Obstfeld and Rogoff׳s international macro puzzles: a quantitative assessment

Jonathan Eaton, Samuel Kortum and Brent Neiman

Journal of Economic Dynamics and Control, 2016, vol. 72, issue C, 5-23

Abstract: 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 et al. (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of puzzles. The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein and Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.

Keywords: International trade; Open-economy macroeconomics; Trade barriers (search for similar items in EconPapers)
JEL-codes: E3 F17 F4 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (51)

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Related works:
Working Paper: Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment (2016)
Working Paper: Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:72:y:2016:i:c:p:5-23

DOI: 10.1016/j.jedc.2016.06.002

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