Trade Models and Macroeconomics

27 Pages Posted: 16 Dec 2019

See all articles by Ray C. Fair

Ray C. Fair

Yale University - Cowles Foundation; Yale School of Management - International Center for Finance

Date Written: December 13, 2019

Abstract

This paper discusses some macro links that are missing from trade models. A multicountry macroeconometric model is used to analyze the effects on the United States of increased import competition from China, an experiment that is common in the recent trade literature. In the macro story a fall in Chinese export prices is stimulative. Domestic prices fall, which increases real wage rates and real wealth, which increases household expenditures. In addition, the Fed may lower the interest rate because of the lower prices, which is stimulative. Trade models do not have these channels, and they likely overestimate the negative effects or underestimate the positive effects on total output and employment from increased Chinese import competition. They lack some important aggregate demand channels, which are not likely second order.

Keywords: Trade models, Macroeconomics

JEL Classification: F1, F4

Suggested Citation

Fair, Ray C., Trade Models and Macroeconomics (December 13, 2019). Cowles Foundation Discussion Paper No. 2214. Available at SSRN: https://ssrn.com/abstract=3503571 or http://dx.doi.org/10.2139/ssrn.3503571

Ray C. Fair (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

Yale School of Management - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States
203-432-3715 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://fairmodel.econ.yale.edu

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