Job Market Paper
International business-cycle models struggle to match aggregate output correlations between countries observed in the data. New Trade models with an active extensive margin of trade have been proposed as a way of generating a positive association between correlation and trade intensity, but it remains an open question whether or not these models can match the levels of correlation. In this paper, I revisit this problem with an explicit comparison between Old and New Trade and their predictions for comovement. I provide tractable expressions for the second moments of sectoral and aggregate output in the two most common static frameworks of International Trade while allowing for an arbitrary number of countries, sectors and input-output linkages. In the symmetric case, I show that the correlation expressions are almost identical across frameworks, their differences converge sublinearly to zero in the number of countries, and that trade and input elasticities are the crucial parameters in matching the data. I calibrate the models using world input-output data and I find that Old Trade under-predicts the correlation of GDP by an order of magnitude, while New Trade predicts correlations between one-fifth and one-half of those observed in the data and helps solve the puzzles quantitatively.
with Joris Hoste
How important are terms-of-trade shocks relative to total-factor-productivity shocks as a source of consumption volatility in commodity-exporting economies? We develop a tractable version of Gopinath & Neiman (2014) with segmented financial markets and realistic real exchange rate determination and provide a bridge to the more traditional frictionless model. We have two main results. First, we show how the differences between the models are captured by two partial elasticities for which we provide analytical expressions. Second, we show that a combination of these two partial elasticities determines the relative importance of terms-of-trade shocks relative to productivity shocks, independent of assumptions on market structure, returns to scale to importing, selection into importing, and financial markets. We calibrate the economy to Chilean and Colombian micro and macro data to show that the terms of trade are at least two times more important than in the standard frictionless small-open economy (SOE) framework: thirty-four percent of this difference is accounted for by monopolistic competition, sixty-two by increasing returns to importing, and only four percent by firm heterogeneity and selection. However, we show that the latter are crucial in capturing moments of the microdata such as the slope of the sub-intensive margin of trade adjustment and the distribution of imports.