Tuesday , January 19 2021
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Menzie Chinn

Menzie Chinn

He is Professor of Public Affairs and Economics at the University of Wisconsin, Madison

Articles by Menzie Chinn

Guest Contribution: “Increasing Income Tax Progressivity: Trickle Up, Not Trickle Down Economics”

1 day ago

Today, we are pleased to present a guest contribution by Christopher Otrok, Sam B. Cook Professor of Economics, University of Missouri, and Research Fellow, Federal Reserve Bank of St Louis. The views expressed here are our own and do not reflect the official opinions of the Federal Reserve Bank of St. Louis or the Federal Reserve System.

Conventional wisdom in some circles is that lowering tax rates on high-income people will result in economic booms that benefit those less well off—trickle-down economics. A half century of tax cuts for those with high incomes accompanied by increasing income and wealth inequality are suggestive that this conventional wisdom is not likely to be true. In recent work my coauthors and I develop a new measure of income tax progressivity. A key feature of

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Treasury Secretary Designate Yellen on the Dollar

2 days ago

From Reuters today:
“The value of the U.S. dollar and other currencies should be determined by markets. Markets adjust to reflect variations in economic performance and generally facilitate adjustments in the global economy”, Yellen will say, if asked about the incoming administration’s dollar policy, according to the report.

Just because the US takes no action to depreciate the dollar doesn’t mean it won’t move. Market forces includes expectations of future policy, and perceived risk and uncertainty. Just moving to a coherent framework of fiscal and international policies (conjoined with presumably coherent monetary policy) will reduce economic policy uncertainty, which has been elevated during the Trump years.

Figure 1: Real value of US dollar against a broad basket of currencies

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“Is a Dollar Crash Coming?”

3 days ago

That’s the title of a symposium in The International Economy, with Anders Åslund, Scott K.H. Bessent, Lorenzo Bini Smaghi, Jill Carlson, Stephen G. Cecchetti, Menzie D. Chinn, Lorenzo Codogno, Tim Congdon, Marek Dabrowski, Mohamed A. El-Erian, Heiner Flassbeck, Takeshi Fujimaki, Joseph E. Gagnon, James K. Galbraith, James E. Glassman, Michael Hüther, Richard Jerram, Gary N. Kleiman, Anne O. Krueger, Mickey D. Levy, Thomas Mayer, Jim O’Neill, Adam S. Posen, Holger Schmieding, Derek Scissors, Mark Sobel, Makoto Utsumi, and Chen Zhao.

Figure 1: Real trade weighted US dollar against a broad basket of currencies, 2006M01=100 (blue). Goods & services weighted spliced to goods weighted at 2006M01. Source: Federal Reserve Board via FRED, and author’s calculations.
My conclusion here:
The

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Economic Report of the President, 2021

4 days ago

Is out, here.

The policy inclusive forecast from CEA, as compared to the official forecast in the FY2021 budget proposal, and the WSJ January survey:

Figure 3: GDP as reported in 2020Q3 3rd release (black), Administration FY2021 forecast (and MSR) (red square), WSJ January survey mean (blue circle), all in billions Ch.2012$, SAAR, on log scale. Source: BEA, 2020Q3 3rd release, OMB, January WSJ survey,  Economic Report of the President, 2021, and author’s calculations.
These projections…
assume passage of additional legislation to provide for reauthorization and expansion of the Paycheck Protection Program to support small business employment, an expanded employee retention tax credit, a reemployment bonus, and a temporary extension of targeted fiscal support to State and local

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Guest Contribution: “The Impact of COVID-19 on Emerging Financial Markets”

4 days ago

Today, we are pleased to present a guest contribution by Steven Kamin (AEI), formerly Director of the Division of International Finance at the Federal Reserve Board. The views presented represent those of the authors, and not necessarily those of the institutions the authors are affiliated with.

The eruption of the Covid-19 pandemic early last year was a triple whammy for the emerging market economies (EMEs): it directly threatened their public health and economic activity; it pushed the global economy into recession and undercut their export markets; and it triggered a spike in global financial volatility which threatened to cut off their capital flows.  The financial spillovers from the turmoil last March are clearly evident in Figure 1.  Risk-off swings in U.S. markets led EME

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The Outlook: WSJ January Survey

5 days ago

Upgrades in forecasted growth rates,  largely due to expectations of widespread vaccinations.

Figure 1: GDP as reported in 2020Q3 3rd release (black), WSJ April survey (tan), June survey (green), August survey (red), October survey (pink), December survey (blue), January (orange), all in billions Ch.2012$, SAAR, all on log scale. Source: BEA, various vintages, WSJ survey, various vintages, author’s calculations.
Note that while the implied projected level of GDP is higher in the January survey relative to December, this is hard to discern in the graph because the large drop and subsequent jump in quarters 2 and 3 dwarf the upgrade. The upwardly revised growth expectations are marked starting in Q2.
Figure 2 shows the mean GDP forecast, and the fastest forecasted growth (once again7.8%,

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Interpreting Spreads

6 days ago

Here is a graph of two spreads oft-cited: (1) a term spread, the 10 year-3 month spread, and (2) a spread between a nominal rate and a real rate, the 10 year Treasury yield and 10 year TIPS yield, commonly interpreted as the inflation breakeven. (I leave the credit spread for another post.)

Figure 1: 10 year-3 month Treasury spread, % (blue), 10 year Treasury – 10 year TIPS spread, % (brown). Dashed orange line at declaration of national emergency, light blue dashed line at election, orange shading at Georgia election/Capitol insurrection. Source: Fed via FRED, and author’s calculations.
There has been some misunderstanding about what drives the spreads (e.g., term spread). Here is a short primer.
Term Spread:
Consider securities issued by the same entity, in this case the Federal

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Spreads and Risk over the Past Week (and Months)

8 days ago

I’ve been amazed at how little the last week’s political turmoil has shown up in financial markets. The only thing that seems to have moved anything is the apparent control of the Senate moving to the Democrats.

Figure 1: 10yr-3mo Treasury spread, % (blue, left scale), VIX (green, right scale), and Economic Policy Uncertainty (EPU) index divided by 10 (brown, right scale). 1/11 observation for 2/30 EST. Light blue dashed line at 11/3 (election day); light blue shading at 1/5-1/6 (Georgia election, insurrection at Capitol). 
You would think with the president of the United States inciting an insurrection against the legislative branch, there would be heightened perceived risk (VIX) and/or heightened uncertainty regarding the course of economic policy (EPU), but no pattern is apparent to

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The Strong Dollar Debate, Yet Again

9 days ago

(Somewhat repetitive of a 2007 post…)

Steven Englander of Standard Charter writes several weeks ago (not online):
“From the Treasury’s perspective, the purpose of a strong dollar policy is less a strong dollar itself than to encourage foreigners to lend to the US on favourable terms even when the dollar is under pressure. The success of a strong dollar policy is reflected in the absence of USD risk premium on US assets when the USD is weak. In fact, the preferred asset market outcome is probably for the US to gain an export advantage via a weak dollar without paying a price on the financing side. But to be clear, the negative correlation between the USD and US yields over a period of decades suggests that neither an overtly strong nor an overtly weak USD policy affects borrowing costs

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“Richard Cooper, cutting-edge economist”

10 days ago

That’s from the title of a Harvard Gazette article today:
Most economists live in the world of theory, using careful calculations to predict the future. But Richard N. Cooper believed theory couldn’t tell the whole story when it came to solving real-world problems, particularly when they involve the whole world — which he amply demonstrated after a global recession in the 1970s.
The Maurits C. Boas Professor of International Economics “understood that human systems are complex,” said Kenneth Rogoff, professor of economics and Thomas D. Cabot Professor of Public Policy, a colleague of Cooper in Harvard’s economics department. “He wanted to bring realism, institutional understanding, and historical experience to economics, not just mathematical technique.”
Cooper, who died Dec. 23 at age 86

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Winning (per Trump Dictionary)! US-China Trade

11 days ago

Chad Bown, US-China Phase 1 Tracker:
No matter how you look at it – use data on China’s imports or US exports – through November, China purchased only slightly more than half of the US goods Trump pledged it would buy over all of 2020 under his Phase One deal.

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Downside Employment Surprise and Business Cycle Indicators as of January 8th

11 days ago

Nonfarm payroll (NFP) employment down 100 thousand, contra +81 Bloomberg consensus, even worse than GS and DB.

Figure 1: Change in nonfarm payroll employment, in thousands, s.a. (blue), Bloomberg consensus (light blue square), Goldman Sachs (red +), and Deutsche Bank (green triangle). Source: BLS, Bloomberg, Goldman Sachs, and Deutsche Bank all as of 1/7, and author’s calculations.
The change in net employment is below the negative Goldman Sachs and Deutsche Bank forecasts discussed yesterday (but higher than the implied levels assuming the changes applied to November levels).
Key variables tracked by NBER Business Cycle Dating Committee (BCDC) continue to show increasingly negative indications, as  discussed on the 4th.

Figure 2: Nonfarm payroll employment (dark blue), industrial

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A Darkening Short Term Outlook

12 days ago

Goldman Sachs prediction for December NFP is -50 thousand, and Deutsche Bank is -75 thousands. The current Bloomberg consensus of +71 thousand (down from +100 thousand on the 6th).

Figure 1: Nonfarm payroll employment (blue), Bloomberg consensus (light blue square), Goldman Sachs (red +), and Deutsche Bank (green triangle), calculated by adding net job gains onto November actual. Source: BLS, Bloomberg, Goldman Sachs, and Deutsche Bank all as of 1/7, and author’s calculations.

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The Trade Deficit Surges

12 days ago

To a 14 year high (in absolute terms, not as a share of GDP). Shrinkage in US-China deficit stalls.

Figure 1: US goods and services trade balance (blue), and US-China goods trade balance, 12 month trailing moving average (brown), both in millions of $. Gray dashed line at NBER defined peak. Orange shading denotes trade war dated from March 2018. Source: BEA/Census via FRED, and author’s calculations.
While the trade balance improves slightly during the trade war (shaded orange) pre-pandemic, I’d attribute that development more to macroeconomic conditions. The goods trade balance pre-pandemic was increasing, but from the pandemic onward, has trended sideways, with a downward move in latest months. This is merely an illustration of the point that tariffs and other trade barriers will to a

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Covid-19 Weekly Fatalities and Excess Fatalities as of 1/6

13 days ago

Weekly Covid-19 fatalities are falling according to CDC estimates, but those numbers are likely to be revised upward; going from last week’s release to this week’s, excess fatalities have been revised upward drastically. Unofficial estimates indicate a resumption of the upward movement in fatalities to a new peak (18690/week for week ending 1/2/2021, averaging 2670 deaths/day).

Figure 1:  Weekly fatalities due to Covid-19 as reported to CDC for weeks ending on indicated dates (black), excess fatalities calculated as actual minus expected (teal), fatalities as tabulated by Our World in Data (dark red). Note excess fatalities differ from CDC series which are bounded below at zero. Light green shading denotes CDC data that are likely to be revised. Source: CDC  1/6/2021 vintage,

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Private Nonfarm Payrolls in December

13 days ago

ADP at -123 thousand vs. expected +88 thousand.

Figure 1: Private nonfarm payroll employment actual from BLS (black), Bloomberg consensus for December as of 1/6/2021 (teal square), and from ADP (red). Source: BLS, ADP via FRED, Bloomberg accessed 1/6/2021, and author’s calculations.
While the Bloomberg consensus overestimated employment growth for November relative to ADP release, the Bloomberg consensus also overpredicted. One interesting difference regarding December is that the ADP implied job growth is actually negative.
In normal times, the ADP release is considered relatively uninformative (relative to previous BLS numbers). However, the adjusted R-squared for April-November 2020 of log first-difference of BLS series on ADP series is 0.997, and 0.873 for April 2002-December 2019.

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Some Asset Market Reactions

13 days ago

Stock, currency and bond markets respond (up, up, yield up) on news of likely Democratic control of the Senate

Figure 1: DJIA, as of noon CST, 1/6/2021. Source: Tradingeconomics.com.
Stock market jumps – suggesting expectations of higher present value of dividends (despite perhaps higher corporate taxes, see this post). Interestingly, the dollar jumps as well, with some zig-zagging. This might reflect revised expectations of faster economic growth.

Figure 2: DXY trade weighted value of USD, as of noon CST, 1/6/2021. Source: Tradingeconomics.com.
Interestingly, the rise of the 10 year Treasury yield – by around 15 bps – suggests a yield curve steepening that would be associated with an upward revision in growth (it’s also consistent with a greater budget deficit).

Figure 3: Treasury 10

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Business Cycle Indicators, January 4th

15 days ago

With the release of the IHS Markit (nee Macroeconomic Advisers) monthly GDP, key indicators tracked by NBER Business Cycle Dating Committee (BCDC) continue to show mixed behavior. Monthly GDP declined in November (joining personal income ex.-transfers in decline):

Figure 1: Nonfarm payroll employment (dark blue), Bloomberg consensus for employment as of 1/4/2021 (light blue square), industrial production (red),  personal income excluding transfers in Ch.2012$ (green), manufacturing and trade sales in Ch.2012$ (black), and monthly GDP in Ch.2012$ (pink), all log normalized to 2020M02=0. Source: BLS, Federal Reserve, BEA, via FRED, IHS Markit (nee Macroeconomic Advisers) (1/4/2021 release), NBER, Bloomberg, and author’s calculations.
The Bloomberg consensus for nonfarm payroll employment

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On “Intimidation” (and a very short, truncated history on the Chinese diaspora in America)

15 days ago

At the risk of excessive navel-gazing, a commentary on what responsibilities Asian-Americans have in calling out China. An Econbrowser reader writes:
[D]o I think Menzie is a China apologist? No. Do I think Menzie is thoroughly intimidated by China? Absolutely.
But he is hardly alone in this.
Nevertheless, there is a bigger picture. If China follows trend, if this trend leads to open conflict with the US, then Menzie will regret not having taken a more public and determined stand to argue for democracy in China. As I have stated: Our best hope for China’s peaceful rise to superpower status is the rapid development of that country’s internal democracy.

This conversation began because this same reader criticized my banning a commenter on the basis of the use of the term “China virus”. My

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Observations on “Censorship”

17 days ago

An Econbrowser reader, defending the use of the term “China virus” instead of the Covid-19 term, writes:

That would seem accurate.
A China virus is not racist, it’s placist. Other places with epidemics (arguably all racist): Spanish flu, German measles, Lassa fever, West Nile virus, Rocky Mountain spotted fever, Lyme Disease (Connecticut), Ebola Fever, MERS (Middle East Respiratory Syndrome), Zika fever, Japanese encephalitis, Marburg Virus, and Norovirus (Norwalk, Ohio). And let’s not forget Legionnaire’s disease, discriminatory against veterans!
I think a Chinese-American professor censoring criticism of Xi’s China is a really bad idea. A really, really bad idea.
Two observations:
Context is important: There have been numerous attacks on Americans of Asian descent (not just Chinese)

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Wisconsin during the Trade War

18 days ago

The national trade deficit is larger than when Trump took office. We don’t know for sure the gap between Wisconsin goods exports and imports. We do know the gap between exports of goods originating in Wisconsin, and imports with destinations in Wisconsin, as recorded in the Customs data.

Figure 1: Difference between exports of goods originating in Wisconsin and imports of goods with destination in Wisconsin (blue), and centered 12 month moving average (red). Source: Bureau of Census via FRED, and author’s calculations.
In Figure 1, I’m doing exactly what I shouldn’t be doing (see *** at end of post):
[T]he Census Bureau would discourage using these state data to calculate state trade balances.
If one looks closely at Figure 1, one sees that there was little change in the gap between

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The Current Administration’s Current Official Economic Forecast

18 days ago

Illustrated (red squares):

Figure 1: GDP as reported (black), Administration current forecast (red squares), and WSJ December survey mean (blue). Trough assumed to be 2020Q2. Source: BEA, OMB, WSJ, NBER, and author’s calculations.
If you thought it odd that the Administration never revised its GDP forecast to account for…reality — you are not alone. It should have occurred during the Mid-Session Review, which is usually released in July. But you can see from the budget components released November 4th that the GDP forecast is identical to the February Budget forecast:

Source: OMB, FY 2021 Budget based on MSR indicating no change in economic assumptions.**
From Chapter 2 “Economic Assumptions and Overview” of the MSR:
The American economy continues the longest expansion in its recorded

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The Year in Review, 2020: Hanging on for Dear Life (and Rational Policymaking)

19 days ago

I remember once seeing a book on a used bookstore shelf in Washington DC (Second Story Books?) years ago entitled “Great Public Policy Disasters” or something like that. Over this year, I’ve been thinking that one could write an entire book series entitled “Great Public Policy Disasters of 2020” . With that in mind, here’s the year in review:

January: Some people continue their crusade against confidence intervals, and statistical theory in general.
http://econbrowser.com/archives/2020/01/a-critique-of-confidence-intervals
February: The inimitable Judy Shelton is still on on tap for the Fed … to the amazement of all sane people…
http://econbrowser.com/archives/2020/02/malleable-and-ductile
March: I don’t know why people who can’t understand a model talk about models.

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Guest Contribution: “The Year 2020 in Three Phrases”

19 days ago

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy  School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate and The Guardian.

 December 31, 2020 — Let us consider the past year through the lenses of three particular phrases: “witch hunt,” “black swan,” and “exponential.”  Each is widely applied, but not necessarily in the most useful way.
1.  Witch hunt  
Donald Trump has used the words “witch hunt” approximately once every three days on average during his presidency, just counting tweets alone.  It wasn’t just his impeachment trial, which ended with the Senate voting to acquit on February 5 of 2020. He continued during the year to use “witch hunt” to

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Covid-19 Weekly Fatalities and Excess Fatalities, as of December 30

20 days ago

Weekly Covid-19 fatalities are falling according to CDC estimates, although CDC determined fatalities are consistently below alternatively sourced estimates in recent weeks; excess fatalities have been revised upward.

Figure 1:  Weekly fatalities due to Covid-19 as reported to CDC for weeks ending on indicated dates (black), excess fatalities calculated as actual minus expected (teal), fatalities as tabulated by Our World in Data (dark red). Note excess fatalities differ from CDC series which are bounded below at zero. Light green shading denotes CDC data that are likely to be revised. Source: CDC  12/30/2020 vintage, OurWorldinData version of 12/29 accessed 12/30/2020 and author’s calculations.
In this post from end-November, I predicted a rise in fatalities — not a controversial point

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Some Economic Data Release Conventions

20 days ago

When I first started working in the government, I was often confused by the many different ways in which economic data is reported. Now, thirty years into teaching economics – -particularly international economics – – I still have to help out my students when they venture outside of the safe world of textbooks to read official reports from different governments and institutions. So, here’s an incomplete (but hopefully helpful) primer on some conventions used in relevant government releases:

Quantities/Rates actual or annualized?
GDP level (US BEA): “Seasonally Adjusted at Annual Rate” SAAR
GDP growth rate (US BEA): SAAR
GDP level (Europe): quarterly, not at annual rate, SA
GDP growth rate (Europe): quarterly, not at annual rate, SA
GDP level (China): quarterly, NSA, sometimes cumulative

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Protectionist High Water Mark?

21 days ago

“… the quick fix, of the “countervailing tariff,” “voluntary” restraints, and the like, will only mean higher prices for consumers in the short run, and greater distress in the long term. “Reciprocity” … notwithstanding, protectionism will only prove a temporary, and costly, palliative for inefficient industries, in a world populated by NICs, MICs and [Advanced Developing Countries].”

That’s me, writing in 1984, “Protectionism: The Rising Tide“. With the election of Joe Biden, is an end to chaotic, counterproductive tariff wars in sight? Is a more coherent, theory-consistent approach in the offing? It’s hard for me to say definitively, so let me outsource predictions (including Jeff Frankel). Cato describes the trade policy views of the CEA choices here. The USTR nominee, Katherine Tai,

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State GDP Relative to 2019Q4

22 days ago

Here’s the cumulative GDP decline relative to 2019Q4, nationwide:

Figure 1: Decline in real GDP by state relative to 2019Q4 levels. Nationwide decline is 3.4% on this state level basis. Source: BEA and author’s calculations.

Wisconsin’s decline (discussed in this post) at 3.6% is slightly larger than the nationwide decline 3.4% (US GDP reported on a basis consistent with state level GDP).
Washington state, which has implemented fairly comprehensive public health measures during the pandemic, has done relatively well, with essentially zero net loss by 2020Q3; it’s second to Utah, which is the only state registering a gain (of 0.2%).

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Wisconsin GDP in Q3

23 days ago

Recovery in Wisconsin has brought real GDP back to within 4% of peak levels.

Figure 1: GDP in Wisconsin (red), Minnesota (blue) and US (black), all in Ch.2012$, SAAR, in logs 2019Q4=0. Source: BEA, and author’s calculations.
To place the recovery in context, GDP at 299 billion Ch.2012$ in Q3 implies 12.6% growth in Q4 (to 308 billion) in order to hit the November’s Economic Outlook‘s forecasted level for 2020. This seems unlikely, given national GDP growth nowcasted at about 5.7% (IHS Markit 12/23)

Figure 2: Wisconsin GDP (red), predicted based on US GDP (pink) and Department of Revenue November forecast (teal squares), all in millions Ch.2012$, SAAR. Source: BEA, Wisconsin Economic Outlook, November 2020, and author’s calculations.
My forecast based on a first differences

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Guest Contribution: “The US consumer benefits from Chinese imports”

24 days ago

Today, we are pleased to present a guest post written by Liang Bai (University of Edinburgh) and Sebastian Stumpner (Banque de France). The views presented represent those of the authors, and not necessarily those of the institutions the authors are affiliated with.

Over the last two decades, the share of US expenditure on imports from China has increased rapidly. Among others, this has contributed to a decline in US manufacturing employment (Autor et al. 2013). But how much did US consumers benefit from Chinese import penetration? Using detailed consumption data from US households for the period 2004-15, we estimate that prices of consumer tradable goods have grown by roughly 0.2 percentage points less per year, due to Chinese import penetration.
In recent years, there has been a shift

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