Working Paper: NBER ID: w16960
Authors: Ariel Burstein; Marc J. Melitz
Abstract: In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, sunk export costs, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes.
Keywords: trade liberalization; firm dynamics; innovation; export market selection
JEL Codes: F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| trade liberalization (F13) | aggregate transition dynamics (C69) |
| trade liberalization (F13) | firm-level innovation (O31) |
| trade liberalization (F13) | export decisions (D79) |
| expectations regarding future trade costs (F17) | firms' innovation activities (O31) |
| firm-level innovation and export-market selection (O31) | trade volumes (F10) |
| firm-level innovation and export-market selection (O31) | aggregate output (E10) |
| trade liberalization (F13) | long-run trade elasticities (F12) |