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

Listed author(s):
  • Samuel Kortum

    (Yale University)

  • Brent Neiman

    (University of Chicago)

  • Jonathan Eaton

    (Pennsylvania State University)

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.

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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 772.

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Date of creation: 2016
Handle: RePEc:red:sed016:772
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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