Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment

43 Pages Posted: 7 Dec 2015

See all articles by Jonathan Eaton

Jonathan Eaton

Pennsylvania State University, College of the Liberal Arts - Department of Economic

Samuel S. Kortum

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Brent Neiman

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Date Written: December 2015

Abstract

Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton, Kortum, Neiman, and Romalis (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of the puzzles: The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein-Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.

Suggested Citation

Eaton, Jonathan and Kortum, Samuel S. and Neiman, Brent, Obstfeld and Rogoff's International Macro Puzzles: A Quantitative Assessment (December 2015). NBER Working Paper No. w21774, Available at SSRN: https://ssrn.com/abstract=2700003

Jonathan Eaton (Contact Author)

Pennsylvania State University, College of the Liberal Arts - Department of Economic ( email )

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Samuel S. Kortum

University of Chicago - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Brent Neiman

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/brent.neiman/index.html

National Bureau of Economic Research (NBER) ( email )

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United States

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