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Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment

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  • Jonathan Eaton
  • Samuel S. Kortum
  • Brent Neiman

Abstract

Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton, Kortum, Neiman, and Romalis (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of the puzzles: The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein-Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.

Suggested Citation

  • Jonathan Eaton & Samuel S. Kortum & Brent Neiman, 2015. "Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment," NBER Working Papers 21774, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21774
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    References listed on IDEAS

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    Cited by:

    1. repec:bis:bisbps:95 is not listed on IDEAS
    2. Petroulakis, Filippos, 2017. "Internal devaluation in currency unions: the role of trade costs and taxes," Working Paper Series 2049, European Central Bank.
    3. Nicholas Ford & Charles Yuji Horioka, 2017. "The ‘real’ explanation of the Feldstein–Horioka puzzle," Applied Economics Letters, Taylor & Francis Journals, vol. 24(2), pages 95-97, January.
    4. Ricardo Reyes-Heroles, 2018. "Globalization and Structural Change in the United States: A Quantitative Assessment," 2018 Meeting Papers 1027, Society for Economic Dynamics.
    5. Stijn Claessens & M Ayhan Kose, 2017. "Asset prices and macroeconomic outcomes: a survey," BIS Working Papers 676, Bank for International Settlements.
    6. Hanno Lustig & Robert J. Richmond, 2017. "Gravity in FX R-Squared: Understanding the Factor Structure in Exchange Rates," NBER Working Papers 23773, National Bureau of Economic Research, Inc.
    7. Horioka, Charles Yuji & Ford, Nicholas, 2017. "The Solution to the Feldstein-Horioka Puzzle," AGI Working Paper Series 2017-17, Asian Growth Research Institute.
    8. repec:taf:apeclt:v:24:y:2017:i:5:p:325-328 is not listed on IDEAS
    9. Nicholas Ford & Charles Yuji Horioka, 2017. "The ‘real’ explanation of the PPP puzzle," Applied Economics Letters, Taylor & Francis Journals, vol. 24(5), pages 325-328, March.
    10. repec:eee:ecolet:v:163:y:2018:i:c:p:27-31 is not listed on IDEAS
    11. repec:eee:moneco:v:91:y:2017:i:c:p:1-18 is not listed on IDEAS
    12. Robert C. Johnson, 2017. "Measuring Global Value Chains," NBER Working Papers 24027, National Bureau of Economic Research, Inc.

    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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