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Varieties and the Transfer Problem: the Extensive Margin of Current Account Adjustment

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Author Info
Corsetti, Giancarlo
Martin, Philippe
Pesenti, Paolo

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6660.

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Date of creation: Jan 2008
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Handle: RePEc:cpr:ceprdp:6660

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Related research
Keywords: current account extensive margin global imbalances transfer problem

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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