Variety and Quality in Trade Dynamics

Masashige Hamano

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper provides a simple two-country DSGE model that includes endoge- nous determination of both the number of traded varieties and the traded products quality with heterogeneous firms. By introducing product quality explicitly, the theo- retical model sheds light on the cyclical properties of quality in international trade. We find that aggregate product quality of exports and imports are both negatively correlated with real exports and imports in the US data. Our model can replicate a wedge-shaped pattern of cross-correlations, together with a number of statistics on US trade dynamics. We also perform several impulse response analyses and find that trade liberalization induces quality downgrading of exports and imports, which negatively impacts consumer welfare.

Keywords: product quality; product variety; firm entry; firm heterogeneity (search for similar items in EconPapers)
JEL-codes: F12 F41 F43 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge and nep-int
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:16-19

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