Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment

Samuel Kortum, Brent Neiman and Jonathan Eaton

No 772, 2016 Meeting Papers from Society for Economic Dynamics

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, Kortum, Neiman, and Romalis (2015), we revisit the puzzles in a counterfactual with drastically lower trade frictions. Our results largely support Obstfeld and Rogoff’s explanation. Most notably, with lower trade frictions, domestic investment becomes much less correlated with domestic saving, mitigating the Feldstein-Horioka (1980) puzzle. Nominal GDP becomes less variable while real GDP becomes much more closely tied to nominal GDP, mitigating the purchasing power parity and exchange rate disconnect puzzles. Lower trade frictions don’t help resolve all of the puzzles, however. The correlation of consumption growth across countries, if anything, diminishes.

Date: 2016
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Journal Article: 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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