(Ψ)(m)pl]pi一l(4)6Thecostoftheunitinputbundle,c,isafunctionofthepricesoffactorsofproduction,pf,t,andpricesofcommoditiesusedasintermediates,p:c=|Ψ(pf,t)1去ρi+Ψ(p)1去ρi卜l一pi(5)Firmscombinefactorsofproduction(f,t)andintermediatecommodities(m)accord-ingtothefollowingsub-productionfunctions:f,t=┌(Ψ,)kl+(Ψ,lt)yl┐ui一l(6)m=(Ψ)(q)ului一l(7)The?rstaggregatorcombinescapital,kd,t,andlabor,yd,t,asfactorsofproduction,whilethesecondoneusessectoralcommoditiesqasintermediateinputs.2.3SupplyofFactorsofProductionThesupplyofthethreefactorsofproductionchangesovertime.Theyareperfectlymobileandthushaveauniformpriceacrosssectors.Foreachcountry,anexogenouspathofendowmentsoflaborisimposedbasedonexternalprojectionsfromtheUnitedNationsandtheInternationalMonetaryFundasdescribedinthedatasectionbelow.Aggregatecapital,kd,t,isafunctionofcapitalinthepreviousperiod,kd,t去1,deprecia-tion,δ,andinvestment,ind,t,evolvingaccordingtothefollowinglawofmotion:kd,t=(1_δd)kd,t去1+ind,t(8)Thereisaninvestmentsectorthatcombinesdi?erentsectoralcommoditiesqwithLeontieftechnologyunderperfectcompetition:ind,t=min,,...,、(9)Hence,thedemandforanyparticularinputiandthepriceoftheaggregateinvestmentgoodare,respectively:q=χind,t(10)p=Lχp(11)i年zWeassumethattheratioofaregion’stradebalancetoitstotalincomeis?xed.Ab-stractingfromothercomponentsofthecurrentaccount,thecapitalaccountisequaltothetradebalance.Assuminga?xedtradebalanceratio(relativetoincome)thusimpliesthattheinvestmentrateisequaltothesavingsrate.Hence,inequilibriumwehave:Lpind,t=sd,tYd,t(12)i年z7minminns,2.4InternationaltradeConsumers,investorsand?rmsdemandsectoralcommoditiesqbyamountsqqandq,respectively.Alocalproducersourcethecheapestlandedvarieties{q(ω):ωe[0,1]}fromallcountriesseDandproducesthesectoralcommodityaccordingtothefollowingtechnology:qqgldgjl(13)ThepriceofcommodityjeIthussatis?es:p,1]p(ω)1去σjdω┐ll一gj(14)Tradehappensthroughdemandforvarietiesusedasinputsintheproductionofsectoralgoodsq.Thesegoods,inturn,areusedintwodi?erentways:asintermediateinputsintheproductionofvarietiesandinvestmentgoods;andin?nalconsumption.Letx(ω)bethelandedunitcostofsupplyingvarietyωofcommodityieIproducedinsourceregionseDanddeliveredtoregiondeD:x(ω)==(15)wheretmaregrossimporttaxes,whichcanbesourceanddestinationspeci?c;τd,t21arebilateralicebergtradecosts;andz,t(ω)isthe?rm’sproductivity.Thelastequalityfollowsfromde?ning=tm.τd,t.casthelandedinputbundlecosts.SincevarietiescanbesourcedfromeveryregionseDconsumersindestinationregiondeDwillonlybuyvarietyωfromthesourcewiththelowestlandedprice.FollowingBernardetal.(2003),producersengageinBertrandcompetition.Foreachcountry,order?rmsk=[1,2,...]suchthatzs,t(ω)>zs,t(ω),....Ifthelowest-costproviderofthevarietyωtocountrydeDisaproducerfromcountryseD,thepriceindsatis?es:zs,t(ω)è2MCof2ndmostproductive?rmfromsAssumption1(Productivitydraws).WefollowthecanonicalEatonandS.Kortum(2002)assumptionthatandtakez,t(ω):A×D×I×?-R+tobetherealizationofani.i.d.ran-domvariable,whereAisthesetofstatesoftheworld.ProductivityisdistributedaccordingF,t(z)=exp{_λz去θi}(17)Thecountry-speci?cFr′echetdistributionhasaregion-commodity-speci?clocationpa-rameterλ,whichdenotesabsoluteadvantage(betterdrawsforallvarieties),andasector-specci?cscaleparameterθi,whichgovernscomparativeadvantage(higherθiimpliesless8variabilityinproductivityandlowerpotentialfordiversi?cationaccordingtocomparativeadvantage).WeshowintheAppendixthatpricesinthedestinationregiondeDwillbe,respectively:p=Γ1(Φ)去whereΓ1isaconstant6;Φ=|s年pλ()去θi.Astherearein?nitelymanyvarietiesintheunitinterval,bythelawoflargenumbers,theexpenditureshareofdestinationregiondeDongoodscomingfromsourcecountryseDconvergestotheirexpectedvalues.πd,tdenotesexpendituresofconsumersinregiondeDongoodscomingfromregionseDasashareoftheirtotalexpenditureoncommodityieIandisgivenby:d,tπd,t=λ(d,t)去θd,tSectoralcommoditiescanbeusedbothfor?nalconsumptionandasintermediateinputs.Giventheassumptionsabove,π,whichistheexpenditureongoodscomingfromstobeusedasintermediateinputsinsectoriofcountrydasashareoftotalexpendituresofthatsectorongoodsfromsectorjisequaltothetradesharesfor?nalconsumption,i.e:(Ai,j)π=π.InthepresenceofBertrandCompetition,weshowintheAppendixthatsource?rmsrealizeapro?twhichisproportionaltothetotalexpenditureofdestinationcountries.Inparticular,pro?tsare:Π=πd,te;withithe=pqe=Leag年{c,in,m}2.5MarketClearingIneverregion,factormarketsmustclear,suchthattheuseofeachfactorofproductionsummedoverallsectorsieIinregionseDbyproducersofvarietiesmustequalitssupply:Lk,t=ks,Ly=ys,t(21)i年zi年zThemainequilibriumconditionsare|D|.|I|expenditureequationsthatsatisfy:e=πη,.η,,.ei+Lπ.╱κ.(1_sd,t)Yd,t+e、(22)d年pThe?rstlineofequation(22)denotesthepurchasingby?rmsofintermediateinputs.πisthetradeshareofsinvarietiesdemandedbytheproducerofsectoralgoodjin6Speci?cally,Γ1=′1一+/、┐9i]Γ、,whereΓ(．)istheGammafunction9regiond;ηisthecostshareofsectorjinthetotalintermediateexpenditureuseinsectori;ηisthecostshareofintermediatesintotalcostinsectori;andeisthetotalcostpayments7.Thesecondlinerepresentsexpenditurerelatedtotheuseofvarietiesintheproductionofsectoralgoodsfor?nalconsumptionandforinvestmentgoods.κistheCobb-Douglasparameterthatdenotesexpenditureshareinsectoriasafractionoftotal?nalgoodsexpenditures.Pricesoffactorsofproductionareproportionaltotheiruseandtotalcost.Sincefactorsareusedineverysector,weaggregateoversectorstocalculateaggregatepaymentstoeachfactorofproduction:ws,tys,t=η.η..πd,t.ers,tks=η.η..πd,t.ewhereηisthecostshareofvalueaddedintotalcost;and,foreachfactorofproductionne{y,k},ηisthecostshareoffactornintotalexpenditureonfactorsofproduction8.Thegovernmentcollectstari?sandothertaxesanddirectsthemtotherepresentativehouseholdaslump-sumtransfers:Td,t=πd,teRecallingthatpro?tsareΠ=|d年pπd,tecompletesallelementsnecessarytocharacterizedomesticincome:Ys,t=ws,tys,t+rs,tks,t+Ts,t+LΠj年zOurmodelischaracterizedbyasequenceofstaticequilibriasatisfyingtheequilibriumequationsineachoftheperiodst.Solutionsinthedi?erentperiodsarerelatedintwoways.First,thecapitalstockinperiodtisdeterminedbyinvestmentinperiodtandthecapitalstockinperiodt_1(plusdepreciation)asspeci?edinequation(8).Second,thecountry-sector-speci?ctechnologyparametersλchangeovertimeasspeci?edinequation(24)below.Weabstractfromintertemporaloptimizationofconsumption,imposinginsteada?xedsavingsrate.Thismakesthemodelcomputationallymoretractableandleadstoamorestraightforwardinterpretationofthesimulationresults.Wefocusonthelong-rune?ectsofdecouplingoftheglobaleconomyfrom2020to2040andnotonthee?ectsofdecoupling7Thecostsharesare,respectivelly:η=Ψ(p)1┐ui/(Ψ(pm)1┐pi/(Ψ(pf,t)1┐pi+Ψ(pm)1┐pi).8Onceagain,themathematicalexpressionsfortheΨ(pf,t)1┐pi/(Ψ(pf,t)1┐pi+Ψ(p)1┐pi);and,foreach=k~4Ψ(p,t)1┐ui)and=costsharesare:η=factorofproductionn∈{e,k},η=Ψ(pn)1┐vi/g~|e,k}Ψ(pq,t)1┐vi,withpnstandingforthepriceoffactorn.onthetrajectoryfollowedbytheeconomyto2040.However,abstractingfromintertempo-raloptimizationimpliesthatpotentiale?ectsthroughchangesinsavingsratesoncapitalaccumulationarealsoabstractedfrom9.2.6DynamicinnovationUnlikeinthestandardEatonandS.Kortum(2002)modelorintheBertrand-competitionversiondevelopedinBernardetal.(2003),weassumethateachregion’slocationparameterevolvesovertime.EachcommodityieIandeachcountrydeDhasadi?erentperiod-speci?cproductivitydistributionF,t(z).Ourmodelfollowsastrandoftheliteraturewhichmodelsideasdi?usionthroughrandommatchesbetweendomesticandforeignmanagers10.SeminalexamplesofthisworkincludeJovanovicandRob(1989)andS.S.Kortum(1997).Morerecently,Alvarezetal.(2013)exploredhowideadi?usionisintertwinedwithtradelinkages.LikeBueraandOber?eld(2020),weassumethatamanagerdrawsnewinsightsasaby-productofsourcingabasketofinputs.Weextendthisframeworktoamodelwithdi?usionofideasinamulti-sectorcontextandsolveitinarecursivefashionthatpermitsforward-lookingassessmentofpolicyexperiments.Theideadi?usionmechanismismediatedbytheinput-outputstructureofproduction,suchthatbothsectorcostsharesandimporttradesharescharacterizethesourcedistributionofAssumption2(Ideaformation).Newideasarethetransformationoftworandomvari-ables,namely:(i)originalinsightso,whicharriveaccordingtoapowerlaw:Ot(o)=Pr(O<o)=1_αto去θ;(ii)derivedinsightsz\,drawnfromasourcedistributionG(z).Aftertherealizationofthosetworandomvariables,thenewideahasproductivityz=o(z\)β,whereoistheoriginalcomponentofthenewidea,z\isthederivedinsight,andβe[0,1)newideasiftheirqualitydominatesthequalityoflocalvarieties.Therefore,foranyperiod,domestictechnologicalfrontierevolvesaccordingto12:F,t+?(z)=F尸z)2×╱1_\tt+?\ατz去θ(z\)βθdG(z\)dτ、Pr{productivity<zPr{productivity<zatt}←今Pr{nobetterdrawsin(t,t+?)}Lemma(GenericLawofMotion,BueraandOber?eld2020).GivenAssumption2,if,foranyt,F,t(z)isFr′echetwithlocationparameterλ=|oατ|(z\)βθidG(z\)dτand9Theassumptionofa?xedtradebalanceimpliesthatthecapitalstockisalsonota?ectedbypotentialchangesinthecapitalbalanceinresponsetoshocks.However,theinternational?nanceliteraturesuggeststhatstandardopeneconomymodelswithintertemporaloptimizationhavegeneratedcounterfactualpredic-tionsonthedirectionofcapital?owsbetweendevelopedandemergingcountriesinthe1990sand2000s.Capitalwas?owingonnetfromemergingtodevelopedeconomiesinsteadofcapital?owingtotheemergingeconomieswithhighergrowthratesaspredictedbythestandardmodels.10Foradetailedreviewofthisliterature,seethecomprehensivereviewchapterpublishedbyBueraandLucas(2018).11Asmentionedearlier,ourworkiscloselyrelatedtoSantacreu,Li,andCai(2017),whoextendS.S.Kortum(1997)toamulti-sectorframework.Wedi?erinthattheymodeldi?usionashappeningseparatelyfromtrade,ratherthanasatrade-externality.12Herewesimplyusethefactthato=X(X\)┐8andnotethat,givenaninsightX\,atanymomenttthearrivalrateofideasofqualitybetterthanXisPr(O>o)=Pr(O>X(X\)┐8)=αtX┐9(X\)89.WethenintegrateoverallpossiblevaluesofX\.scaleparameterθi,theformerevolvingaccordingtothefollowinglawofmotion:?λ=αt\(z\)βθidG(z\