international trade and macroeconomic dynamics with...

INTERNATIONAL TRADE AND MACROECONOMICDYNAMICS WITH HETEROGENEOUS FIRMS

FABIO GHIRONI AND MARC J MELITZ

We develop a stochastic general equilibrium two-country model of trade andmacroeconomic dynamics Productivity differs across individual monopolisticallycompetitive firms in each country Firms face a sunk entry cost in the domesticmarket and both fixed and per-unit export costs Only relatively more productivefirms export Exogenous shocks to aggregate productivity and entry or trade costsinduce firms to enter and exit both their domestic and export markets thusaltering the composition of consumption baskets across countries over time In aworld of flexible prices our model generates endogenously persistent deviationsfrom PPP that would not exist absent our microeconomic structure with hetero-geneous firms It provides an endogenous microfounded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials andderegulation Finally the model successfully matches several moments of U Sand international business cycles

I INTRODUCTION

Formal models of international macroeconomic dynamics donot usually address or incorporate the determinants and evolu-tion of trade patterns The vast majority of such macroeconomicmodels take the pattern of international trade and the structureof markets for goods and factors of production as given1 Thedeterminants of such trade patterns are in turn analyzed withinmethodologically distinct models that are generally limited tocomparisons of long-run positions or growth dynamics afterchanges in some determinants of trade These models do notconsider short- to medium-run business cycle dynamics and theireffect on the pattern of trade over time This separation betweenmodern models of international macroeconomics and trade theory

For helpful comments we thank the editor (Robert Barro) two anonymousreferees Philippe Bacchetta Marianne Baxter Paul Bergin Lawrence Chris-tiano Giancarlo Corsetti Jonathan Eaton Pierre-Olivier Gourinchas GeneGrossman Elhanan Helpman Hugo Hopenhayn Andreas Hornstein Jean ImbsPaolo Pesenti Kenneth Rogoff Kei-Mu Yi and seminar and conference partici-pants at several institutions We are grateful to Kolver Hernandez for excellentresearch assistance Remaining errors are our responsibility We thank the NSFfor financial support (SES 0417757) Ghironi also acknowledges funding for thisproject from Boston College and the European University Institute through aJean Monnet Fellowship in the General Programme of the Robert SchumanCentre for Advanced Studies

1 See Lane [2001] for a survey of the recent literature We discuss therelation between our work and some exceptions to this trend in internationalmacroeconomics below

copy 2005 by the President and Fellows of Harvard College and the Massachusetts Institute ofTechnologyThe Quarterly Journal of Economics August 2005

865

is somewhat unnatural Modern international macroeconomicsprides itself on its microfoundations Yet it neglects to analyzethe effects of macro phenomena on its microeconomic underpin-nings Similarly much of trade theory does not recognize theaggregate feedback effects of micro-level adjustments over time2

This paper contributes to bridging the gap between interna-tional macroeconomics and trade theory We use Melitzrsquos [2003]model of trade with monopolistic competition and heterogeneousfirms as the microeconomic underpinning of a two-country dy-namic stochastic general equilibrium (DSGE) model of interna-tional trade and macroeconomics3 Firms face some initial uncer-tainty concerning their future productivity when making an irre-versible investment to enter the domestic market Postentryfirms produce with different productivity levels In addition to thesunk entry cost firms face both fixed and per-unit export costs4

Forward-looking firms formulate entry and export decisionsbased on expectations of future market conditions Only a subsetof relatively more productive firms export while the remainingless productive firms only serve their domestic market Thismicroeconomic structure endogenously determines the extent ofthe traded sector and the composition of consumption baskets inboth countries Exogenous shocks to aggregate productivity orentry and trade costs induce firms to enter and exit both theirdomestic and export markets thus altering the composition ofconsumption baskets across countries over time This introducesa new and potentially important channel for the transmission ofmacroeconomic shocks and their propagation over time

We first introduce this microeconomic structure in a flexible-price model with no international trade in financial assetsmdashandfocus on the role of goods market dynamics We show that themicroeconomic features of our model have important conse-quences for macroeconomic variables Macroeconomic dynamics

2 Baldwin and Lyons [1994] and Dumas [1992] are two notable exceptionsThey analyze general equilibrium models that describe the dynamic interactionsbetween costly trade and the real exchange rate We incorporate microfoundationsinto such a model

3 Melitz [2003] focuses on the analysis of steady-state effects of trade4 Recent empirical micro-level studies have documented the relevance of

plant-level fixed export costs See Bernard and Jensen [2001] (for the UnitedStates) Bernard and Wagner [2001] (for Germany) Das Roberts and Tybout[2001] (for Colombia) and Roberts and Tybout [1997] (for Colombia) These fixedcosts include market research advertising and regulatory (such as testing pack-aging labeling requirements) expenses incurred by plants exporting differenti-ated products

866 QUARTERLY JOURNAL OF ECONOMICS

in turn feed back into firm-level decisions further altering thepattern of trade over time Our model generates deviations frompurchasing power parity (PPP) that would not exist absent ourmicroeconomic structure with heterogeneous firms It provides anendogenous microfounded explanation for a Harrod-Balassa-Samuelson (HBS) effect More productive economies or less regu-lated ones (phenomena that affect all firms in the economy)exhibit higher average prices relative to their trading partnersWe then show how under fully flexible prices deviations fromPPP display substantial endogenous persistence in response totransitory aggregate shocks (for very plausible calibrated pa-rameters)5 Since the micro-level adjustments we analyze occurwithin sectors our model also explains how these deviations fromPPP are manifested in sector-level pricesmdasheven for sectors con-sidered ldquotradedrdquo

Next we extend our model to allow for international bondtrading In this setup we show that permanently more produc-tive economies or less regulated ones also run persistent foreigndebt positions to finance the accelerated entry of firms into therelatively more favorable business environment A stochastic ex-ercise shows that the model matches several important momentsof the U S and international business cycle quite well In con-trast to benchmark international real business cycle (RBC) mod-els our setup generates positive GDP correlation across coun-tries it does not automatically produce high correlation betweenrelative consumption and the real exchange rate and it substan-tially reduces the ldquoconsumption-output anomalyrdquo associated withstandard models

The rest of the paper is organized as follows Section IIdiscusses the HBS effect and contrasts our approach to the re-lated literature Section III describes the benchmark model withfinancial autarky Section IV presents results on the determi-nants of the real exchange rate in our setup These results guideour interpretation of the impulse responses in Section V whichanalyzes the dynamic responses to shocks affecting aggregateproductivity and sunk entry costs (interpreted as changes indomestic market regulation) Section VI introduces internationalbond trading and discusses its implications It also presents re-

5 More generally the introduction of micro dynamics motivated by hetero-geneity and entry and trade costs significantly improves the ability of our modelto generate endogenously persistent dynamics a stumbling block for many well-known DSGE macro models

867TRADE AND MACROECONOMIC DYNAMICS

sults on second-moment properties of the model Section VIIconcludes

II THE HBS LITERATURE AND OUR MODELING APPROACH

Textbook analysis of the HBS effect assumes an exogenouslydefined nontraded sector and some favorable productivity shocksaffecting only the traded sector These shocks cause the relativeprice of nontraded goods to increase leading to a real exchangerate appreciation (relative to trading partners) An aggregateproductivity increase (across all sectors) would have no effect onthe real exchange rate Although the cross-country correlationbetween development (usually measured as GDP per capita) andprice levels is robust and pervasive the evidence linking thiscorrelation to productivity differentials across traded and non-traded sectors is much weaker and controversial (see Rogoff[1996 sections 6AndashB]) Our model explains the former withoutrelying on the latter it also explains why persistent deviationsfrom PPP also show up in cross-country price differences fortradable goods as documented by Engel [1993 1999]

One potential problem with the textbook HBS effect is thereliance on the law of one price for traded goods If these aredifferentiated then productivity shocks to either the traded ornontraded sectors engender movements in the terms of tradeacross countries Recently Fitzgerald [2003] and MacDonald andRicci [2002] have shown how product differentiation within trad-ables affects the measurement of HBS and have found indirectevidence for such terms-of-trade effects Our model incorporatesthese effects but additionally addresses a more fundamentalinconsistency with the textbook HBS effect highlighted by recentmicro-level studies of plant export behavior most goods in thetradable sector are not traded Moreover this division betweentraded and nontraded occurs within narrowly defined sectors (onthe demand side) and substantially evolves over time For exam-ple in the United States only 21 percent of manufacturing plantsexport [Bernard Eaton Jensen and Kortum 2003] and roughly13 percent of plants switch their export status in a given year[Bernard and Jensen 2004]6 It therefore seems improbablemdashas

6 Similar patterns hold for many other countries Bernard et al [2003]further report that the partitioning between exporters and nonexporters is per-vasive across narrowly defined four-digit manufacturing sectors Bernard and


required for the ldquotextbookrdquo HBS effectmdashthat some productivityshocks only affect the (time varying) proportion of exporting firmswithin each sector

Our model captures the effects of aggregate shocks on boththe determination of the set of traded goods and their terms oftrade As previously mentioned these changes occur within sec-tors and generate persistent deviations in sector-level pricesAlthough we do not explicitly model multiple sectors our frame-work nevertheless highlights the micro-level characteristics ofsectors (the level of product differentiation firm entry and exitrates levels of sunk costs and trade costs) that would generatedifferences in persistence rates for cross-country sector-levelprice differentials Imbs Mumtaz Ravn and Rey [2005] andCheung Chinn and Fujii [2001] both document that sector-levelprice differentials can be very persistent (across countries) andthat the persistence levels are quite heterogeneous across sectorsCheung Chinn and Fujii further find that sectors with moreintraindustry trade exhibit higher persistence levelsmdasha findingthat is broadly consistent with the forces in our model

Dornbusch Fischer and Samuelson [DFS 1977] first ana-lyzed the endogenous determination of nontraded sectors andpointed out how aggregate productivity shocks could lead to av-erage price differentials across countries Bergin and Glick[2003a 2003b] embed this structure into a dynamic frameworkwhere endogenous nontradability further arises from differencesin trade costs across sectors7 Whereas this line of research ana-lyzes cross-sectoral variations in tradability we focus on thewithin-sector determination of ldquotradednessrdquo based on firm-leveldecisions all goods are tradable in our model some are nontradedas a consequence of firm decisions We believe that the endoge-nous determination of both intrasectoral nontradedness and in-tersectoral nontradability are important and we view these linesof research as complementary

Other contributions to the international macroeconomic lit-erature have emphasized the role of trade costs and nontradedintermediate services in the propagation of shocks Already

Jensen [2004] also document the important aggregate effects of new exporters inthe United States 38 percent of the export growth between 1987 and 1992 wasdriven by entry of new exporters

7 Obstfeld and Rogoff [1996 Ch 4] Kehoe and Ruhl [2002] and Kraay andVentura [2002] also develop dynamic extensions of the DFS model that capturechanges in the pattern of trade (and tradability) over time


Backus Kehoe and Kydland [1992] showed that the inclusion oftrade frictions improves the quantitative performance of an in-ternational RBC model Obstfeld and Rogoff [2001] present sim-ple models in which the addition of per-unit trade costs and thepotentially endogenous nature of tradedness help explain a num-ber of puzzles in international macroeconomics Burstein Nevesand Rebelo [2003] and Burstein Eichenbaum and Rebelo [2002]focus on the role of the nontraded distribution sector and compo-sition effects in the CPI

Several recent papers study the consequences of firm entry orendogenous nontradedness Ricci [1997] focuses on the effect ofthe exchange rate regime on the location choice of monopolisti-cally competitive firms under sticky prices and wages CorsettiMartin and Pesenti [2005] explore the implications of entry forthe transmission of monetary shocks in a two-country sticky-wage model in which all goods are traded Bergin Glick andTaylor [2003] use a model with monopolistic competition fixedexport costs and heterogeneous productivity (but an exogenousnumber of producers) in their analysis of the HBS effect Bettsand Kehoe [2001] introduce heterogeneous per-unit trade costsin a multicountry trade and macro model with complete assetmarkets and differentiated goods Our approach is distinguishedby its focus on fixed costs heterogeneous productivity and en-dogenous entry into both domestic and export markets8

III THE MODEL

We begin by developing a version of our model under finan-cial autarky

IIIA Household Preferences and Intratemporal Choices

The world consists of two countries home and foreign Wedenote foreign variables by an asterisk Each country is popu-lated by a unit mass of atomistic households All contracts andprices in the world economy are written in nominal terms Pricesare flexible Thus we only solve for the real variables in themodel However as the composition of consumption baskets in

8 Alessandria and Choi [2003] Ruhl [2003] and Russ [2003] develop modelsthat are closest to ours In contrast to our model Alessandria and Choi assumethat firm-specific productivity displays no persistence Ruhl uses a model thatincludes an exogenously nontraded good and Russ focuses on foreign directinvestment under nominal stickiness


the two countries changes over time (affecting the definitions ofthe consumption-based price indexes) we introduce money as aconvenient unit of account for contracts Money plays no otherrole in the economy For this reason we do not model the de-mand for cash currency and resort to a cashless economy as inWoodford [2003]

The representative home household supplies L units of laborinelastically in each period at the nominal wage rate Wt denom-inated in units of home currency The household maximizes ex-pected intertemporal utility from consumption (C) Et [yenst

stCs1(1 )] where (01) is the subjective discount

factor and 0 is the inverse of the intertemporal elasticity ofsubstitution At time t the household consumes the basket ofgoods Ct defined over a continuum of goods Ct (

ct()(1)d)(1) where 1 is the symmetric elasticity ofsubstitution across goods At any given time t only a subset ofgoods t is available Let pt() denote the home currencyprice of a good t The consumption-based price index forthe home economy is then Pt (t

pt()1d)1(1 ) andthe householdrsquos demand for each individual good is ct() ( pt()Pt)

CtThe foreign household supplies L units of labor inelastically

in each period in the foreign labor market at the nominal wagerate Wt denominated in units of foreign currency It maximizesa similar utility function with identical parameters and a simi-larly defined consumption basket Crucially the subset of goodsavailable for consumption in the foreign economy during period tis t and can differ from the subset of goods that areavailable in the home economy

IIIB Production Pricing and the Export Decision

There is a continuum of firms in each country each produc-ing a different variety Production requires only one factorlabor Aggregate labor productivity is indexed by Zt (Zt) whichrepresents the effectiveness of one unit of home (foreign) laborFirms are heterogeneous as they produce with different technol-ogies indexed by relative productivity z A home firm with rela-tive productivity z produces Ztz units of output per unit of laboremployed Productivity differences across firms therefore trans-late into differences in the unit cost of production This costmeasured in units of the consumption good Ct is wt(Ztz) wherewt WtPt is the real wage Similarly foreign firms are indexed


by their productivity z and unit cost (measured in units of theforeign consumption good) wt(Ztz) where wt WtPt is thereal wage of foreign workers9

Prior to entry firms are identical and face a sunk entry costof fEt ( f Et) effective labor units equal to wtfEtZt (w tf EtZt)units of the home (foreign) consumption good Upon entry homefirms draw their productivity level z from a common distributionG( z) with support on [ zmin ) Foreign firms draw their produc-tivity level from an identical distribution This relative produc-tivity level remains fixed thereafter Since there are no fixedproduction costs all firms produce in every period until they arehit with a ldquodeathrdquo shock which occurs with probability (01)in every period This exit-inducing shock is independent of thefirmrsquos productivity level so G( z) also represents the productivitydistribution of all producing firms

Given our modeling assumption relating each firm to anindividual variety we think of a firm as a production line for thatvariety and the entry cost as the development and setup costassociated with the latter (potentially influenced by market regu-lation) The exogenous ldquodeathrdquo shock also takes place at theindividual variety level Empirically a firm may comprise morethan one of these production lines Our model does not addressthe determination of product variety within firms but our mainresults would be unaffected by the introduction of multiproductfirms

Home and foreign firms can serve both their domestic marketas well as the export market Exporting is costly and involvesboth a melting-iceberg trade cost 13t 1 (13t 1) as well as a fixedcost fXt ( f Xt) (measured in units of effective labor) We assumethat firms hire workers from their respective domestic labormarkets to cover these fixed costs These costs in real terms arethen wtfXtZt for home firms (in units of the home consumptiongood) and w tf XtZt for foreign firms (in units of the foreignconsumption good) The fixed export costs are paid on a period-

9 We use the same index z for both home and foreign firms as this variableonly captures firm productivity relative to the distribution of firms in that countryConsistent with standard RBC theory aggregate productivity Zt (Zt) affects allhome (foreign) labor uniformly We abstract from more complex technology diffu-sion processes across firms of different vintages See Caballero and Hammour[1994] and Campbell [1998] for a treatment of this topic


by-period basis rather than sunk upon entry in the exportmarket10

All firms face a residual demand curve with constant elastic-ity in both markets and they set flexible prices that reflect thesame proportional markup ( 1) over marginal cost LetpDt( z) and pXt( z) denote the nominal domestic and export pricesof a home firm We assume that export prices are denominated inthe currency of the export market Prices in real terms relative tothe price index in the destination market are then given by

(1) Dtz pDtz

Pt

1wt

Ztz Xtz

pXtz

Pt Qt

113tDtz

where Qt εtPtPt is the consumption-based real exchange rate(units of home consumption per unit of foreign consumption εt isthe nominal exchange rate units of home currency per unit offoreign)11 However due to the fixed export cost firms with lowproductivity levels z may decide not to export in any given periodWhen making this decision a firm decomposes its total profitdt( z) (dt( z)) (returned to households as dividends) into portionsearned from domestic sales dDt( z) (dDt( z)) and from potentialexport sales dXt( z) (dXt( z)) All these profit levels (dividends)are expressed in real terms in units of the consumption basket inthe firmrsquos location12 In the case of a home firm total profits inperiod t are given by dt( z) dDt( z) dXt( z) where

dDt z 1

Dt z1Ct

dXt z Qt

Xt z1Ct

wtfXt

Ztif firm z exports

0 otherwise

10 Although a substantial portion of fixed export costs are probably sunkupon market entry we do not model the sunk nature of these costs explicitly Wedo this for simplicity as sunk export market entry costs would complicate thesolution method considerably while leaving the main message of the paper unaf-fected We conjecture that introducing these costs would enhance the persistenceproperties of our model

11 Similar price equations hold for foreign firms Note that Xt( z) pXt( z)Pt Qt13tDt( z)

12 Note that an exporterrsquos relative price Xt( z) (Xt( z)) is expressed inunits of Ct (Ct) (the consumption good at the location of sales) but the profits fromexport sales dXt( z) (dXt( z)) are expressed in units of Ct (Ct) (the consumptionbasket in the firmrsquos location)


Foreign firms behave in a similar way13 As expected moreproductive firms earn higher profits (relative to less productivefirms) although they set lower prices (see (1))14 A firm willexport if and only if it would earn nonnegative profit fromdoing so For home firms this will be the case so long asproductivity z is above a cutoff level zXt infz dXt(z) 0 Asimilar cutoff level zXt infz dXt(z) 0 holds for foreignexporters We assume that the lower bound productivity zmin islow enough relative to the export costs that zXt and zXt areboth above zmin This ensures the existence of an endogenouslydetermined nontraded sector the set of firms that could exportbut decide not to These firms with productivity levels betweenzmin and the export cutoff level only produce for their domesticmarket This set of firms fluctuates over time with changes inthe profitability of the export market inducing changes in thecutoff levels zXt and zXt

IIIC Firm Averages

In every period a mass NDt (NDt) of firms produces in thehome (foreign) country These firms have a distribution of pro-ductivity levels over [ zmin ) given by G( z) Among these firmsthere are NXt [1 G( zXt)]NDt and NXt [1 G( zXt)]NDtexporters Following Melitz [2003] we define two special ldquoaver-agerdquo productivity levelsmdashan average zD for all producing firms (ineach country) and an average zXt for all home exporters

zD zmin

z1dGz11

zXt 11 GzXt

zXt

z1dGz11

(The definition of zXt is analogous to that of zXt) As shown inMelitz these productivity averagesmdashbased on weights propor-tional to relative firm output sharesmdashsummarize all the informa-tion on the productivity distributions relevant for all macroeco-nomic variables In essence our model is isomorphic to one whereNDt (NDt) firms with productivity level zD produce in the home(foreign) country and NXt (NXt) firms with productivity level zXt( zXt) export to the foreign (home) market

13 A foreign firm earns export profits dXt( z) Qt1[Xt( z)]1Ct

wtf XtZt if it sells output in the home country14 We think of firm prices as adjusted for product quality Our model is

isomorphic to one where firms produce the differentiated goods with differentquality levels


In particular pDt pDt( zD) ( pDt pDt( zD)) representsthe average nominal price of home (foreign) firms in their domes-tic market and pXt pXt( zXt) ( pXt pXt( zXt)) representsthe average nominal price of home (foreign) exporters in theexport market The price index at home therefore reflects theprices of the NDt home firms (with average price pDt) and theNXt foreign exporters to the home market (with average pricepXt) The home price index can thus be written as Pt [NDt( pDt)

1 NXt( pXt)1]1(1 ) This is equivalent to

NDt(Dt)1 NXt(Xt)

1 1 where Dt Dt( zD) andXt Xt( zXt) represent the average relative prices of homeproducers and foreign exporters in the home market Similarequations hold for the foreign price index

The productivity averages zD zXt and zXt are constructedin such a way that dDt dDt( zD) (dDt dDt( zD)) representsthe average firm profit earned from domestic sales for all home(foreign) producers and dXt dXt( zXt) (dXt dXt( zXt))represents the average firm export profits for all home (foreign)exporters Thus dt dDt [1 G( zXt)]dXt and dt dDt [1 G( zXt)]dXt represent the average total profits of home andforeign firms since 1 G( zXt) and 1 G( zXt) represent theproportion of home and foreign firms that export and earn exportprofits15

IIID Firm Entry and Exit

In every period there is an unbounded mass of prospectiveentrants in both countries These entrants are forward lookingand correctly anticipate their future expected profits dt(dt) inevery period (the preentry expected profit is equal to postentryaverage profit) as well as the probability (in every period) ofincurring the exit-inducing shock We assume that entrants attime t only start producing at time t 1 which introduces aone-period time-to-build lag in the model The exogenous exitshock occurs at the very end of the time period (after productionand entry) A proportion of new entrants will therefore neverproduce Prospective home entrants in period t compute theirexpected postentry value given by the present discounted value oftheir expected stream of profits dsst1

15 dt and dt represent average firm profit levels in the sense that dt zmin

dt( z)dG( z) and dt zmin dt( z)dG( z) See Melitz [2003] for proofs


(2) vt Et st1

1 stCs

Ct

ds

This also represents the average value of incumbent firms afterproduction has occurred (since both new entrants and incum-bents then face the same probability 1 of survival andproduction in the subsequent period) Firms discount futureprofits using the householdrsquos stochastic discount factor ad-justed for the probability of firm survival 1 Entry occursuntil the average firm value is equalized with the entry costleading to the free entry condition vt wtfEtZt This conditionholds so long as the mass NEt of entrants is positive Weassume that macroeconomic shocks are small enough for thiscondition to hold in every period Finally the timing of entryand production we have assumed implies that the numberof home-producing firms during period t is given by NDt (1 )(NDt1 NEt1) Similar free entry condition require-ment on the size of shocks and law of motion for the number ofproducing firms hold in the foreign country

IIIE Parameterization of Productivity Draws

In order to solve our model we parameterize the distributionof firm productivity draws G( z) We assume that productivity z isdistributed Pareto with lower bound zmin and shape parameterk 1 G( z) 1 ( zminz)k The assumption of a Paretodistribution for productivity induces a size distribution of firmsthat is also Pareto which fits firm-level data quite well k indexesthe dispersion of productivity draws dispersion decreases as kincreases and the firm productivity levels are increasingly con-centrated toward their lower bound zmin16 Letting k[k ( 1)]1(1) the average productivities zD and zXt are givenby zD zmin and zXt zXt The share of home-exporting firmsis then NXtNDt 1 G( zXt) (zminzXt)

k and the zeroexport profit condition (for the cutoff firm) dXt( zXt) 0 impliesthat average export profits must satisfy dXt ( 1)(1k)wtfXtZt Analogous results hold for zXt NXtNDt and dXt

16 The standard deviation of log productivity is equal to 1k The conditionthat k 1 ensures that the variance of firm size is finite


IIIF Household Budget Constraint and Intertemporal Choices

Households in each country hold two types of assets sharesin a mutual fund of domestic firms and domestic risk-free bonds(We assume that bonds pay risk-free consumption-based realreturns) We now focus on the home economy Let xt be the sharein the mutual fund of home firms held by the representative homehousehold entering period t The mutual fund pays a total profitin each period (in units of home currency) that is equal to theaverage total profit of all home firms that produce in that periodPtdtNDt During period t the representative home householdbuys xt1 shares in a mutual fund of NHt NDt NEt homefirms (those already operating at time t and the new entrants)Only NDt1 (1 ) NHt firms will produce and pay dividendsat time t 1 Since the household does not know which firms willbe hit by the exogenous exit shock at the very end of period t itfinances the continuing operation of all preexisting home firmsand all new entrants during period t The date t price (in units ofhome currency) of a claim to the future profit stream of themutual fund of NHt firms is equal to the average nominal price ofclaims to future profits of home firms Ptvt

The household enters period t with bond holdings Bt in unitsof consumption and mutual fund share holdings xt It receivesgross interest income on bond holdings dividend income on mu-tual fund share holdings and the value of selling its initial shareposition and labor income The household allocates these re-sources between purchases of bonds and shares to be carried intonext period and consumption The period budget constraint (inunits of consumption) is

(3) Bt1 vtNHtxt1 Ct 1 rt Bt dt vt NDtxt wtL

where rt is the consumption-based interest rate on holdings ofbonds between t 1 and t (known with certainty as of t 1) Thehome household maximizes its expected intertemporal utilitysubject to (3)

The Euler equations for bond and share holdings are

Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1


As expected forward iteration of the equation for share holdingsand absence of speculative bubbles yield the asset price solutionin equation (2)17

IIIG Aggregate Accounting and Balanced Trade

Aggregating the budget constraint (3) across (symmetric)home households and imposing the equilibrium conditions underfinancial autarky (Bt1 Bt 0 and xt1 xt 1) yields theaggregate accounting equation Ct wtL NDtdt NEtvt Asimilar equation holds abroad Consumption in each period mustequal labor income plus investment income net of the cost ofinvesting in new firms Since this cost NEtvt is the value of homeinvestment in new firms aggregate accounting also states thefamiliar equality of spending (consumption plus investment) andincome (labor plus dividend) that must hold under financial au-tarky To close the model observe that financial autarky impliesbalanced trade the value of home exports must equal the value offoreign exports Hence QtNXt(Xt)

1Ct NXt(Xt)1Ct

IIIH Summary

Table I summarizes the main equilibrium conditions of themodel The equations in the table constitute a system of nineteenequations in nineteen endogenous variables wt wt dt dt NEtNEt zXt zXt NDt NDt NXt NXt rt rt vt vt Ct Ct QtOf these endogenous variables four are predetermined as of timet the total numbers of firms at home and abroad NDt and NDtand the risk-free interest rates rt and rt Additionally the modelfeatures eight exogenous variables the aggregate productivitiesZt and Zt and the policy variables fEt f Et fXt f Xt 13t 13t Weinterpret changes in fEt and f Et as changes in market regulationfacing a countryrsquos firms in the respective domestic markets andchanges in fXt f Xt 13t and 13t as changes in trade policy SincefXt and 13t are trade costs facing home firms they are best inter-preted as the foreign governmentrsquos trade policy instruments

17 We omit the transversality conditions for bonds and shares that must besatisfied to ensure optimality The foreign household maximizes its utility func-tion subject to a similar budget constraint resulting in analogous Euler equationsand transversality conditions


IV THE REAL EXCHANGE RATE AND THE

HARROD-BALASSA-SAMUELSON EFFECT

Up to now we have used a definition of the real exchangerate Qt εtPtPt computed using welfare-based price indexes(Pt and Pt) Under CES product differentiation it is well-

TABLE IMODEL SUMMARYmdashFINANCIAL AUTARKY

Price indexesNDt(Dt)

1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt

Zero-profit export cutoffsdXt wt

fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1

Share of exporting firms

NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1

Number of firmsNDt (1 )(NDt1 NEt1)NDt (1 )(NDt1 NEt1)

Euler equation (bonds)(Ct)

(1 rt1)Et[(Ct1)](Ct)

(1 rt1)Et[(Ct1)]

Euler equation (shares)vt 1 EtCt1

Ct

vt1 dt1vt 1 EtCt1

Ct

vt1 dt1Aggregate accounting

Ct wtL NDtdt NEtvt

Ct wtL NDtdt NEtvtBalanced trade QtNXt(Xt)

1Ct NXt(Xt)1Ct

In the equations above it must be understood that the average real prices and profitsdividends arefunctions of the average productivity levels (as previously defined) Dt Dt( zD) Xt Xt( zXt) dDt dDt( zD) dXt dXt( zXt) The same applies for the average foreign real prices and profitsdividends (2) Thezero-profit export cutoff conditions hold only when fXt and f Xt are strictly positive If all firms export (ieif fXt f Xt 0) then these conditions must be replaced with zXt zXt zD The same is true in the bondtrading case


known that these price indexes can be decomposed into com-ponents reflecting average prices and product variety Pt Nt

1(1 )Pt and Pt (Nt)1(1 )Pt where Nt NDt NXt

(Nt NDt NXt) reflects product variety at home (foreign) andPt (Pt) is an average nominal price for all varieties sold in home(foreign)18 These average prices (Pt Pt) correspond much moreclosely to empirical measures such as the CPI then the welfare-based indexes19 Thus we define Qt εtPtPt as the theoreticalcounterpart to the empirical real exchange ratemdashsince the latterrelates CPI levels best represented by Pt and Pt This real ex-change rate deviates from the previously defined welfare-basedmeasure Qt due to relative changes in product variety Qt (NtNt)

1(1)Qt The differences between these two exchangerates can best be described using an example Qt 1 implies thataverage prices (expressed in a common currency) are higher inthe home market On the other hand Qt measures differences ina consumerrsquos welfare derived from spending a given nominalamount in each market (where the amount is converted at thenominal exchange rates) It is then possible for Qt 1 even ifQt 1 which implies that the consumer derives higher utilityfrom spending the same amount in the home market with higherprices This would be the case so long as product variety in thehome market Nt is sufficiently above that in the foreign marketNt Our simulations will highlight such divergences between thereal exchange rate (comparing CPI levels) and the welfare-basedmeasuremdashdriven by the crucial contribution of product varietydifferentials across countries20

As we highlighted in the introduction we will analyze ourmodelrsquos predictions for deviations (both permanent and transi-tory) from PPP in response to aggregate shocks These will begiven by the impulse responses for Qt In order to understand

18 Pt is a weighted average of pDt and pXt the average prices of domesticgoods and imports paid by home consumers where the weights are proportionalto the relative consumption levels of both types of goods Similarly Pt is aweighted average of pDt and pXt

19 Feenstra [1994] develops a similar decomposition (also allowing for pref-erence asymmetries between varieties) to address empirically the impact of in-creasing product variety Broda and Weinstein [2003] also use this decompositionfor U S import prices and find that increases in imported product varietysignificantly contribute to unmeasured welfare benefits for U S consumers

20 We do not address the growth effects of changes in product variety Bilsand Klenow [2001] document that these effects are empirically relevant for theUnited States


how and why Qt may deviate from 1 we use the price indexequations to write it in the following way

(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1

defining TOLt εt(WtZt)(WtZt) as the ldquoterms of laborrdquo21

TOLt measures the relative cost of effective units of labor acrosscountries A decrease in TOLt indicates an appreciation of homeeffective labor relative to foreign if TOLt 1 a firm with givenproductivity z could produce any amount of output at lower costin the foreign country than in home Note that absent trade costsPPP would always hold Qt 1 t22

Dropping time subscripts to denote a variablersquos level insteady state we assume that fE f E fX f X 13 13 L L 1 Z Z 1 In a technical appendix available onrequest we demonstrate existence and uniqueness of a symmet-ric steady state under these assumptions where Q Q TOL 1 Using sans-serif fonts to denote percentage deviations fromthis steady state log-linearizing (4) yields

(5) Qt 2sD 1TOLt 1 sD)[(zXtzXt (tt tt )]

1

1 ND

ND NX sDNDt NXt) (NDt NXt)]

where sD is the steady-state share of spending on domestic goods(sDt NDt(Dt)

1) and tt(tt ) denotes the percentage deviationof 13t (13t) from the steady state Equation (5) highlights threeimportant channels for real exchange rate changes 1) given the

21 This is related to the double factorial terms of trade The two concepts aredistinct because our measure adjusts for the productivity of all labor not just theproductivity in the export and import sectors (which are endogenous in ourmodel)

22 When fXt f Xt 0 all firms export NXt NDt and NXt NDt Ifin addition 13t 13t 1 it is immediate from (4) that Qt 1 (and hence Qt 1)Note that this property does not imply that there can be no movements in theterms of trade Absent trade costs balanced trade under financial autarky wouldimply that Tt

1(CtCt) NDtNDt where Tt εtpXtpXt denotes the averageterms of trade With constant numbers of firms at home and abroad as in morestandard macroeconomic models Tt

1(CtCt) is constant Hence shocks thatcause the consumption differential CtCt to increase (such as an increase in homeproductivity) always result in a deterioration of the terms of trademdashleaving Qt Qt 1 t In our model firm entry dampens this deterioration of the terms oftrade (We discuss terms of trade dynamics in our model in Section V)


existence of a nontraded sector under costly trade (which impliesthat sD 1 2) changes in the relative cost of labor (TOLt) leadto relative price differences for nontraded goods across countries2) Changes in relative import prices These can happen exoge-nously when tariffs change but more importantly these relativeprices endogenously change with relative changes in the exportproductivity cutoffs (driven by entry and exit decisions for theexport market)23 3) An expenditure switching channel Plausibleparameter values imply that ND(ND NX) sD in the sym-metric steady state This will be the case whenever average pricespD pD which include the high prices of the least productivefirms that do not export are higher than average import pricespX pX24 Changes in the relative availability of domestic andimported varieties (NDtNXt and NDtNXt) then induce expen-diture switching effects for the real exchange rate

The endogenous HBS effect mentioned in the introductionoccurs through all three of these channels reinforcing the realexchange rate appreciation in response to increases in aggregateproductivity or deregulation Before analyzing the full responsepath of Qt and other key endogenous variables to these shocks wefirst describe the long-run effects of permanent changes in pro-ductivity and deregulation These effects also highlight steady-state differences for an asymmetric version of our model

Consider a permanent increase in home productivity Zt or apermanent decrease in home entry costs fEt (which we interpretas permanent deregulation as in Blanchard and Giavazzi [2003])Relative to the old steady state the home market becomes a moreattractive location for prospective entrants (When productivityincreases the home market becomes more attractive due to itsincreased size The standard ldquohome market effectrdquo of new tradetheory models with trade costs then implies that home attracts abigger share of firms than its relative size in the world econ-

23 Since the average export productivity level zXt is proportional to thecutoff zXt their percentage changes from steady-state levels are identical Thesame holds for z Xt and zXt Statistical agencies typically do not adjust priceindexes to reflect differences in the price levels of new goods Thus the contribu-tion of the newly imported goods to the aggregate relative price Qt would gounmeasured (except when price hedonics are used) However this particularchannel is not crucial in generating changes in Qt

24 This condition is equivalent to zX 13zD the productivity advantage ofexporters is larger than the iceberg export cost


omy25) Absent any change in the relative cost of effective labor(TOLt) all new firms would only enter the home market (therewould be no new entrants into the foreign market) Thus in thenew long-run equilibrium home effective labor units must appre-ciate (TOLt decreases) in order to keep foreign labor employed26

This causes the relative price of nontraded goods at home toincrease relative to foreign (the first channel for real exchangerate appreciation) The higher relative labor costs at home reducethe export profitability of home firms and conversely increasethat of foreign firms Hence the export cutoff for home firms zXtrises (only relatively more productive home firms export) and thecutoff for foreign firms zXt drops (relatively less productiveforeign firms can now profitably export) This induces an increasein the average price of home imports relative to the average priceof foreign imports (the second channel for appreciation)27 Lastthe increase in the number of domestic varieties relative to for-eign ones available to home consumers (generated by entry intothe more attractive market) induces those consumers to switchtheir expenditures toward home-produced goods (whose prices onaverage are higher than imported goods) This is the third chan-nel for real exchange rate appreciation28

All three channels generating the endogenous HBS effect inour model critically depend on the incorporation of endogenousentry (and the associated endogenous location of new firms acrosscountries) It is this key feature that generates the appreciation ofhome labor in response to the accelerated entry of firms in therelatively more favorable business environment at home Withoutthis feature home effective labor would depreciate in response toa favorable aggregate productivity shock at home (when the num-ber of firms is fixed the increased demand by home consumers forforeign varietiesmdashwhose productivity remains unchangedmdashleadsto an excess demand for foreign labor) We highlight this property

25 Without trade costs entry in the home economy relative to foreign in thenew long-run equilibrium would be directly proportional to the change in relativemarket size

26 Absent entry into the foreign country the number of foreign producingfirms would steadily decrease with the ldquodeathrdquo shock

27 After an increase in home productivity the total number of home export-ers NXt is higher in the new long-run equilibrium (compared with the initialsteady state) However relatively less productive home exporters have droppedout of the export market

28 Foreign consumers also switch their expenditures between domestic andimported varieties The direction depends on the type of shock (productivityincrease versus deregulation) but the effect is always dominated by the expendi-ture switching for home consumers


in our dynamic simulations Although our model also captures anadditional channel for real exchange rate appreciation via en-dogenous nontradedness the appreciation of home effective laboralong with an exogenous nontraded sector is enough to generatereal exchange rate appreciation and the HBS effect

Our model also provides a new explanation for the pervasiveevidence that real exchange rate appreciations are associatedwith increases in the cross-country relative price of tradablegoods (usually referred to as traded goods) This does not precludethe contribution of the traditional HBS channel If there areexogenously nontradable sectors whose productivity lags behindthe tradable sector the traditional mechanism operates ampli-fying the appreciation

We conclude this section with two important observationsFirst when product variety is endogenous an appreciation inaverage relative prices (Qt decreases) need not lead to an appre-ciation of the welfare-based real exchange rate Qt the simula-tions described in the next section show that the relative increasein product variety at home overwhelmingly dominates the in-crease in average prices leading to a depreciation of this welfare-based index Second equation (4) and its log-linear counterpart(5) do not depend on the assumption of financial autarky Inparticular these equations still hold when we introduce interna-tional bond tradingmdashand would also hold under other assump-tions on asset markets The international-bond-trading scenariowill thus feature the same three channels for real exchange ratedynamics

V INTERNATIONAL TRADE AND MACROECONOMIC DYNAMICS

We now analyze the full response path of the real exchangerate and other key variables in response to permanent and tran-sitory shocks to productivity and permanent deregulation29 Todo so we log-linearize the system of equilibrium conditions inTable I around the unique symmetric steady state under assump-tions of log-normality and homoskedasticity of exogenous sto-chastic shocks We calibrate parameters compute the impliedsteady-state levels of endogenous variables and numerically

29 We discuss the consequences of worldwide trade liberalization in theAppendix


solve for the dynamic responses to exogenous shocks using themethod of undetermined coefficients

VA Calibration

We calibrate parameters as follows We interpret periods asquarters and set 99 and 2mdashboth standard choices forquarterly business cycle models We set the size of the exogenousfirm exit shock 025 to match the U S empirical level of 10percent job destruction per year30 We use the value of fromBernard Eaton Jensen and Kortum [BEJK 2003] and set 38 which was calibrated to fit U S plant and macro trade dataBEJK also report that the standard deviation of log U S plantsales is 167 In our theoretical model this standard deviation isequal to 1(k 1) The choice of 38 then implies that k 34 (this satisfies the requirement k 1) We postulate that13 13 roughly in line with Obstfeld and Rogoff [2001] and setthe steady-state fixed export cost fX such that the proportion ofexporting plants matches the number reported in BEJK (21 per-cent) This leads to a fixed export cost fX equal to 235 percent ofthe per-period amortized flow value of the entry cost [1 (1 )][(1 )] fE31 Changing the entry cost fE while maintain-ing the same ratio fXfE does not affect any of the impulse re-sponses32 We therefore set fE to 1 without loss of generality Forsimilar reasons we normalize zmin to 1 Our calibration impliesthat exporters are on average 582 percent more productive thannonexporters The steady-state share of expenditure on domesticgoods is 733 and the share of expenditure on nontraded domesticgoods is 176 The relative size differential of exporters relative tononexporters in the domestic market is 361

It may be argued that the value of results in a steady-statemarkup that is too high relative to the evidence A standardchoice in the macro literature is 6 to deliver a 20 percent

30 Empirically job destruction is induced by both firm exit and contractionIn our model the ldquodeathrdquo shock takes place at the product level In a multiprod-uct firm the disappearance of a product generates job destruction without firmexit Since we abstract from the explicit modeling of multiproduct firms weinclude this portion of job destruction in

31 We tried using different values of 13 (11 12 125) and recalculated fXrelative to fE to match the 21 percent of exporting plants The impulse responseswere very similar in all cases

32 The total number of firms in steady state is inversely proportional tofEmdashand the size and value of all firms are similarly proportional to fE Basicallychanging fE for given ratio fXfE amounts to changing the unit of measure foroutput and number of firms


markup of price over marginal cost [Rotemberg and Woodford1992] However it is important to observe that in models withoutany fixed cost ( 1) is a measure of both markup over mar-ginal cost and average cost In our model with entry costs freeentry ensures that on average firms earn zero profits net of theentry cost This means that on average firms price at averagecost (inclusive of the entry cost) The markup over average costincreases with firm productivity The firm with productivity zminalways prices below average cost the net present value of itsprofits does not cover the entry cost Thus although 38implies a fairly high markup over marginal cost our parameter-ization delivers reasonable markups over average costs

VB Impulse Responses

Figures I and II show the responses (percent deviations fromsteady state) to a permanent 1 percent increase in home produc-tivity and a permanent 1 percent decrease in home entry costsThe number of years after the shock is on the horizontal axisConsider first the long-run effects in the new steady state As waspreviously described the home market becomes a relatively moreattractive business environment drawing a permanently highernumber of entrants which translates into a permanently highernumber of producers This induces the new steady state for TOLtbelow 1 This appreciation of home labor costs (which raises therelative costs of home exporters and decreases those of foreignexporters) leads to a long-run increase in zXt and a decrease inzXt These effects combine to induce a long-run appreciation ofthe real exchange rate Qt However our simulations suggest thatthe increase in product variety for home consumers dominatesthis average price appreciation leading to a depreciation of thewelfare-based index Qt Thus consumers in both countries wouldrather spend a given nominal expenditure in the home marketeven though average prices there are relatively higher33

We now describe the transitional changes in response to thepermanent home productivity increase (summarized by the im-pulse responses in Figure I) Absent sunk entry costs and theassociated time-to-build lag before production starts the numberof producing firms NDt would immediately adjust to its new

33 We have experimented with numerous different parameter choices andalways obtained this long-run dichotomy between the real exchange rate Qt andits welfare-based counterpart Qt


FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)


steady-state level Sunk costs and time-to-build transform NDtinto a state variable that behaves very much like a capital stockthe number of entrants NEt represents the home consumersrsquoinvestment which translates into increases in the stock NDt overtime The immediate impact of the productivity increase on TOLt(which increases) is typical of open economy macroeconomic mod-els without entry (with or without capital) there is an immediateincrease in demand for all existing goods (domestic and foreign)sold in the home market The increase in home labor productivitythen translates into an excess supply of home effective labor unitsrelative to foreignmdashwhose productivity is unchanged The result-ing short-run depreciation of home labor then leads to a short-rundecrease in the home export cutoff zXt and a short-run deprecia-tion of the real exchange rate Qt The foreign export cutoff fallsnonetheless as the short-run increase in the foreign exportersrsquorelative cost is dominated by the increase in home demand (for allexisting goods including imports) The numbers of home andforeign exporters NXt and NXt increase on impact as the exportproductivity cutoffs fall From this point on the number of homeproducers NDt steadily increases this steadily shifts the increasein home demand toward domestic varieties (and away from for-eign varieties) The effect of endogenous entry is crucial as thelabor demand generated by a greater number of home firmstranslates into an appreciation of home labor units reversing theinitial change in TOLt zXt and the real exchange rate Qt Entryof new domestic firms pushes NXt upward but the reversal in thedynamics of zXt has the opposite effect The net result is that NXtsettles at a higher level than in the initial steady state the largernumber of more productive home firms ensures that NXt ishigher even if relatively less productive exporters have droppedout Yet the long-run response of NXt is smaller than the short-run effect as the less productive exporters drop out during thetransition

The path of endogenous variables in Figure I highlights theimportance of the microeconomic dynamics in our model relativeto the standard setup with a constant number of firms absententry TOLt would remain depreciated in the long run as wouldQt

34 Note that even though prices are fully flexible the realexchange rate appreciation takes a long time to unfold reaching

34 When we allow for international trade in bonds the accelerated entry offirms in the home market financed by borrowing causes TOLt to appreciate also


less than half of its long-run appreciation within five years of thepermanent productivity increase

In our model endogenous entry also crucially affects theevolution of the terms of trade In models with a constant numberof firms the induced excess demand for foreign labor and depre-ciation in TOLt are also manifested in a strong deterioration ofhomersquos terms of trade This prediction is hard to square with theempirical evidence that suggests a link between productivitygains and improvements in a countryrsquos terms of trade35 Ourmodel shows how the entry of new producers and varieties in themore productive economy may dampen or even reverse the dete-rioration in the terms of trade In particular for any given homeand foreign exporters with productivity z and z (whose tradestatus does not change with the productivity shock) the relativeprice Tt εtpXt( z)pXt( z) ( zz)(13t13t)TOLt

1 increases(due to the appreciation in TOLt)mdashexcept initially36

We now turn to the transitional changes in response to per-manent deregulation (summarized by the impulse responses inFigure II) In contrast to the previous scenario deregulation doesnot increase the available supply of effective labor units for pro-duction in the home market Thus there is no short-run excesssupply of home effective labor units and TOLt steadily appreci-ates over time with the increase in home labor demand generatedby entry (the appreciation in TOLt is therefore amplified relativeto the productivity scenario) There is thus no reversal in thepaths of TOLt zXt and Qt The response in the number of homeexporters NXt reflects the opposing effects of the increase in thetotal number of producers NDt and the increase in the exportproductivity cutoff zXt The immediate increase in the lattercauses NXt to fall on impact Subsequently since the increase inzXt is amplified relative to the productivity scenario (due to theamplified appreciation in TOLt) its effect dominates the effect of

in the short run There is then no reversal in the paths of TOLt zXt and Qt Wedescribe this in further detail in the following section

35 For instance see Corsetti Dedola and Leduc [2004]36 The initial deterioration of Tt is much shorter-lived when the productivity

increase is not permanent The average terms of trade Tt εtpXtpXt ( zXtzXt)(13t13t)TOLt

1 decreases in our exercise due to the dominating effect of thechange in the composition of exports (driven by the changes in the cutoffs zXt andzXt) Nevertheless as previously mentioned this deterioration is dampenedrelative to the case where the number of home producers is fixed Gagnon [2003]finds strong empirical support for the positive effect of entry on the terms of tradefirst analyzed by Krugman [1989]


higher NDt leading to a further decrease in NXt Another majordifference in the current scenario is that home consumption de-creases in the short run in order to finance the entry of new firms(this requires a much greater reallocation of effective labor unitsaway from production as the supply of these labor units is unaf-fected by deregulation) The initial decrease in home import de-mand leads to an initial increase in the foreign export productiv-ity cutoff zXt and an associated decrease in the number of foreignexporters These changes are reversed as home consumption re-covers As was the case with the productivity increase we notethat the real exchange rate appreciation is slow to unfold Againless than half of the long-run appreciation occurs within fiveyears of the permanent deregulation shock

We further illustrate the endogenous persistence propertiesof our model by showing the impulse responses to a transitoryincrease in home productivity These responses are illustrated inFigure III where Zt 9Zt1 t 0 As the responses clearlyshow the shock has no permanent effect since all endogenousvariables are stationary in response to stationary exogenousshocks However the responses also clearly highlight the sub-stantial persistence of key endogenous variablesmdashwell beyondthe exogenous 9 persistence of the productivity shock Approxi-mately 84 percent of the initial increase in productivity has beenreabsorbed ten years after the shock At that point in time thereal exchange rate Qt still needs to cover roughly half the dis-tance between the peak appreciation (which happens approxi-mately four years after the shock) and the steady state37

A large literature has developed in the past few years striv-ing to explain empirical real exchange rate movements withmodels that feature nominal rigidity and local currency pricing(see Chari Kehoe and McGrattan [2002] and references therein)The success has been at best mixed (especially for models withmonopolistic competition thatmdashlike oursmdashare best interpreted asone-sector models and should thus explain persistence in sectoralrelative prices) Plausible degrees of nominal rigidity and localcurrency pricing (supported by the assumption of market segmen-

37 Although persistence 9 is already low by RBC standards this result isrobust to lower persistence of the productivity shock If Zt 5Zt1 t 0 99percent of the shock has died out within two years while Qt still needs to covermore than half the distance to the steady state after five years Qt is roughlyhalfway to the steady state even five years after a zero-persistence shock The re-sult also does not depend on the presence of a steady-state iceberg cost 13 13 1 A similarly persistent deviation from PPP happens if 13 13 1


FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)


tation) succeed in generating volatile real exchange rates butonly special assumptions deliver persistence in line with the dataBenigno [2004] highlights inertia in endogenous interest ratesetting by central banks and differences in nominal rigidity assources of real exchange rate persistence Burstein Neves andRebelo [2003] and Corsetti and Dedola [forthcoming] incorporatea nontraded distribution sector pointing to structural featuresbeyond nominal rigidity that matter for real exchange rate dy-namics We propose a different mechanism that delivers substan-tial real exchange rate persistence in response to transitoryshocks firm entry and reallocation in and out of markets in aworld of flexible prices

VI INTERNATIONAL TRADE IN BONDS

We now extend the model of Section III to allow for interna-tional trade in bonds We study how international bond tradingaffects the results we have previously described and how our newmicroeconomic dynamics affect the current account Since theextension to international borrowing and lending does not involveespecially innovative features relative to the financial autarkysetup we herein limit ourselves to describing its main ingredi-ents in words and present the relevant model equations in theAppendix

We assume that agents can trade bonds domestically andinternationally Home bonds issued by home households aredenominated in home currency Foreign bonds issued by foreignhouseholds are denominated in foreign currency We maintainthe assumption that nominal returns are indexed to inflation ineach country so that bonds issued by each country provide arisk-free real return in units of that countryrsquos consumption bas-ket International asset markets are incomplete as only risk-freebonds are traded across countries In the absence of any otherchange to our model this would imply indeterminacy of steady-state net foreign assets and nonstationarity The choice of initialconditions would then become a matter of convenience and allshocks would have permanent consequences via wealth realloca-tion across countries (regardless of the nature of the distur-bances) Such a setup would undermine the reliability of log-linear approximation and the validity of stochastic analysis (Ghi-roni [2000] discusses the issue in detail) To solve this problemwe assume that agents must pay fees to domestic financial inter-


mediaries when adjusting their bond holdings We assume thatthese fees are a quadratic function of the stock of bonds Thisconvenient specification is sufficient to uniquely pin down thesteady state and deliver stationary model dynamics in responseto temporary shocks Realistic choices of parameter values implythat the cost of adjusting bond holdings has a very small impacton model dynamics other than pinning down the steady stateand ensuring mean reversion in the long run when shocks aretransitory38

We assume that financial intermediaries rebate the revenuesfrom bond-adjustment fees to domestic households In equilib-rium the markets for home and foreign bonds clear and eachcountryrsquos net foreign assets entering period t 1 depend oninterest income from asset holdings entering period t labor in-come net investment income and consumption during period tThe change in asset holdings between t and t 1 is the countryrsquoscurrent account Home and foreign current accounts add to zerowhen expressed in units of the same consumption basket Thereare now three Euler equations in each country the Euler equa-tion for share holdings which is unchanged and Euler equationsfor holdings of domestic and foreign bonds The fees for adjustingbond holdings imply that the Euler equations for bond holdingsfeature a term that depends on the stock of bondsmdasha key ingre-dient delivering determinacy of the steady state and model sta-tionarity Euler equations for bond holdings in each country im-ply a no-arbitrage condition between bonds In the log-linearmodel this no-arbitrage condition relates (in a standard fashion)the real interest rate differential across countries to expecteddepreciation of the consumption-based real exchange rate

The balanced trade condition closed the model under finan-cial autarky Since trade is no longer balanced under interna-tional bond trading we must explicitly impose labor marketclearing conditions in both countries39 These conditions statethat the amount of labor used in production and to cover entrycosts and fixed export costs in each country must equal laborsupply in that country in each period The costs of adjusting bond

38 Under financial autarky introducing costs of adjusting bond holdings ofthe type we consider would have no effect on the system of equilibrium conditionsin Table I since holdings of bonds are always zero in equilibrium

39 In the technical appendix we show that under financial autarky bal-anced trade implies labor market clearing in each country


holdings imply zero holdings (of both domestic and foreign bonds)in the unique symmetric steady state Thus the extended modelwith international bond trading features exactly the same steadystate as the model under financial autarky As before we log-linearize the system and solve it using the method of undeter-mined coefficients40 We set the scale parameter for the bondadjustment cost to 0025mdashsufficient to generate stationarity inresponse to transitory shocks but small enough to avoid overstat-ing the role of this friction in determining the dynamics of ourmodel

VIA Impulse Responses

We consider the same productivity and deregulation shocksas under financial autarky Figure IV shows impulse responses toa permanent 1 percent increase in home productivity The re-sponse of several key variables to the shock is qualitatively simi-lar to that under financial autarky The permanent nature of theshock implies that home households do not have an incentive toadjust their net foreign asset position to smooth the effect of atransitory fluctuation in income The path of C is therefore verysimilar to that in Figure I

The home economy runs a current account deficit in responseto the shock and accumulates net foreign debt41 Home house-holds borrow from abroad to finance higher initial investment(relative to autarky) in new home firms This is apparent in thedifferent responses of NEt in the initial years after the shock(Figure IV relative to Figure I) The home householdrsquos incentiveto front-load entry of more productive firms is mirrored by theforeign householdrsquos desire to invest savings in the more attractiveeconomy Although foreign households cannot hold shares in themutual portfolio of home firms (since only bonds can be tradedacross countries) the return on bond holdings is tied to the returnon holdings of shares in home firms by no-arbitrage betweenbonds and shares within the home economy Therefore foreign

40 Since steady-state holdings of bonds are zero the percentage deviationsof bond stocks from the steady state (used in the log-linearization) are normalizedusing the steady-state level of consumption (for instance Bt1 dBt1C)Similar normalizations are applied for the current account and the trade balance

41 In Figure IV ca denotes the current account The impulse response of theasset stock a cumulates holdings of domestic and foreign bonds It shows the levelof a at the end of each period The response of the trade balance (omitted) issimilar to that of the current account in all the examples we consider


FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)


households share the benefits of higher home productivity vialending42

As in the case of financial autarky TOL must decrease in thelong run (home effective labor must relatively appreciate) other-wise all new entrants would choose to locate in the home econ-omy The accelerated entry of new home firms induces an imme-diate relative increase in home labor demand and TOLt no longerdepreciates in the short run Thus the real exchange rate Qt alsoappreciates in the short runmdashin response to the appreciation ofTOLt and the relative increase in average home import prices(which now occurs also in the short run) The opening of theeconomy to international asset trading does not qualitativelychange the functioning of the endogenous HBS mechanism in ourmodel As in the case of financial autarky the welfare-basedrelative price index depreciates due to the dominating effect ofincreased product variety at home (relative to foreign)

Figure V shows impulse responses to deregulation of thehome market The comparison with the case of financial autarkyin Figure II is similar to what we described concerning a produc-tivity shock Home households borrow from abroad to front-loadentry of new firms in the more favorable home market The homecountry runs a current account deficit and accumulates foreigndebt Home consumption initially declines and is permanentlyhigher in the long run Foreign consumption moves by more thanin Figure II as foreign households initially save in the form offoreign lending and then receive income from their positive assetposition The terms of labor TOLt and the real exchange rate Qtappreciate in both the short run and the long run Again thewelfare-based relative price index Qt depreciates

Dynamics in response to a productivity shock with persis-tence 9 are qualitatively similar to those under financial au-tarky thus we omit the figure As in the case of a permanentshock an important difference is the absence of an initial depre-ciation of the terms of labor again motivated by faster entry ofnew firms into the home economy Home households borrow ini-tially to finance faster entry However borrowing is quickly re-versed and home runs current account surpluses for approxi-mately seven years after the initial response The path of the

42 Note that foreign lending also entails less investment in the foreignmarket and a consequent larger initial drop in the number of new foreignentrants NEt


FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)


current account is such that homersquos net foreign assets are actu-ally above the steady state throughout the transition except inthe initial few quarters When the shock is not permanent lend-ing abroad to smooth the consequences of a temporary favorableshock on consumption becomes the main determinant of net for-eign asset dynamics

VIB International Business Cycles

Backus Kehoe and Kydland [BKK 1992] show that intro-ducing trade costs in an international RBC model improves itsability to replicate second moments of U S and internationaldata They specify a resource cost of trade as a quadratic functionof net exports However the introduction of such trade costs intheir model does not resolve the counterfactual prediction thatconsumption is more strongly correlated across countries thanaggregate output (the consumption-output anomaly) Backus andSmith [1993] show that international RBC models with completeasset markets tie the cross-country consumption differential tothe real exchange rate through international risk sharing Con-trary to this prediction of perfect positive correlation betweenrelative consumption and the real exchange rate they documentthat no clear pattern emerges from the data (the consumption-real exchange rate anomaly) Chari Kehoe and McGrattan[CKM 2002] report evidence of negative correlation between rela-tive consumption and the real exchange rate for the United Statesrelative to Europe Their sticky-price model does better than BKKconcerning the consumption-output anomaly but does not resolvethe consumption-real exchange rate anomaly (and also does notgenerate the empirical persistence of the latter) Obstfeld andRogoff [2001] argue that introducing iceberg trade costs helpsexplain a variety of puzzles in international comovements includ-ing the BKK consumption-output anomaly They observe thattrade costs and incomplete asset markets can explain the con-sumption-real exchange rate anomaly43 Our model featurestrade costs and incomplete asset markets Here we investigateits ability to reproduce key features of international businesscyclesmdashincluding the resolution of the puzzles highlighted above

The model includes only one source of fluctuations at busi-

43 Benigno and Thoenissen [2003] show that international asset marketincompleteness plays a central role in dealing with the Backus-Smith puzzle in amodel in which intermediate goods are traded and households consume onlynontraded goods


ness cycle frequency the shocks to aggregate productivities Ztand Zt In this section we assume that the percentage deviationsof Zt and Zt from the steady state follow the bivariate process

(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ

where the persistence parameters Z and Z are in the unitinterval the spillover parameters ZZ and ZZ are nonnega-tive and t

Z and tZ are normally distributed zero-mean innova-

tions For purposes of comparison we use the symmetrized esti-mate of the bivariate productivity process for the United Statesand an aggregate of European economies in BKK and set

Z ZZ

ZZ Z 906 088

088 906

This matrix implies a small positive productivity spilloveracross countries such that if home productivity rises duringperiod t foreign productivity will also increase at t 1 We setthe standard deviation of the productivity innovations to00852 (a 73 percent variance) and the correlation to 258(corresponding to a 19 percent covariance) as estimated byBKK We calculate the implied second moments of endogenousvariables (percent deviations from steady state) using the fre-quency domain technique described in Uhlig [1999] and wecompare the model-generated moments with those of U S andinternational data computed in BKK and reported in Table IIfor the readerrsquos convenience44 For consistency with BKK andCKM who focus on the high-frequency properties of businesscycles in the United States and abroad we report second mo-ments of Hodrick-Prescott (HP)-filtered variables45

We previously argued that empirical price deflators are bestrepresented by the average prices Pt and Pt in our model (asopposed to the welfare based price indices Pt and Pt) As with thereal exchange rate we thus focus on the second moments of real

44 Results based on model simulation are similar Benigno [2004] and CKMare the sources on the empirical properties of the real exchange rate Benignoreports averages of data in Bergin and Feenstra [2001] and CKM

45 The productivity process has eigenvalues 994 and 818 A stationaryprocess for productivity and model stationarity imply that all endogenous vari-ables of interest are stationary However productivity and key endogenous statevariables such as the number of firms and asset stocks are persistent enoughthat model-generated moments calculated without HP filtering pick up low fre-quency fluctuations that are not featured in the HP-filtered data in BKK


TABLE IIBUSINESS CYCLE DATA

United States Standard deviation

Variable Percentage Relative to output

Output 171 100Consumption 84 49Investment 538 315Capital stock 63 37Net exportsoutput 45

Corr(VariabletjOutputt) j 5 5

Variable 2 5 4 3 2 1 0 1 2 3 4 5

Output 03 15 38 63 85 100 85 63 38 15 03Consumption 20 38 53 67 77 76 63 46 27 06 12Investment 09 25 44 64 83 90 81 60 35 08 14Capital

stock 60 60 54 43 24 01 24 46 62 71 72Net exports

output 51 51 48 43 37 28 17 00 17 30 38

International Contemporaneous cross correlation

Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output

Austria 31 07 29 42Finland 02 01 09 36France 22 18 04 17Germany 42 39 42 27Italy 39 25 06 62Switzerland 27 25 38 66United Kingdom 48 43 07 21Europe 70 46United States 100 100 68 36

Real exchange rate

SourceFirst-orderautocorr

Std dev(ratio to output)

Corr withrelative consumption

CKM 83 550 35BF 80 481

Source Backus Kehoe and Kydland [1992] unless otherwise noted


variables deflated by the average prices Pt and Pt To obtain suchmeasures for any variable Xt in units of consumption we definethe corresponding real variable deflated by the average priceindex as XRt PtXtPt

46

As we previously discussed new entrants embody the invest-ment by households and the stock of firms represents the capitalaccumulated by such investments For comparison with the in-vestment and capital variables from BKK we compute secondmoments for NEt and NDt as well as for their overall values interms of average firm valuation deflated by the average priceindex (vRt

E and vRtD where vRt

E vRtNEt and vRtD vRtNDt)

Consistent with BKK we define saving (in units of consumption)as the difference between GDP and consumption yt Ct whereGDP yt is defined by yt wtL NDtdDt We investigate thecorrelation between the saving rate (1 CRtyRt) and the in-vestment rate (vRt

E yRt) relative to the dataTable III reports our results The model underpredicts the

standard deviation of aggregate output (measured by GNP inBKK) and overpredicts that of consumption although it is suc-cessful at generating less volatile consumption than GDP Theratio of the standard deviation of CRt to yRt is roughly 59 tenpercent higher than the consumption-output volatility ratio inBKKrsquos data Like fixed investment in the data investment in newfirms is substantially more volatile than GDP The ratio of tradebalance (TBR) to GDP is much more volatile than the net exportsoutput ratio in the data The trade costs in our model do notprevent the trade balanceGDP ratio from being quite volatile asthe BKK specification does by penalizing trade balance move-ments directly47 Instead the real exchange rate is clearly lessvolatile than in the data There it reflects to a large extent thevolatility of the nominal exchange rate which has no impact onreal variables in the flexible-price setup of this paper

The model is quite successful at reproducing the autocorre-lation function of key U S aggregate variables with output theautocorrelation functions for output itself consumption invest-ment in new firms the stock of productive firms and the tradebalance in Table III all reproduce the qualitative pattern in Ta-ble II In the cases of output consumption and investment

46 Unless noted the main results are unaffected when we consider secondmoments of variables including the variety effect

47 Note however that the volatility of the trade balance itself is muchsmaller


success is also reasonable if not striking on quantitativegrounds

The BKK model does not deliver positive correlation betweenhome and foreign output A puzzling negative cross-country cor-relation of aggregate outputs is a standard result of the interna-tional RBC literature Our model successfully generates positivecorrelation between foreign and domestic GDPs However as theBKK setup ours does not generate cross-country consumption

TABLE IIIMODEL GENERATED MOMENTS

Standard deviation

Variable Percentage Relative to yR

yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035

Corr(VariabletjyRt) j 5 5

Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19

Contemporaneous cross correlation

yR yR CR CR 1CRyR vREyR CRCR Q CC Q

21 86 95 99 71


correlation that is smaller than the correlation across GDPs forthe same parameterization of productivity The contemporaneouscorrelation between saving and investment rates is positive butstronger than in the data The autocorrelation function for thereal exchange rate Qt displays substantial persistence with afirst-order coefficient equal to 89 roughly in line with the evi-dence The correlation between relative consumption spendingand the real exchange rate Qt is negative as in the CKM databut too large in absolute value The correlation between relativeconsumption (including the variety effect) and the consumption-based real exchange rate which is 1 in Backus and Smithrsquos [1993]complete markets world is 71

To verify robustness we considered an alternative parame-terization of the productivity process (6) and set ZZ ZZ 0 and ZZ ZZ 999 consistent with evidence described inBaxter [1995] and Baxter and Farr [2005] As in Baxterrsquos exer-cise we kept the same variance-covariance matrix of the produc-tivity innovations as in BKK Several key features of our resultsdo not change in this scenario relative to the BKK productivityprocess48 In particular the model continues to perform well onthe persistence dimension The real exchange rate is somewhatless persistent but its volatility increases Most importantly theconsumption-output anomaly is substantially weaker The corre-lation between CR and CR is only slightly larger than that be-tween yR and yR (46 versus 44 respectively) and the correlationbetween C and C becomes smaller than that between y and y(30 versus 32 respectively) When productivity spillovers arepresent the response of foreign consumption to a home shock islarger as foreign households anticipate that foreign productivitywill rise too When we remove the spillovers the increase inforeign consumption following a home shock is muted signifi-cantly ameliorating the anomaly The correlation between savingand investment rates is now in the same range as in the data(47) As in the case of the BKK productivity process the corre-lation between CRCR and Q is negative but too large in absolutevalue (98) Importantly the correlation between CC and Qnow drops to 1349

Overall we interpret the results of the stochastic exercise of

48 We omit details but they are available on request49 Setting the scale parameter for the costs of adjusting bond holdings to 01

leaves most results unaffected


this section as supportive of the novel features of our model as amechanism for the propagation of business cycles across coun-tries and over time Even after HP filtering (and thus removinglow-frequency fluctuations that are arguably important for me-dium- to long-run transmission) the model is successful at gen-erating persistent dynamics of endogenous variables and match-ing several key moments of the data quite well for plausibleparameter valuesmdashchosen to match micro-level datamdashand astandard productivity process Consistent with Obstfeld and Ro-goff rsquos [2001] arguments the introduction of trade costs and mar-ket incompleteness pushes results in the right direction withrespect to important puzzles in international macroeconomicsalthough assumptions about the exogenous shock process alsoplay an important role

VII CONCLUSIONS

We developed a two-country stochastic general equilibriummodel of international trade and macroeconomic dynamics Rela-tive to existing international macro models ours has the advan-tage of matching several features of empirical evidence in themicro trade literature It does so while preserving substantialtractability and the ability to provide intuitions for the mainresults

We assumed that firms face some uncertainty about theirfuture productivity when they make the decision whether or notto sink the resources necessary to enter the domestic marketConsistent with overwhelming empirical evidence we assumedthat firms face fixed costs as well as per-unit costs when theyexport As a consequence of the fixed export cost only the rela-tively more productive firms self-select into the export marketAggregate productivity shocks changes in domestic market regu-lation and changes in trade policy cause firms to enter and exitmarkets and generate deviations from PPP that would not existabsent our microeconomic structure

Our model provides a fully microfounded endogenous expla-nation for the HBS effect All goods are tradable in our setupwhile some are nontraded in equilibrium this nontradednessmargin then changes over time In contrast to the textbook treat-ment of the HBS effect shocks are aggregate rather than sector-specific Our model predicts that more productive economies orless regulated ones exhibit higher average prices relative to their


trading partners This real exchange rate appreciation is drivenby entry and endogenous nontradedness the two key new fea-tures of our setup Entry also has a positive effect on a countryrsquosterms of trade in response to productivity advantages The samenew features of our model result in substantial persistence of keyendogenous variables in response to transitory exogenous shocksIn particular our model results in persistent PPP deviations in aworld of flexible prices

When we allow for international borrowing and lending themodel predicts that more productive or less regulated economieswill experience HBS real appreciation and run persistent foreigndebt positions to finance faster entry of new firms in the economyThus our framework provides a novel perspective on recent styl-ized facts for the U S economy that are broadly in line with thesepredictions In addition the model matches several importantmoments of the U S and international business cycle quite wellfor reasonable assumptions about parameters and productivityIn particular it generates positive GDP correlation across coun-tries it does not constrain the correlation between relative con-sumption and the real exchange rate to being perfect and itimproves on the standard international RBC setup as far ascross-country correlations of consumption and GDP are con-cerned confirming Obstfeld and Rogoff rsquos [2001] argument thattrade costs help explain international macroeconomic puzzles

Importantly our model suggests a dichotomy between thebehavior of relative CPIs as currently measured by the data anda welfare-based measure of the real exchange rate that accountsfor availability of new varieties Rather than appreciating thelatter depreciates as a consequence of a productivity advantage orderegulation This raises the issue of PPP adjustments in inter-national statistics which may contain substantial biases due tothe omission of variety effects The policy relevance of this impli-cation is apparent since international agencies use these PPPadjustments to compare per capita income levels that determinecrucial international policy decisions such as the allocation of aid

APPENDIX 1 TRADE POLICY

In this Appendix we investigate the effects of changes inexogenous trade costs We focus on the consequences of tradeliberalization a symmetric worldwide decrease in the icebergcosts 13t 13t or fixed export costs fXt f Xt The impulse


responses are in Figures VI and VII Since the shocks are sym-metric there are no movements in relative cross-country vari-ables such as the terms of labor the terms of trade and the real

FIGURE VIResponse to Permanent 13 13 Shock

FIGURE VIIResponse to Permanent fx f x Shock


exchange rate Thus only home variables are represented as theresponses of all foreign variables are identical to their homecounterparts In both scenarios trade liberalization induces asubstantial increase in the number of exporting firms along witha decrease in the export productivity cutoff (exporting becomesmore profitable for all firms) The increased export competitioninduces a small downward adjustment in the number of domesticfirms However product variety Nt NDt NXt increases inboth countries as the increase in the number of exporters domi-nates this small reduction in the number of domestic firms50 Asexpected the welfare gains from a decrease in the iceberg cost(which affects the trade costs for all export production) aregreater than those generated from a decrease in fixed cost (whichdoes not affect any marginal trade costs) As documented in manymicro-level studies of trade liberalization our simulation resultshighlight the feature that a substantial portion of the increase inoverall trade comes from the extensive margin (more exportingfirms)

APPENDIX 2 INTERNATIONAL BOND TRADING

The budget constraint of the representative home householdin units of the home consumption basket is now

Bt1 QtBt1

2 Bt12

2 QtBt12 vtNHtxt1 Ct

1 rt Bt Qt1 rt Bt dt vt NDtxt Ttf wtL

where Bt1 denotes holdings of home bonds Bt1 denotes hold-ings of foreign bonds ( 2)(Bt1)2 is the cost of adjusting hold-ings of home bonds ( 2)(Bt1)2 is the cost of adjustingholdings of foreign bonds (in units of foreign consumption) Tt

f isthe fee rebate taken as given by the household and equal to( 2)[(Bt1)2 Qt(Bt1)2] in equilibrium For simplicity weassume that the scale parameter 0 is identical across costs ofadjusting holdings of home and foreign bonds Also there is no

50 To see this based on the impulse responses for NDt and NXt recall thatthe steady-state ratio of exporting firms is calibrated to the U S empirical shareof NXND 21 The impulse responses clearly show that the increase in NXt ismuch greater than five times (121) the decrease in NDt


cost of adjusting equity holdings The justification for this is thatin equilibrium bond holdings differ from zero only because oftransactions with a foreign counterpart As a consequence inequilibrium bond-adjustment fees actually capture fees on inter-national transactions which we assume absent from domestictransactions such as those involving equity to avoid adding un-necessary complication51

The representative foreign household faces a similar con-straint in units of foreign consumption

Bt1

Qt Bt1

2Bt1

2

Qt

2 Bt12 vt NFtx t1 Ct

1 rt

QtBt 1 rt Bt dt vt NDtxt T t

f wt L

where Bt1 denotes holdings of the home bond Bt1 denotesholdings of the foreign bond and Tt

f ( 2)[(Bt1)2Qt (Bt1)2] in equilibrium

Home and foreign households maximize the respective inter-temporal utility functions subject to the respective constraintsThe first-order conditions for the choices of share holdings inmutual portfolios of domestic firms at home and abroad are un-changed relative to the case of financial autarky Instead wehave the following Euler equations for bond holdings At home

Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1

51 We also experimented with a specification of the cost of adjusting bondholdings as a function of overall assets ( 2)( At1)2 where At1 Bt1 QtBt1 The specification we use has the advantage of pinning down uniquelythe steady-state levels and dynamics of Bt1 and Bt1 as well as of theiraggregate The alternative specification only pins down the latter It is possible toverify that the two specifications yield identical log-linear dynamics under theassumptions that the steady-state levels of Bt1 and Bt1 are zero when the cost( 2)( At1)2 is used and (12)


The presence of the terms that depend on the stock of bondson the left-hand side of these equations is crucial for determinacyof the steady state and model stationarity It ensures that zeroholdings of bonds are the unique steady state in which the prod-uct of times the gross interest rate equals 1 in each country sothat economies return to this initial position after temporaryshocks If we had perfect foresight and 0 Euler equations forbond holdings at home and abroad would imply the no-arbitragecondition (1 rt1)(1 rt1) Qt1Qt This is the familiarcondition that says that the real interest rate differential must beequal to expected depreciation of the consumption-based realexchange rate for agents to be indifferent between home andforeign bonds With perfect foresight and 0 no-arbitrageconditions for home and foreign households imply

(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1

Equilibrium requires that home and foreign bonds be in zeronet supply worldwide

(8) Bt1 Bt1 0

(9) Bt1 Bt1 0

Home and foreign holdings of each individual bond must add upto zero because each country is populated by a unitary mass ofidentical households that make identical equilibrium choices andonly the home (foreign) country issues home (foreign) currencybonds Using (8) and (9) in conjunction with the second equality in(7) makes it possible to show that Bt1 Bt1 and Bt1 Bt1 at an optimum under perfect foresight Since householdsface quadratic costs of adjusting bond holdings with identicalscale parameters across bonds it is optimal to adjust holdings ofdifferent bonds equally so as to spread the cost evenly The sameresult holds in the log-linear version of the stochastic model

Aggregate accounting implies the following laws of motion fornet foreign assets at home and abroad

(10) Bt1 QtBt1 1 rt Bt Qt1 rt Bt

wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt

wt L NDt dt NEtvt Ct

where holdings of individual bonds across countries are tied bythe equilibrium conditions (8) and (9) Given these conditionsmultiplying (11) times Qt and subtracting the resulting equationfrom (10) yields an expression for home net foreign asset accu-mulation as a function of interest income and of the cross-countrydifferentials between labor income net investment income andconsumption

Bt1 QtBt1 1 rtBt Qt1 r t Bt 12 wtL Qtw t L

12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt

Current accounts are by definition equal to the changes inaggregate bond holdings in the two countries

CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt

It is straightforward to verify that the bond-market clearingconditions (8) and (9) imply that CAt QtCAt 0 (a countryrsquosborrowing must equal the other countryrsquos lending) and Ct QtCt wtL QtwtL NDtdt NDtQtdt (NEtvt NEtQtvt) (since the world as a whole is a closed economy worldconsumption must equal world labor income plus world net in-vestment income)

Labor market clearing conditions at home and abroad re-quire

L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et

We thus have 23 endogenous variables wt wt dt dt NEtNEt zXt zXt NDt NDt NXt NXt rt rt vt vt Ct Ct Qt


Bt Bt Bt Bt Of these eight are predetermined as of time tthe total numbers of firms at home and abroad NDt and NDt therisk-free interest rates rt and rt and the stocks of bonds BtBt Bt and Bt The model features the same eight exogenousvariables as in the financial autarky case The 23 endogenousvariables above are determined by a system of 23 equations thatis identical to the system in Table I in the following blocks Priceindexes Profits Free entry Zero-profit export cutoffs Share ofexporting firms Number of firms Euler equation (shares) Thefive equations in Euler equation (bonds) Aggregate accountingand Balanced trade are replaced by the nine equations in Ta-ble IV52

BOSTON COLLEGE AND EURO AREA BUSINESS CYCLE NETWORK

HARVARD UNIVERSITY CENTRE FOR ECONOMIC POLICY RESEARCH AND NATIONAL

BUREAU OF ECONOMIC RESEARCH

52 Of course we apply again the functions at the bottom of Table I

TABLE IVMODEL SUMMARYmdashBOND TRADING

Euler equations (bonds)

(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1

C t 1 Bt1 1 rt1Et Qt

Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets

Bt1 QtBt1 (1 rt)Bt Qt(1 rt)Bt

1frasl2 (wtL QtwtL) 1frasl2 (NDtdDt

NDtQtdDt) 1frasl2 (NXtdXt NXtQt dXt)

1frasl2 (NEtvt NEtQtvt) 1frasl2 (Ct QtCt)

Bond marketequilibrium

Bt1 Bt1 0Bt1 B

t1 0

Labor marketequilibrium

L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES

Alessandria George and Horag Choi ldquoExport Decisions and International Busi-ness Cyclesrdquo mimeo Ohio State University 2003

Backus David K Patrick J Kehoe and Finn E Kydland ldquoInternational RealBusiness Cyclesrdquo Journal of Political Economy C (1992) 745ndash775

Backus David K and Gregor W Smith ldquoConsumption and Real Exchange Ratesin Dynamic Economies with Non-Traded Goodsrdquo Journal of InternationalEconomics XXXV (1993) 297ndash316

Baldwin Richard E and Richard K Lyons ldquoExchange Rate Hysteresis LargeVersus Small Policy Misalignmentsrdquo European Economic Review XXXVIII(1994) 1ndash22

Baxter Marianne ldquoInternational Trade and Business Cyclesrdquo Handbook of In-ternational Economics Gene M Grossman and Kenneth S Rogoff eds VolIII (New York NY North-Holland 1995) pp 1801ndash1864

Baxter Marianne and Dorsey D Farr ldquoVariable Capital Utilization and Inter-national Business Cyclesrdquo Journal of International Economics LXV (2005)335ndash347

Benigno Gianluca ldquoReal Exchange Rate Persistence with Endogenous MonetaryPolicyrdquo Journal of Monetary Economics LI (2004) 473ndash502

Benigno Gianluca and Christophe Thoenissen ldquoOn the Consumption-Real Ex-change Rate Anomalyrdquo mimeo London School of Economics 2003

Bergin Paul R and Robert C Feenstra ldquoPricing to Market Staggered Contractsand Real Exchange Rate Persistencerdquo Journal of International EconomicsLIV (2001) 333ndash359

Bergin Paul R and Reuven Glick ldquoA Model of Endogenous Nontradability andIts Implications for the Current Accountrdquo mimeo University of CaliforniaDavis 2003a

Bergin Paul R and Reuven Glick ldquoEndogenous Nontradability and Macroeco-nomic Implicationsrdquo NBER Working Paper No 9739 2003b

Bergin Paul R Reuven Glick and Alan Taylor ldquoProductivity Tradability andthe Great Divergencerdquo mimeo University of California Davis 2003

Bernard Andrew B Jonathan Eaton J Bradford Jensen and Samuel KortumldquoPlants and Productivity in International Traderdquo American Economic Re-view XCIII (2003) 1268ndash1290

Bernard Andrew B and J Bradford Jensen ldquoWhy Some Firms Exportrdquo NBERWorking Paper No 8349 2001

Bernard Andrew B and J Bradford Jensen ldquoEntry Expansion and Intensity inthe U S Export Boom 1987ndash1992rdquo Review of International Economics XII(2004) 662ndash675

Bernard Andrew B and Joachim Wagner ldquoExport Entry and Exit by GermanFirmsrdquo Weltwirtschaftliches ArchivmdashReview of World Economics CXXXVII(2001) 105ndash123

Betts Caroline M and Timothy J Kehoe ldquoTradability of Goods and Real Ex-change Rate Fluctuationsrdquo mimeo University of Minnesota 2001

Bils Mark and Peter J Klenow ldquoThe Acceleration in Variety Growthrdquo AmericanEconomic Review XCI (2001) 274ndash280

Blanchard Olivier J and Francesco Giavazzi ldquoMacroeconomic Effects of Regu-lation and Deregulation in Goods and Labor Marketsrdquo Quarterly Journal ofEconomics CXVIII (2003) 879ndash907

Broda Christian and David E Weinstein ldquoGlobalization and the Gains fromVarietyrdquo mimeo Federal Reserve Bank of New York 2003

Burstein Ariel T Martin Eichenbaum and Sergio Rebelo ldquoWhy Are Rates ofInflation So Low After Large Devaluationsrdquo NBER Working Paper No 87482002

Burstein Ariel T Joao C Neves and Sergio Rebelo ldquoDistribution Costs and RealExchange Rate Dynamics during Exchange-Rate-Based Stabilizationsrdquo Jour-nal of Monetary Economics L (2003) 1189ndash1214

Caballero Ricardo J and Mohamad L Hammour ldquoThe Cleansing Effect ofRecessionsrdquo American Economic Review LXXXIV (1994) 1350ndash1368

Campbell Jeffrey R ldquoEntry Exit Embodied Technology and Business CyclesrdquoReview of Economic Dynamics I (1998) 371ndash408


Chari Varadarajan V Patrick J Kehoe and Ellen R McGrattan ldquoCan StickyPrice Models Generate Volatile and Persistent Real Exchange Ratesrdquo Reviewof Economic Studies LXIX (2002) 533ndash563

Cheung Yin-Wong Menzie D Chinn and Eiji Fujii ldquoMarket Structure and thePersistence of Sectoral Real Exchange Ratesrdquo International Journal of Fi-nance and Economics VI (2001) 95ndash114

Corsetti Giancarlo and Luca Dedola ldquoA Macroeconomic Model of InternationalPrice Discriminationrdquo Journal of International Economics forthcoming

Corsetti Giancarlo Luca Dedola and Sylvain Leduc ldquoInternational Risk-Sharingand the Transmission of Productivity Shocksrdquo European Central Bank Work-ing Paper No 308 2004

Corsetti Giancarlo Philippe Martin and Paolo Pesenti ldquoProductivity SpilloversTerms of Trade and the lsquoHome Market Effectrsquordquo NBER Working Paper No11165 2005

Das Sanghamitra Mark J Roberts and James R Tybout ldquoMarket Entry CostsProducer Heterogeneity and Export Dynamicsrdquo NBER Working Paper No8629 2001

Dornbusch Rudiger Stanley Fischer and Paul A Samuelson ldquoComparativeAdvantage Trade and Payments in a Ricardian Model with a Continuum ofGoodsrdquo American Economic Review LXVII (1977) 823ndash839

Dumas Bernard ldquoDynamic Equilibrium and the Real Exchange Rate in a Spa-tially Separated Worldrdquo Review of Financial Studies V (1992) 153ndash180

Engel Charles ldquoReal Exchange Rates and Relative Prices An Empirical Inves-tigationrdquo Journal of Monetary Economics XXXII (1993) 35ndash50

mdashmdash ldquoAccounting for U S Real Exchange Rate Changesrdquo Journal of PoliticalEconomy CVII (1999) 507ndash538

Feenstra Robert C ldquoNew Product Varieties and the Measurement of Interna-tional Pricesrdquo American Economic Review LXXXIV (1994) 157ndash177

Fitzgerald Doireann ldquoTerms-of-Trade Effects Interdependence and Cross-Coun-try Differences in Price Levelsrdquo mimeo University of California Santa Cruz2003

Gagnon Joseph E ldquoProductive Capacity Product Varieties and the ElasticitiesApproach to the Trade Balancerdquo Board of Governors of the Federal ReserveSystem International Finance Discussion Paper No 781 2003

Ghironi Fabio ldquoMacroeconomic Interdependence under Incomplete MarketsrdquoBoston College Economics Working Paper No 471 2000

Imbs Jean Haroon Mumtaz Morten O Ravn and Helene Rey ldquoPPP StrikesBack Aggregation and the Real Exchange Raterdquo Quarterly Journal of Eco-nomics CXX (2005) 1ndash43

Kehoe Timothy J and Kim J Ruhl ldquoHow Important Is the New Goods Marginin International Traderdquo mimeo University of Minnesota 2002

Kraay Aart and Jaume Ventura ldquoTrade Integration and Risk Sharingrdquo Euro-pean Economic Review XLVI (2002) 1023ndash1048

Krugman Paul ldquoDifferences in Income Elasticities and Trends in Real ExchangeRatesrdquo European Economic Review XXXIII (1989) 1055ndash1085

Lane Philip R ldquoThe New Open Economy Macroeconomics A Surveyrdquo Journal ofInternational Economics LIV (2001) 235ndash266

MacDonald Ronald and Luca A Ricci ldquoPurchasing Power Parity and New TradeTheoryrdquo International Monetary Fund Working Paper No 0232 2002

Melitz Marc J ldquoThe Impact of Trade on Intra-Industry Reallocations and Ag-gregate Industry Productivityrdquo Econometrica LXXI (2003) 1695ndash1725

Obstfeld Maurice and Kenneth S Rogoff Foundations of International Macro-economics (Cambridge MA MIT Press 1996)

Obstfeld Maurice and Kenneth S Rogoff ldquoThe Six Major Puzzles in Interna-tional Macroeconomics Is There a Common Causerdquo NBER MacroeconomicsAnnual 2000 Ben S Bernanke and Kenneth S Rogoff eds (Cambridge MAMIT Press 2001) pp 339ndash390

Ricci Luca A ldquoExchange Rate Regimes and Locationrdquo International MonetaryFund Working Paper No 9769 1997

Roberts Mark J and James R Tybout ldquoThe Decision to Export in Colombia AnEmpirical Model of Entry with Sunk Costsrdquo American Economic ReviewLXXXVII (1997) 545ndash564


Rogoff Kenneth S ldquoThe Purchasing Power Parity Puzzlerdquo Journal of EconomicLiterature XXXIV (1996) 647ndash668

Rotemberg Julio J and Michael Woodford ldquoOligopolistic Pricing and the Effectsof Aggregate Demand on Economic Activityrdquo Journal of Political Economy C(1992) 1153ndash1207

Ruhl Kim J ldquoSolving the Elasticity Puzzle in International Economicsrdquo mimeoUniversity of Minnesota 2003

Russ Katheryn N ldquoThe Endogeneity of the Exchange Rate as a Determinant ofFDI A Model of Money Entry and Multinational Firmsrdquo mimeo JohnsHopkins University 2003

Uhlig Harald ldquoA Toolkit for Analyzing Nonlinear Dynamic Stochastic ModelsEasilyrdquo Computational Methods for the Study of Dynamic Economies RamonMarimon and Andrew Scott eds (Oxford UK Oxford University Press1999) pp 30ndash61

Woodford Michael Interest and Prices Foundations of a Theory of MonetaryPolicy (Princeton NJ Princeton University Press 2003)


is somewhat unnatural Modern international macroeconomicsprides itself on its microfoundations Yet it neglects to analyzethe effects of macro phenomena on its microeconomic underpin-nings Similarly much of trade theory does not recognize theaggregate feedback effects of micro-level adjustments over time2

This paper contributes to bridging the gap between interna-tional macroeconomics and trade theory We use Melitzrsquos [2003]model of trade with monopolistic competition and heterogeneousfirms as the microeconomic underpinning of a two-country dy-namic stochastic general equilibrium (DSGE) model of interna-tional trade and macroeconomics3 Firms face some initial uncer-tainty concerning their future productivity when making an irre-versible investment to enter the domestic market Postentryfirms produce with different productivity levels In addition to thesunk entry cost firms face both fixed and per-unit export costs4

Forward-looking firms formulate entry and export decisionsbased on expectations of future market conditions Only a subsetof relatively more productive firms export while the remainingless productive firms only serve their domestic market Thismicroeconomic structure endogenously determines the extent ofthe traded sector and the composition of consumption baskets inboth countries Exogenous shocks to aggregate productivity orentry and trade costs induce firms to enter and exit both theirdomestic and export markets thus altering the composition ofconsumption baskets across countries over time This introducesa new and potentially important channel for the transmission ofmacroeconomic shocks and their propagation over time

We first introduce this microeconomic structure in a flexible-price model with no international trade in financial assetsmdashandfocus on the role of goods market dynamics We show that themicroeconomic features of our model have important conse-quences for macroeconomic variables Macroeconomic dynamics

2 Baldwin and Lyons [1994] and Dumas [1992] are two notable exceptionsThey analyze general equilibrium models that describe the dynamic interactionsbetween costly trade and the real exchange rate We incorporate microfoundationsinto such a model

3 Melitz [2003] focuses on the analysis of steady-state effects of trade4 Recent empirical micro-level studies have documented the relevance of

plant-level fixed export costs See Bernard and Jensen [2001] (for the UnitedStates) Bernard and Wagner [2001] (for Germany) Das Roberts and Tybout[2001] (for Colombia) and Roberts and Tybout [1997] (for Colombia) These fixedcosts include market research advertising and regulatory (such as testing pack-aging labeling requirements) expenses incurred by plants exporting differenti-ated products






















III THE MODEL

























(1) Dtz pDtz

Pt

1wt

Ztz Xtz

pXtz

Pt Qt

113tDtz


dDt z 1

Dt z1Ct

dXt z Qt

Xt z1Ct

wtfXt

Ztif firm z exports

0 otherwise






IIIC Firm Averages


zD zmin

z1dGz11

zXt 11 GzXt

zXt

z1dGz11








NDt(Dt)1 NXt(Xt)








(2) vt Et st1

1 stCs

Ct

ds













Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES















































































III THE MODEL

























(1) Dtz pDtz

Pt

1wt

Ztz Xtz

pXtz

Pt Qt

113tDtz


dDt z 1

Dt z1Ct

dXt z Qt

Xt z1Ct

wtfXt

Ztif firm z exports

0 otherwise






IIIC Firm Averages


zD zmin

z1dGz11

zXt 11 GzXt

zXt

z1dGz11








NDt(Dt)1 NXt(Xt)








(2) vt Et st1

1 stCs

Ct

ds













Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES














































































(1) Dtz pDtz

Pt

1wt

Ztz Xtz

pXtz

Pt Qt

113tDtz


dDt z 1

Dt z1Ct

dXt z Qt

Xt z1Ct

wtfXt

Ztif firm z exports

0 otherwise






IIIC Firm Averages


zD zmin

z1dGz11

zXt 11 GzXt

zXt

z1dGz11








NDt(Dt)1 NXt(Xt)








(2) vt Et st1

1 stCs

Ct

ds













Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES




























































IIIC Firm Averages


zD zmin

z1dGz11

zXt 11 GzXt

zXt

z1dGz11








NDt(Dt)1 NXt(Xt)








(2) vt Et st1

1 stCs

Ct

ds













Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES





























































NDt(Dt)1 NXt(Xt)








(2) vt Et st1

1 stCs

Ct

ds













Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES



























































(2) vt Et st1

1 stCs

Ct

ds













Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES

































































Ct 1 rt1 EtCt1

vt 1 EtCt1

Ct

vt1 dt1





1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES






























































1Ct NXt(Xt)1Ct

IIIH Summary









1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES
































































1 NXt(Xt)1 1

NDt(Dt)1 NXt(Xt)

1 1

Profitsdt dDt

NXt

NDtdXt

dt dDt NXt

NDtdXt

Free entryvt wt

fEt

Zt

vt wtfEt

Zt


fXt

Zt

1k 1

dXt wtfXt

Zt

1k 1


NXt

NDt zmin

kzXtk k

k 1k1

NXt

NDt zmin

kzXtk k

k 1k1




(1 rt1)Et[(Ct1)]


Ct

vt1 dt1vt 1 EtCt1

Ct


Ct wtL NDtdt NEtvt


1Ct NXt(Xt)1Ct













(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES





































































(4) Qt1 NDt

NtTOLt

1 NXt

Nt13t

zD

zXt 1

NDt

Nt

NXt

NtTOLt13t

zD

zXt 1





1

1 ND































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES

















































































VA Calibration













FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES

































































FIG

UR

EI

Res

pon

seto

Per

man

ent

ZS

hoc

k(F

inan

cial

Au

tark

y)


FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES



























































FIG

UR

EII

Res

pon

seto

Per

man

ent

f ES

hoc

k(F

inan

cial

Au

tark

y)





















FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES














































































FIG

UR

EII

IR

espo

nse

toT

ran

sito

ryZ

Sh

ock

(Fin

anci

alA

uta

rky)




















FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES













































































FIG

UR

EIV

Res

pon

seto

Per

man

ent

ZS

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)








FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES

































































FIG

UR

EV

Res

pon

seto

Per

man

ent

f ES

hoc

k(I

nte

rnat

ion

alB

ond

Tra

din

g)









(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES


































































(6) Zt

Zt Z ZZ

ZZ Z Zt1

Zt1 t

Z

tZ




Z ZZ

ZZ Z 906 088

088 906











Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES
































































Variable 2 5 4 3 2 1 0 1 2 3 4 5



output 51 51 48 43 37 28 17 00 17 30 38


Country

with United States

within country

Output Consumption

Saving-investment

rate(Net exports

output)-output


Real exchange rate




CKM 83 550 35BF 80 481




46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES




























































46














Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES






























































Standard deviation


yR 7950 100CR 4681 5888vR

E 35002 45754NE 36314vR

D 3795 4773ND 2697TBRyR 10178TBR 2968 3733Q 0278 035


Variable 2 5 4 3 2 1 0 1 2 3 4 5

yR 02 10 27 47 71 100 71 47 27 10 02CR 08 03 18 37 59 87 66 48 32 19 08vR

E 08 18 31 46 65 86 49 22 02 12 21NE 07 17 29 44 62 84 49 23 04 10 19vR

D 34 37 39 39 37 33 06 30 45 51 52ND 41 38 31 21 05 16 44 59 65 65 60TBRyR 01 13 29 48 71 99 66 41 20 05 07TBR 05 13 23 36 50 67 33 10 05 14 18

Corr(QtjQt) j 5 5

5 4 3 2 1 0 1 2 3 4 5

19 37 55 73 89 100 89 73 55 37 19



21 86 95 99 71









VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES


































































VII CONCLUSIONS


















Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES








































































Bt1 QtBt1

2 Bt12









Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES





























































Bt1

Qt Bt1

2Bt1

2

Qt


1 rt


f wt L




Ct1 Bt1 1 rt1 EtCt1

Ct1 Bt1 1 rt1 EtQt1

QtCt1

Abroad

Ct1 Bt1 1 rt1 Et Qt

Qt1Ct1

Ct1 Bt1 1 rt1 EtCt1




(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES




























































(7)1 rt1

1 rt1

Qt1

Qt

1 Bt1

1 Bt1

Qt1

Qt

1 Bt1

1 Bt1


(8) Bt1 Bt1 0

(9) Bt1 Bt1 0




wtL NDtdt NEtvt Ct


(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES



























































(11)Bt1

Qt Bt1

1 rt

QtBt 1 rt Bt




12 NDtdt NDtQtd t

12 NEtvt NEtQtvt

12 Ct QtCt


CAt Bt1 Bt QtBt1 Bt

CAt Bt1 Bt

Qt Bt1 Bt



L 1

wtNDtdDt NXtdXt

1Zt

NXtfXt NEt fEt

L 1

wtNDtdDt NXtdXt

1Zt

NXtf Xt N Et f Et










(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES


































































(Ct)(1 Bt1) (1 rt1)Et[(Ct1)]

Ct1 Bt1 1 rt1EtQt1

QtCt1


Qt1Ct1

(Ct)

(1 Bt1) (1 rt1)Et[(Ct1)]

Net foreign assets






Bt1 Bt1 0Bt1 B

t1 0


L 1

wtNDt dDt NXtdXt

1Zt

NXtfXt NEtfEt

L 1

wtNDt dDt NXtdXt

1Zt

N Xt f Xt N Et f Et


REFERENCES



























































REFERENCES



























































international trade and macroeconomic dynamics with...

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