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Philipp Herkenhoff

Johannes Gutenberg University Mainz

Philipp Herkenhoff is a postdoctoral researcher at the Chair of International Finance at Johannes Gutenberg University Mainz. His research interests are in international trade, international finance, and global value chains. He holds a PhD from LMU Munich and a MSc in Economics from Goethe University Frankfurt.
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How Expected Inflation Distorts the Current Account and the Valuation Effect

We show that the current account balance (CA) is systematically distorted by an inflation effect, which arises because income on foreignissued debt is recorded as nominal interest in the currency of denomination. Since nominal interest includes compensations for expected inflation, increases in the latter must impact the CA. Guided by the relevant international accounting rules, we impute the inflation effect for 50 economies between 1991 and 2017. When adjusting for the inflation effect, the absolute value of yearly CAs drops by 0.13% of GDP on average. Over the full period, the reduction is sizable 22.85% of initial GDP for the average country (26.4% for the U.S.). As the flip-side of the CA distortions, the inflation effect contributes systematically to the well-known valuation effect of net foreign assets, of which about a twelfth is accounted for between 1991 and 2017 for the average country and well over half for the U.S.

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The International Organization of Production in the Regulatory Void

In recent decades, a large and increasing number of leading firms in a diverse set of industries have faced allegations of ‘unethical’ practices along their international value chains. In many cases this has triggered consumer boycotts and NGO campaigns, introducing a new link between upstream (un)ethical choices and downstream consumer demand. Does this feedback effect shape the international organization of production, as casual observation of NGO campaigns seems to suggest? In an explorative empirical investigation, we indeed find that - over and above the effects of established determinants of the integration vs outsourcing decision - high potential cost savings of ‘unethical’ production in an industry favor international outsourcing and most strongly so for sourcing from low-regulation countries. Motivated by these findings, we introduce a cost-saving ‘unethical’ technology, consumer boycotts, and advocacy NGOs into a standard property-rights model of the international organization of production. Contracts are incomplete, limiting a firm’s control over both investment and (un)ethical technology choices of integrated as well as independent suppliers. We identify the unethical outsourcing incentive as a novel determinant of the international organization of production. It implies that high potential cost savings from ‘unethical’ production incentivize keeping the supplier at arm’s length, rationalizing our empirical findings.

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