The paper I choose discusses the major factor affecting global capital flows last century. Ohanian, Restrepo-Echavarria, and Wright (2018) argued that distortion in labor markets rather than in domestic or international capital markets can better explain why international capital flowed into Latin America with capital returns rather than Asia with higher capital returns. They built their model based on approaches introduced by Cole and Ohanian (2002) and Chari, Kehoe, and McGrattan (2007), which studies macroeconomic variables in the closed economy business cycle. Their model is an extension to general equilibrium of a world economy. With the model, they used standard estimation for some parameters and recover others with the data. Finally Ohanian et al. (2018) used the model to decompose the effect of different distortions on capital flows using counterfactuals and found that distortion in labor markets explained about 2/3 of the observed capital flows while distortions in capital market either have small and short-lived effect or even have opposite effect(p. 3565-3569). The data they used comes from various sources. In the model, they divide the world into 3 regions, Asia, Latin American and rest, and use countries accounting for most of GDP in that region to represent every region. They used data from the Organization for Economic Co-operation and Development for its member countries and data from the World Bank’s World Development Indicators for other countries primarily. There are also some other sources for some specific countries.
The paper inspires me to think about the effect of different distortions on resource allocation. In contrast to the paper, I want to focus on my homeland, China and show the effect of distortions caused by political relationship on resource allocation. Different from United States, the capital market in China is bank-based and the most powerful banks are state-owned. With the structure of capital market, the most significant distortion is caused by political factors in China. The purpose of the study is to find whether the economic crisis will exacerbate distortion caused by political factors and the persistence of the effect. I would build time series models with breaks. The dependent is capital from bank. Independents will include both variables of firm characteristics, such as firm scale, profit, industry and variables representing political relationship, such as ownership of the firm, whether leaders of the firm used to work in government. To identify the effect of economic crisis on distortions caused by political factors, I will use 2008 as the break date and see whether the coefficients of variables representing political relationship change after the crisis. Besides, I will use the Quandt Likelihod Ratio (QLR) Statistic to test the persistence of the effect. I will choose public companies of different ownership and different industries as samples. Financial data of those companies can be got from their financial statements, which are posted on the official website of Shanghai Stock Exchange or that of Shenzhen Stock Exchange. Data of political relationship can be collected by analyzing information of firm leaders, which can be got from Wind dataset. All of the data is public. In order to identify the effect of economic crisis, the target firms should be public a few years earlier than 2008 and exist afterwards. We may take data from 1998 to 2018, while the break point is just in the middle of the period.
Reference
Lee E. Ohanian, Paulina Restrepo-Echavarria, and Mark L. J. Wright, “Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America”, American Economic Review, 2018, 108(12): 3541–3582
The paper I choose discusses the major factor affecting global capital flows last century. Ohanian, Restrepo-Echavarria, and Wright (2018) argued that distortion in labor markets rather than in domestic or international capital markets can better explain why international capital flowed into Latin America with capital returns rather than Asia with higher capital returns. They built their model based on approaches introduced by Cole and Ohanian (2002) and Chari, Kehoe, and McGrattan (2007), which studies macroeconomic variables in the closed economy business cycle. Their model is an extension to general equilibrium of a world economy. With the model, they used standard estimation for some parameters and recover others with the data. Finally Ohanian et al. (2018) used the model to decompose the effect of different distortions on capital flows using counterfactuals and found that distortion in labor markets explained about 2/3 of the observed capital flows while distortions in capital market either have small and short-lived effect or even have opposite effect(p. 3565-3569). The data they used comes from various sources. In the model, they divide the world into 3 regions, Asia, Latin American and rest, and use countries accounting for most of GDP in that region to represent every region. They used data from the Organization for Economic Co-operation and Development for its member countries and data from the World Bank’s World Development Indicators for other countries primarily. There are also some other sources for some specific countries. The paper inspires me to think about the effect of different distortions on resource allocation. In contrast to the paper, I want to focus on my homeland, China and show the effect of distortions caused by political relationship on resource allocation. Different from United States, the capital market in China is bank-based and the most powerful banks are state-owned. With the structure of capital market, the most significant distortion is caused by political factors in China. The purpose of the study is to find whether the economic crisis will exacerbate distortion caused by political factors and the persistence of the effect. I would build time series models with breaks. The dependent is capital from bank. Independents will include both variables of firm characteristics, such as firm scale, profit, industry and variables representing political relationship, such as ownership of the firm, whether leaders of the firm used to work in government. To identify the effect of economic crisis on distortions caused by political factors, I will use 2008 as the break date and see whether the coefficients of variables representing political relationship change after the crisis. Besides, I will use the Quandt Likelihod Ratio (QLR) Statistic to test the persistence of the effect. I will choose public companies of different ownership and different industries as samples. Financial data of those companies can be got from their financial statements, which are posted on the official website of Shanghai Stock Exchange or that of Shenzhen Stock Exchange. Data of political relationship can be collected by analyzing information of firm leaders, which can be got from Wind dataset. All of the data is public. In order to identify the effect of economic crisis, the target firms should be public a few years earlier than 2008 and exist afterwards. We may take data from 1998 to 2018, while the break point is just in the middle of the period.
Reference Lee E. Ohanian, Paulina Restrepo-Echavarria, and Mark L. J. Wright, “Bad Investments and Missed Opportunities? Postwar Capital Flows to Asia and Latin America”, American Economic Review, 2018, 108(12): 3541–3582