International Trade and Macroeconomic Dynamics with Heterogeneous Firms

51 Pages Posted: 22 Oct 2004

See all articles by Fabio Pietro Ghironi

Fabio Pietro Ghironi

University of Washington

Marc J. Melitz

Centre for Economic Policy Research (CEPR); Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: September 2004

Abstract

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.

Keywords: Entry, Harrod-Balassa-Samuelson effect, heterogenous producers, endogenous non-tradeness, international business cycles, persistence, real exchange rate dynamics

JEL Classification: F12, F41

Suggested Citation

Ghironi, Fabio Pietro and Melitz, Marc J. and Melitz, Marc J., International Trade and Macroeconomic Dynamics with Heterogeneous Firms (September 2004). Available at SSRN: https://ssrn.com/abstract=608985

Fabio Pietro Ghironi

University of Washington ( email )

Department of Economics
Box 353330
Seattle, WA 98195-3330
United States
206-543-5795 (Phone)

HOME PAGE: http://faculty.washington.edu/ghiro

Marc J. Melitz (Contact Author)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-495-8297 (Phone)
617-417-6536 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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