Dynamics of Firms and Trade in General Equilibrium

Abstract

This paper develops a dynamic general equilibrium model that attempts to reconcile the observation that aggregate movements of exports and imports are disconnected from real exchange rate movements, while firm-level exports co-move significantly with the real exchange rate. Firms are heterogeneous, facing recurrent aggregate and firm-product specific productivity shocks, choose which goods to export, and decide to enter and exit the business endogenously. We calibrate and estimate the model with both aggregate and firm level data.

Keywords: Trade and Macroeconomics, Firm Dynamics, Exchange Rate Disconnect, Current Account

JEL Classification: F44, F41, F32