Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment

Giancarlo Corsetti, Philippe Martin and Paolo Pesenti

No 2008/01, RSCAS Working Papers from European University Institute

Abstract: Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms'net entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic 'transfer problem', using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.

Keywords: transfer problem; current account; global imbalances; extensive margin (search for similar items in EconPapers)
Date: 2008-01-24
New Economics Papers: this item is included in nep-cba, nep-int and nep-opm
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Citations: View citations in EconPapers (16)

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Related works:
Working Paper: Varieties and the Transfer Problem: the Extensive Margin of Current Account Adjustment (2008)
Working Paper: Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment (2008)
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