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The Paul Storer Memorial Lecture—Cross-Border Trade Integration and Monetary Policy

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  • Stephen S. Poloz

Abstract

In this paper we explore the nexus between cross-border trade integration and monetary policy. We first review the evidence that trade liberalization has increased the degree of integration in North America and conclude that, while robust structural inferences remain elusive, there is sufficient supporting evidence for central banks to treat the issue seriously. The paper then discusses several channels by which increased integration might affect macroeconomic models. We introduce modifications to the Bank of Canada’s main policy model, ToTEM, to capture some of the impacts of integration suggested in the literature and generate stochastic simulations to compare versions of the model with low and high integration. The main conclusion is that increased integration may make it more challenging for central banks to control inflation, in the sense that doing so will require more variability in interest rates, exchange rates and the output gap.

Suggested Citation

  • Stephen S. Poloz, 2016. "The Paul Storer Memorial Lecture—Cross-Border Trade Integration and Monetary Policy," Discussion Papers 16-20, Bank of Canada.
  • Handle: RePEc:bca:bocadp:16-20
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    References listed on IDEAS

    as
    1. Silvana Tenreyro & Miklos Koren & Francesco Caselli, 2012. "Diversification through Trade," 2012 Meeting Papers 539, Society for Economic Dynamics.
    2. Paul R. Bergin & Robert C. Feenstra & Gordon H. Hanson, 2017. "Offshoring and Volatility: Evidence from Mexico’s Maquiladora Industry," World Scientific Book Chapters,in: International Macroeconomic Interdependence, chapter 2, pages 31-44 World Scientific Publishing Co. Pte. Ltd..
    3. Liao, Wei & Santacreu, Ana Maria, 2015. "The trade comovement puzzle and the margins of international trade," Journal of International Economics, Elsevier, vol. 96(2), pages 266-288.
    4. Jan De Loecker & Pinelopi K. Goldberg & Amit K. Khandelwal & Nina Pavcnik, 2016. "Prices, Markups, and Trade Reform," Econometrica, Econometric Society, vol. 84, pages 445-510, March.
    5. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
    6. Jonathan A. Parker & Nicholas S. Souleles & David S. Johnson & Robert McClelland, 2013. "Consumer Spending and the Economic Stimulus Payments of 2008," American Economic Review, American Economic Association, vol. 103(6), pages 2530-2553, October.
    7. Pinelopi Koujianou Goldberg & Nina Pavcnik, 2007. "Distributional Effects of Globalization in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 45(1), pages 39-82, March.
    8. Richard Blundell & Martin Browning & Costas Meghir, 1994. "Consumer Demand and the Life-Cycle Allocation of Household Expenditures," Review of Economic Studies, Oxford University Press, vol. 61(1), pages 57-80.
    9. Daniel Trefler, 2004. "The Long and Short of the Canada-U. S. Free Trade Agreement," American Economic Review, American Economic Association, vol. 94(4), pages 870-895, September.
    10. Alla Lileeva, 2008. "Trade liberalization and productivity dynamics: evidence from Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 41(2), pages 360-390, May.
    11. Caselli, Francesco & Koren, Miklos & Lisicky, Milan & Tenreyroy, Silvana, 2015. "Diversification through trade," LSE Research Online Documents on Economics 86293, London School of Economics and Political Science, LSE Library.
    12. Guvenen, Fatih, 2006. "Reconciling conflicting evidence on the elasticity of intertemporal substitution: A macroeconomic perspective," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1451-1472, October.
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    16. Krugman, Paul, 1980. "Scale Economies, Product Differentiation, and the Pattern of Trade," American Economic Review, American Economic Association, vol. 70(5), pages 950-959, December.
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    18. Feenstra, Robert C, 1994. "New Product Varieties and the Measurement of International Prices," American Economic Review, American Economic Association, vol. 84(1), pages 157-177, March.
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    20. repec:pri:cepsud:231deloecker is not listed on IDEAS
    21. Paul Fenton & Stephen Murchison, 2006. "ToTEM: The Bank of Canada's New Projection and Policy-Analysis Model," Bank of Canada Review, Bank of Canada, vol. 2006(Autumn), pages 5-18.
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    23. Michael Francis & Louis Morel, 2015. "The Slowdown in Global Trade," Bank of Canada Review, Bank of Canada, vol. 2015(Spring), pages 13-25.
    24. McCalman, Phillip & Spearot, Alan, 2013. "Why trucks jump: Offshoring and product characteristics," Journal of International Economics, Elsevier, vol. 91(1), pages 82-95.
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    More about this item

    Keywords

    Economic models; Monetary Policy; Trade Integration;

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F1 - International Economics - - Trade
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F6 - International Economics - - Economic Impacts of Globalization

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