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

Author

Listed:
  • Samuel Kortum

    (Yale University)

  • Brent Neiman

    (University of Chicago)

  • Jonathan Eaton

    (Pennsylvania State University)

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 (2015), we revisit the puzzles in a counterfactual with drastically lower trade frictions. Our results largely support Obstfeld and Rogoff’s explanation. Most notably, with lower trade frictions, domestic investment becomes much less correlated with domestic saving, mitigating the Feldstein-Horioka (1980) puzzle. Nominal GDP becomes less variable while real GDP becomes much more closely tied to nominal GDP, mitigating the purchasing power parity and exchange rate disconnect puzzles. Lower trade frictions don’t help resolve all of the puzzles, however. The correlation of consumption growth across countries, if anything, diminishes.

Suggested Citation

  • Samuel Kortum & Brent Neiman & Jonathan Eaton, 2016. "Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment," 2016 Meeting Papers 772, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:772
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    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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