Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment

29 Pages Posted: 5 Jun 2008

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS); University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Philippe Martin

Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques

Paolo A. Pesenti

Federal Reserve Bank of New York; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2008

Abstract

Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms' net entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic 'transfer problem,' using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.

Keywords: Current account, extensive margin, global imbalances, transfer problem

JEL Classification: F32, F41

Suggested Citation

Corsetti, Giancarlo and Martin, Philippe and Pesenti, Paolo A., Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment (January 2008). , Vol. , pp. -, 2008. Available at SSRN: https://ssrn.com/abstract=1140589

Giancarlo Corsetti (Contact Author)

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

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University of Rome III - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Philippe Martin

Université Paris I Panthéon-Sorbonne - Centre Maison des Sciences Economiques ( email )

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Paris Cedex 13, 75647
France

Paolo A. Pesenti

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States
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212-720-6831 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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