and Erasmus Mundus Master: Models and Methods of Quantitative Economics (QEM)

Timothy J. Kehoe

Dynamic Models of International Trade

Universitat Autònoma de Barcelona

Spring 2009

Class notes

Notes on Monopolistic Competition and Trade with Heterogeneous Firms

Problem set #1

Least traded goods excercise: Mexico to Canada, China to United States

Problem set #2

Data for growth accounting

Web page for T. J. Kehoe and E. C. Prescott, Great Depressions of the Twentieth Century

Notes on capital flows

Notes on great depressions

Notes on self-fulfilling crises

Notes on real exchange rates

Turkey-Germany real exchange rate data

Notes on sudden stops

Hints for problem set #2

Spain-United States real exchange rate data

1. The New Trade Theory and its Applications

Questions:

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

2. 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?

Readings:

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

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.

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.

2. Trade Models with Heterogeneous Firms

Questions:

3. From which products does the growth in exports come after trade liberalization, from products with large exports volumes before the liberalization or from those with small export volumes?

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

Readings:

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.

T. J. Kehoe and K. J. Ruhl, “How Important is the New Goods Margin in International Trade?” Federal Reserve Bank of Minneapolis, 2009.

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

K. J. Ruhl, “Solving the Elasticity Puzzle in International Economics,” University of Texas at Austin, 2008.

3. Trade Models with Heterogeneous Firms: Alternative Specifications

Questions:

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

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

Readings:

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

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

4. Trade and Growth

Questions:

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

8. 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?

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.

5. Closed Economy Models of Great Depressions

Questions:

9. What is a great depression?

10. How can we use growth accounting and dynamic general equilibrium theory to discipline our search for a satisfactory theory of great depressions?

Readings:

R. Bergoeing, P. J. Kehoe, T. J. Kehoe, and R. Soto, “A Decade Lost and Found: Mexico and Chile in the 1980s,” Review of Economic Dynamics, 5 (2002), 166-205.

J. C. Conesa, T. J. Kehoe, and K. J. Ruhl “Modeling Great Depressions:  The Depression in Finland in the 1990s,” Federal Reserve Bank of Minneapolis Quarterly Review, 31:1 (2007), 16–44. 

T. J. Kehoe y E. C. Prescott, “Great Depressions of the Twentieth Century,” Review of Economic Dynamics, 5 (2002), 1-18.

6. Self-Fulfilling Crises

Questions:

11. Can we construct a dynamic stochastic general equilibrium model in which financial crises are driven by self-fulfilling expectations on the part of investors?

12. What role did the maturity of Mexican government debt play in the 1994–95 financial crisis?

Readings:

H. L. Cole and T. J. Kehoe (1996), “A Self-Fulfilling Model of Mexico's 1994-95 Debt Crisis,” Journal of International Economics, 41, 309-330.

H. L. Cole and T. J. Kehoe (2000), “Self-Fulfilling Debt Crises,” Review of Economic Studies, 67, 91-116.

7. Real Exchange Rates and Crises

Questions:

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

14. 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?

Readings:

C. M. Betts and T. J. Kehoe, “Real Exchange Rate Movements and the Relative Price of Nontraded Goods,” Federal Reserve Bank of Minneapolis Staff Report 415.

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.

G. Fernandez de Cordoba and T. J. Kehoe, “Capital Flows and Real Exchange Rate Fluctuations Following Spain's Entry into the European Community,” Journal of International Economics, 51 (2000), 49-78.

T. J. Kehoe and K. J. Ruhl, “Sudden Stops, Sectoral Reallocations, and the Real Exchange Rate,” Journal of Development Economics, forthcoming.

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