International Trade and Macroeconomic Dynamics with Heterogeneous Firms
Fabio Pietro Ghironi
Boston College - Department of Economics
Marc J. Melitz
Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 4595
We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exist absent our microeconomic structure with heterogeneous firms. It provides an endogenous, microfounded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moments of US and international business cycles.
Number of Pages in PDF File: 51
Keywords: Entry, Harrod-Balassa-Samuelson effect, heterogenous producers, endogenous non-tradeness, international business cycles, persistence, real exchange rate dynamics
JEL Classification: F12, F41working papers series
Date posted: October 22, 2004
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