EITM: Distribution Networks, International Business Cycle, and the Dynamic of International Trade

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

While much progress has been made in the profession's understanding of international macroeconomic interdependence over the past decade, standard open economy models have failed to account for several prominent features of the data - issues that can be characterized as international business cycle puzzles and dynamic international trade puzzles. In the business-cycle dimension, standard international macroeconomic models cannot account for several stylized facts, now referred to as puzzles such as the Backus Smith puzzle (relative consumption is orthogonal to the real exchange rate), the consumption correlation puzzle (the correlation between home and foreign consumption is lower than the correlation between home and foreign output), and the price puzzle (relative prices across countries are much more volatile than output but almost as persistent). In the trade dimension, these same models cannot quantitatively account for the elasticity of trade volume with respect to world-wide tariff reductions and for the changing composition of the traded goods basket. This project is motivated by the failure of standard theoretical models to account for these properties of international business cycles and the growth in trade. The project develops a unified framework to study the international transmission of business cycles and the growth in trade over the past 40 years. It employs quantitative methods developed for business-cycle research - an approach that integrates theoretical and empirical research by combining formulation and solution of theoretical models of dynamic stochastic general-equilibrium economies calibrated using evidence on micro-foundations and empirical testing through model simulation. The project seeks to enhance our understanding of the role the distribution sector - an economically significant sector that has generally been ignored in international macroeconomic and trade research - in the workings of the macro economy in an international setting. The investigators have done some exploratory empirical work with a disaggregated trade data set and with a data set of scanner retail sales for the purpose of developing microeconomic evidence about the costs involved in establishing a distribution network and about the durability of these relationships. They have also done exploratory work with a prototype model. Extensions of the framework will be used first to investigate international business cycle implications. A continuation of the project will focus on the role of the distribution sector in understanding the pattern and volume of international trade and their response to trade liberalization associated with reductions in tariffs and nontariff barriers. Broader impacts: This new framework provides a better tool than standard models to study economic and welfare effects of changes in international macroeconomic and trade policy (e.g., periodic changes in tariffs and countervailing duties levied on subsets of goods) such as those embodied in NAFTA.