Working Paper: CEPR ID: DP6660
Authors: Giancarlo Corsetti; Philippe Martin; Paolo Pesenti
Abstract: Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms' net entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic `transfer problem,' using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.
Keywords: current account; extensive margin; global imbalances; transfer problem
JEL Codes: F32; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transfer of real resources (F16) | changes in spending patterns (D12) |
| consideration of extensive margin (F12) | equilibrium movements in international prices (F29) |
| extensive margin adjustments (F12) | welfare costs (I30) |
| elasticity of labor supply and convexity of cost function (H31) | magnitude of real exchange rate movements (F31) |
| adjustment process (F32) | macroeconomic outcomes (E66) |