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

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Author Info
Giancarlo Corsetti
Philippe Martin
Paolo Pesenti

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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 European University Institute in its series RSCAS Working Papers with number 2008/01.

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Date of creation: 24 Jan 2008
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Handle: RePEc:rsc:rsceui:2008/01

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

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Doireann Fitzgerald, 2007. "Trade Costs, Asset Market Frictions and Risk Sharing: A Joint Test," Working Papers CAS_RN_2007_7, Laboratory for Macroeconomic Analysis. [Downloadable!]
  2. 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. [Downloadable!]
  3. Gian Maria Milesi-Ferretti, 2008. "Fundamentals at Odds? The U.S. Current Account Deficit and The Dollar," IMF Working Papers 08/260, International Monetary Fund. [Downloadable!]
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  4. 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. [Downloadable!] (restricted)
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