Working Paper: NBER ID: w10540
Authors: Fabio Ghironi; Marc J. Melitz
Abstract: We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exist absent our microeconomic structure with heterogeneous firms. It provides an endogenous, microfounded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moments of U.S. and international business cycles.
Keywords: International Trade; Macroeconomic Dynamics; Heterogeneous Firms
JEL Codes: F12; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous shocks to aggregate productivity (O49) | firms entering and exiting domestic and export markets (F23) |
| firms entering and exiting domestic and export markets (F23) | alterations in the composition of consumption baskets across countries over time (F61) |
| aggregate productivity differentials (O49) | persistent deviations from purchasing power parity (PPP) (F31) |
| more productive economies (O49) | higher average prices relative to trading partners (F14) |
| macroeconomic dynamics (E19) | influence on firm-level decisions and trade patterns (F12) |