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

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  • Corsetti, Giancarlo
  • Martin, Philippe
  • Pesenti, Paolo

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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Keywords: current account; extensive margin; global imbalances; transfer problem;

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Citations

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Cited by:
  1. Maswana, Jean-Claude, 2010. "The Global Financial Crisis and Recession," Working Papers 15, JICA Research Institute.
  2. Gian-Maria Milesi-Ferretti, 2008. "Fundamentals At Odds? T+L4130he U.S. Current Account Deficit and the Dollar," IMF Working Papers 08/260, International Monetary Fund.
  3. Masahiro Kawai & Fan Zhai, 2010. "Asia’s Post-Global Financial Crisis Adjustment : A Model-Based Dynamic Scenario Analysis," Finance Working Papers 23055, East Asian Bureau of Economic Research.
  4. Fabio Ghironi & Viktors Stebunovs, 2010. "The Domestic and International Effects of Interstate U.S. Banking," NBER Working Papers 16613, National Bureau of Economic Research, Inc.
  5. Milesi-Ferretti, Gian Maria, 2008. "Fundamentals at Odds? The US Current Account Deficit and The Dollar," CEPR Discussion Papers 7046, C.E.P.R. Discussion Papers.
  6. Ehsan U. Choudhri & Lawrence L. Schembri, 2009. "Productivity, the Terms of Trade, and the Real Exchange Rate: The Balassa-Samuelson Hypothesis Revisited," Working Papers 09-22, Bank of Canada.
  7. Ehsan U. Choudhri & Lawrence L. Schembri, 2010. "Productivity, the Terms of Trade, and the Real Exchange Rate: Balassa-Samuelson Hypothesis Revisited," Review of International Economics, Wiley Blackwell, vol. 18(5), pages 924-936, November.
  8. Hamano Masashige, 2012. "International equity and bond positions in a DSGE model with variety risk in consumption," CREA Discussion Paper Series 12-05, Center for Research in Economic Analysis, University of Luxembourg.
  9. Stéphane Auray & Aurélien Eyquem & Jean-Christophe Poutineau, 2009. "Inflation Targets in a Monetary Union with Endogenous Entry," Cahiers de recherche 09-02, Departement d'Economique de la Faculte d'administration à l'Universite de Sherbrooke.
  10. Ester Faia, 2009. "Oligopolistic Competition and Optimal Monetary Policy," Kiel Working Papers 1552, Kiel Institute for the World Economy.
  11. Lilia Cavallari, 2009. "Export And Foreign Direct Investments In An Endogenous-Entry Model With Real And Nominal Uncertainty," Working Papers 0209, CREI Università degli Studi Roma Tre, revised 2009.
  12. Robert Dekle & Jonathan Eaton & Samuel Kortum, 2008. "Global Rebalancing with Gravity: Measuring the Burden of Adjustment," NBER Working Papers 13846, National Bureau of Economic Research, Inc.
  13. Paolo A. Pesenti, 2007. "Comment on "Current Account Dynamics and Monetary Policy"," NBER Chapters, in: International Dimensions of Monetary Policy, pages 244-250 National Bureau of Economic Research, Inc.
  14. Kawai, Masahiro & Zhai, Fan, 2009. "China-Japan-United States integration amid global rebalancing: A computable general equilibrium analysis," Journal of Asian Economics, Elsevier, vol. 20(6), pages 688-699, November.
  15. Hans-Werner Sinn & John Hassler & Gilles Saint-Paul & Giancarlo Corsetti & Michael P. Devereux & Tim Jenkinson & Jan-Egbert Sturm & Xavier Vives, 2009. "Chapter 2: The Financial Crisis," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 59-122, 02.
  16. Auray, Stéphane & Eyquem, Aurélien & Poutineau, Jean-Christophe, 2012. "The effect of a common currency on the volatility of the extensive margin of trade," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1156-1179.

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