Trade Liberalization and Firm Dynamics

Ariel Burstein and Marc Melitz

No 16960, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper, we analyze the transition dynamics associated with an economy's response to trade liberalization. We start by reviewing the recent literature that incorporates firm dynamics into models of international trade. We then build upon that literature to characterize the role of firm dynamics, export-market selection, firm-level innovation, sunk export costs, and firms' expectations regarding the time path of liberalization in generating those transition dynamics following trade liberalization. These modeling ingredients generate substantial aggregate transition dynamics as they shift and shape the endogenous distribution of firms over time. Our results show how the responses of trade volumes, innovation, and aggregate output can vary greatly over time depending on those modeling ingredients. This has important consequences for many issues in international economics that rely on predictions for the effects of globalization over time on those key aggregate outcomes.

JEL-codes: F1 F4 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-bec, nep-dge, nep-int and nep-opm
Note: IFM ITI
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Citations: View citations in EconPapers (48)

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