Timothy J. Kehoe

International Macroeconomics

Norges Handelshøyskole / Norwegian School of Economics and Business Administration

June 2007

Lecture 1. Standard Models

Question:

1. Why do countries trade?

Notes:

Notes on monopolistic competition

Notes on Ricardian models with a continuum of goods

Notes on models with heterogeneous firms

Lecture 2. The New Trade Theory and its Applications

Question:

2. Why has merchandise trade grown so much faster than manufacturing output?

Notes:

Notes on trade theory and trade facts

Readings:

R. Bergoeing and T. J. Kehoe, “Trade Theory and Trade Facts,” Federal Reserve Bank of Minneapolis, 2003.

J. Markusen, “Explaining the Volume of Trade: An Eclectic Approach,” American Economic Review, 76 (1986), 1002-1011.

K.-M. Yi, “Can Vertical Specialization Explain the Growth of World Trade?” Journal of Political Economy, 111 (2003), 52-111.

Lecture 3. Applied General Equilibrium Models

3. Why did the applied general equilibrium models used to analyze the impact of NAFTA fail to predict which sectors would have the largest increases in trade?

Notes:

Notes on applied general equilibrium models

Notes on models of the NAFTA

Excel file on new goods in China ’s exports to the United States

Readings:

T. J. Kehoe, “An Evaluation of the Performance of Applied General Equilibrium Models of the Impact of NAFTA,” in T. J. Kehoe, T. N. Srinivasan, and J. Whalley, editors, Frontiers in Applied General Equilibrium Modeling: Essays in Honor of Herbert Scarf, Cambridge University Press, 2005, 341-77.

P. J. Kehoe and T. J. Kehoe, “A Primer on Static Applied General Equilibrium Models,” Federal Reserve Bank of Minneapolis Quarterly Review, 18:2 (1994), 2-16. 

T. J. Kehoe, C. Polo, and F. Sancho, “An Evaluation of the Performance of an Applied General Equilibrium Model of the Spanish Economy,” Economic Theory, 6 (1995), 115-141.

T. J. Kehoe and K. J. Ruhl, “How Important is the New Goods Margin in International Trade?” Federal Reserve Bank of Minneapolis, 2002.

Lecture 4. Trade Models with Heterogeneous Firms

Question:

1. Why is the distribution of exporters in an industry so different from the overall distribution of firms?

2. Researchers have focused on the decisions of firms to export. Why not study the decision to import?

3. Are there theoretical alternatives to the fixed costs assumed most researchers that can allow models to better account for the data?

Notes:

Notes on the elasticity puzzle

Notes on the extensive margin in trade

Readings:

C. Arkolakis, “Market Access Costs and the New Consumers Margin in International Trade,” University of Minnesota, 2006.

T. Chaney, “Distorted Gravity: Heterogeneous Firms, Market Structure, and the Geography of International Trade,” University of Chicago, 2005.

J. Eaton, S. Kortum, and F. Kramarz, “An Anatomy of International Trade: Evidence from French Firms,” University of Minnesota, 2005.

M. J. Melitz, “The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity.” Econometrica, 71 (2003), 1695-1725.

A. Ramanarayanan, “International Trade Dynamics with Intermediate Inputs,” University of Minnesota, 2006.

K. J. Ruhl, “Solving the Elasticity Puzzle in International Economics,” University of Texas at Austin, 2005.

Lecture 5. Real Exchange Rates and Crises

Question:

4. Is the distinction between traded and nontraded goods useful in accounting for real exchange rate fluctuations?

5. How far can a standard model with traded and nontraded goods go in accounting for the changes in relative prices and quantities observed in developing countries after a sudden stop in capital flows as, for example, in the Mexican Crisis of 1994-95?

Notes:

Notes on real exchange rates

Notes on sudden stops

Readings:

C. M. Betts and T. J. Kehoe, “U.S. Real Exchange Rate Fluctuations and Relative Price Fluctuations,” Journal of Monetary Economics, 53 (2006), 1297-1326.

T. J. Kehoe and K. J. Ruhl, “Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate,” University of Minnesota, 2007.

Lecture 6. Trade and Growth

Questions:

6. Do standard models of trade predict that trade liberalization will increase growth rates?

7. How do the concepts of productivity used by researchers in the theoretical literature on international trade compare with the concepts used by researchers in the empirical literature?

Notes:

Notes on terms of trade shocks and productivity shocks

Notes on dynamic Heckscher-Ohlin models

Readings:

C. Bajona and T. J. Kehoe, “Trade, Growth, and Convergence in a Dynamic Heckscher-Ohlin Model,” Federal Reserve Bank of Minneapolis Staff Report 378, 2006.

M. J. Gibson, “Trade Liberalization, Reallocation, and Productivity,” University of Minnesota, 2006.

T. J. Kehoe and K. J. Ruhl, “Are Shocks to the Terms of Trade Shocks to Productivity?” Federal Reserve Bank of Minneapolis, 2007.

M. Roberts and R. Tybout, “The Decision to Export in Colombia : An Empirical Model of Entry with Sunk Costs.” American Economic Review, 87 (1997), 545-564.

F. Rodriguez and D. Rodrik, “Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence,” in B. Bernanke and K. Rogoff, editors, Macroeconomics Annual 2000, MIT Press, 2001, 261-325.

J. Ventura, “Growth and Interdependence,” Quarterly Journal of Economics, 112 (1997), 57-84.

Exam

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