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Varieties and the transfer problem

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

Abstract

We revisit the classic transfer problem, accounting for two channels of adjustment: increased trade in existing goods and services (the intensive margin) and net creation and destruction of product varieties (the extensive margin). Over the medium term, the latter reduces the scope for real exchange rate and terms of trade variability in response to cross-border flows. We embed our transfer analysis in popular models of current account adjustment, where initial imbalances are driven by domestic demand for — or foreign supply of — net saving, possibly associated with over-optimistic expectations. Simulation exercises based on 2006 data suggest that a transfer of the size of the pre-crisis U.S. current account deficit may require only moderate trend depreciation in real terms, and that the aggregate welfare impact of the transfer is disconnected from the size of the relative price correction.

Suggested Citation

  • Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2013. "Varieties and the transfer problem," Journal of International Economics, Elsevier, vol. 89(1), pages 1-12.
  • Handle: RePEc:eee:inecon:v:89:y:2013:i:1:p:1-12
    DOI: 10.1016/j.jinteco.2012.05.011
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    Cited by:

    1. Davide Romelli & Cristina Terra & Enrico Vasconcelos, 2014. "Current Account and Real Exchange Rate changes: the Impact of Trade Openness," THEMA Working Papers 2014-10, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    2. Cacciatore, Matteo & Ghironi, Fabio & Stebunovs, Viktors, 2015. "The domestic and international effects of interstate U.S. banking," Journal of International Economics, Elsevier, vol. 95(2), pages 171-187.
    3. Cacciatore, Matteo & Duval, Romain & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Short-term pain for long-term gain: Market deregulation and monetary policy in small open economies," Journal of International Money and Finance, Elsevier, vol. 68(C), pages 358-385.
    4. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2016. "Market deregulation and optimal monetary policy in a monetary union," Journal of International Economics, Elsevier, vol. 99(C), pages 120-137.
    5. Cavallari, Lilia, 2013. "Firms' entry, monetary policy and the international business cycle," Journal of International Economics, Elsevier, vol. 91(2), pages 263-274.
    6. Gourinchas, Pierre-Olivier & Rey, Hélène, 2014. "External Adjustment, Global Imbalances, Valuation Effects," Handbook of International Economics, Elsevier.
    7. J.-S. Pentecôte & J.-C. Poutineau & F. Rondeau, 2015. "Trade Integration and Business Cycle Synchronization in the EMU: The Negative Effect of New Trade Flows," Open Economies Review, Springer, vol. 26(1), pages 61-79, February.
    8. Cavallari, Lilia & D׳Addona, Stefano, 2015. "Exchange rates as shock absorbers: The role of export margins," Research in Economics, Elsevier, vol. 69(4), pages 582-602.
    9. Vladimir Gligorov, 2016. "The Transfer and Adjustment Problems in the Balkans," wiiw Balkan Observatory Working Papers 125, The Vienna Institute for International Economic Studies, wiiw.
    10. Philip Sauré, 2015. "The Resilient Trade Surplus, the Pharmaceutical Sector, and Exchange Rate Assessments in Switzerland," Working Paper Series WP15-11, Peterson Institute for International Economics.
    11. Epifani, Paolo & Gancia, Gino, 2017. "Global imbalances revisited: The transfer problem and transport costs in monopolistic competition," Journal of International Economics, Elsevier, vol. 108(C), pages 99-116.
    12. Gomes, S. & Jacquinot, P. & Pisani, M., 2016. "Fiscal devaluation in the euro area: A model-based analysis," Economic Modelling, Elsevier, vol. 52(PA), pages 58-70.
    13. Bems, Rudolfs, 2014. "Intermediate inputs, external rebalancing and relative price adjustment," Journal of International Economics, Elsevier, vol. 94(2), pages 248-262.
    14. Kamil Galuscak & Ivan Sutoris, 2016. "Margins of Trade: Czech Firms Before, During and After the Crisis," Working Papers 2016/12, Czech National Bank, Research Department.
    15. Vahagn Galstyan, 2015. "Productivity, Trade, and Relative Prices in a Ricardian World," Open Economies Review, Springer, vol. 26(4), pages 817-838, September.
    16. repec:eee:ecmode:v:64:y:2017:i:c:p:365-383 is not listed on IDEAS
    17. Rudolfs Bems & Julian di Giovanni, 2016. "Income-Induced Expenditure Switching," American Economic Review, American Economic Association, vol. 106(12), pages 3898-3931, December.
    18. di Mauro, Filippo & Pappadà, Francesco, 2014. "Euro area external imbalances and the burden of adjustment," Journal of International Money and Finance, Elsevier, vol. 48(PB), pages 336-356.
    19. Eggertsson, Gauti & Ferrero, Andrea & Raffo, Andrea, 2014. "Can structural reforms help Europe?," Journal of Monetary Economics, Elsevier, vol. 61(C), pages 2-22.
    20. Sauré, Philip, 2017. "Time-intensive R&D and unbalanced trade," European Economic Review, Elsevier, vol. 91(C), pages 229-244.
    21. Berthou, A. & Gaulier, G., 2013. "Dynamiques de salaires et rééquilibrage des comptes courants dans la zone euro," Bulletin de la Banque de France, Banque de France, issue 191, pages 43-58.
    22. Cacciatore, Matteo & Fiori, Giuseppe & Ghironi, Fabio, 2015. "The domestic and international effects of euro area market reforms," Research in Economics, Elsevier, vol. 69(4), pages 555-581.
    23. Pierre M. Picard & Tim Worrall, 2015. "Currency Areas and Voluntary Transfers," CREA Discussion Paper Series 15-12, Center for Research in Economic Analysis, University of Luxembourg.

    More about this item

    Keywords

    Transfer problem; Current account imbalances; Extensive margin;

    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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