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

Listed author(s):
  • Jonathan Eaton
  • Samuel S. Kortum
  • Brent Neiman

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 21774.

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Date of creation: Dec 2015
Publication status: published as Jonathan Eaton & Samuel Kortum & Brent Neiman, 2016. "Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment," Journal of Economic Dynamics and Control, .
Handle: RePEc:nbr:nberwo:21774
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