Thursday, 25 March 2010: 18:05
The goal of this paper is to show how the progress of vertical specialization can rationalize the econometric puzzle of typifying external openness as unit root series during the Second Era of Globalization (from 1948 to the recent crisis) and illustrates the responsibility of vertically specialised trade in the presence of unit roots. We call it a puzzle because the presence of unit roots is not consistent with the analysis of bounded variables as, in theory, the ratio of exports over GDP is. Our hypothesis is that unit roots are reflecting the upward bias introduced by the vertical specialization into the numerator of the openness series, as a consequence of which, the export shares of GDP are not necessarily bounded between 0 and 1.
To support this hypothesis, we took advantage of the scattered data of vertical specialization (defined as the imported input content in exports or foreign added valued embodied in exports) for ten OECD countries to construct new yearly export series of domestic added value exported, having removed the multiple-accounting introduced by vertically specialised trade. By using the unit root tests with structural changes developed by Lee and Strazicich (2003, 2004), we find that, when this analysis is applied to the unbiased series of openness, the majority of countries (nine out of ten) became stationary, in contrast to the results obtained for the original openness series, where only three countries exhibited a stationary trend. It corroborates our hypothesis of the responsibility of vertical specialization for the presence of unit roots.
To support this hypothesis, we took advantage of the scattered data of vertical specialization (defined as the imported input content in exports or foreign added valued embodied in exports) for ten OECD countries to construct new yearly export series of domestic added value exported, having removed the multiple-accounting introduced by vertically specialised trade. By using the unit root tests with structural changes developed by Lee and Strazicich (2003, 2004), we find that, when this analysis is applied to the unbiased series of openness, the majority of countries (nine out of ten) became stationary, in contrast to the results obtained for the original openness series, where only three countries exhibited a stationary trend. It corroborates our hypothesis of the responsibility of vertical specialization for the presence of unit roots.