Trade and Synchronization in a Multi-Country Economy

Substantial evidence suggests that countries or regions with stronger trade linkages tend to have business cycles that are more synchronized. The standard international business cycle framework cannot replicate this nding. In this paper, we study a multi-country model of international trade with vertical trade linkages, imperfect competition, and variable markups. We embed it in a real business cycle framework by including aggregate technology shocks and allowing for a variable labor supply. A carefully calibrated version of the theoretical economy that ts the model to data on the bilateral trade volume between 210 distinct country-pairs explains between 20 and 41 percent of the relation between trade intensity and business cycle synchronization. We provide empirical evidence supporting the model's predictions for the association between trade costs and business cycle synchronization, and exchange rate volatility and business cycle synchronization.Trade Integration, Business Cycle Synchronization

Sources of exchange rate fluctuations: are they real or nominal?

I analyze the role of real and monetary shocks on the exchange rate behavior using a structural vector autoregressive model of the US vis-à-vis the rest of the world. The shocks are identified using sign restrictions on the responses of the variables to orthogonal disturbances. These restrictions are derived from the predictions of a two-country DSGE model. I find that monetary shocks are unimportant in explaining exchange rate fluctuations. By contrast, demand shocks explain between 23% and 38% of exchange rate variance at 4-quarter and 20-quarter horizons, respectively. The contribution of demand shocks plays an important role but not of the order of magnitude sometimes found in earlier studies. My results, however, support the recent focus of the literature on real shocks to match the empirical properties of real exchange rates.Foreign exchange rates ; Vector autoregression

Asset prices and their effect on the U.S. trade balance

Pronounced cycles and booms in asset prices have usually accompanied widening trade deficits.Asset pricing ; Balance of trade

Quality, trade, and exchange rate pass-through

This paper investigates the heterogeneous response of exporters to real exchange rate fluctuations due to product quality. We model theoretically the effects of real exchange rate changes on the optimal price and quantity responses of firms that export multiple products with heterogeneous levels of quality. The model shows that the elasticity of demand perceived by exporters decreases with a real depreciation and with quality, leading to more pricing-to-market and to a smaller response of export volumes to a real depreciation for higher quality goods. We test empirically the predictions of the model by combining a unique data set of highly disaggregated Argentinean firm-level wine export values and volumes between 2002 and 2009 with experts wine ratings as a measure of quality. In response to a real depreciation, we find that firms significantly increase more their markups and less their export volumes for higher quality products, but only when exporting to high income destination countries. These findings remain robust to different measures of quality, samples, specifications, and to the potential endogeneity of quality

Mexico's integration into NAFTA markets: a view from sectoral real exchange rates

Using a self-exciting threshold autoregressive model, we confirm the presence of nonlinearities in sectoral real exchange rate (SRER) dynamics across Mexico, Canada and the US in the pre-NAFTA and post-NAFTA periods. Measuring transaction costs using the estimated threshold bands, we find evidence that Mexico still faces higher transaction costs than their developed counterparts. Trade liberalization is associated with reduced transaction costs and lower relative price differentials among countries. Other determinants of transaction costs are distance and nominal exchange rate volatility. Our results show that the half-lives of SRERs shocks, calculated by Monte Carlo integration, imply much faster adjustment in the post-NAFTA period.Foreign exchange rates ; North American Free Trade Agreement ; Mexico

Japan reenters the foreign exchange market

From 1999 to 2004 Japan unilaterally sold a combined, and unprecedented, 500 billion dollars of yen.Foreign exchange market ; Japan

Mexico's integration into NAFTA markets: a view from sectoral real exchange rates

The authors use a threshold autoregressive model to confirm the presence of nonlinearities in sectoral real exchange rate dynamics across Mexico, Canada, and the United States for the periods before and after the North American Free Trade Agreement (NAFTA). Although trade liberalization is associated with reduced transaction costs and lower relative price differentials among countries, the authors find, by using estimated threshold bands, that Mexico still faces higher transaction costs than its developed counterparts. Other determinants of transaction costs are distance and nominal exchange rate volatility. The authors' results show that the half-lives of sectoral real exchange rate shocks, calculated by Monte Carlo integration, imply much faster adjustment in the post-NAFTA period.Foreign exchange rates ; North American Free Trade Agreement ; Mexico

Speculation in the oil market

The run-up in oil prices after 2004 coincided with a growing flow of investment to commodity markets and an increased price comovement between different commodities. We analyze whether speculation in the oil market played a key role in driving this salient empirical pattern. We identify oil shocks from a large dataset using a factor-augmented autoregressive (FAVAR) model. We analyze the role of speculation in comparison to supply and demand forces as drivers of oil prices. The main results are as follows: (i) While global demand shocks account for the largest share of oil price fluctuations, financial speculative demand shocks are the second most important driver. (ii) The comovement between oil prices and the price of other commodities is explained by global demand and financial speculative demand shocks. (iii) The increase in oil prices in the last decade is mainly explained by the strength of global demand. However, financial speculation played a significant role in the oil price increase between 2004 and 2008, and its subsequent collapse. Our results support the view that the financialization process of commodity markets explains part of the recent increase in oil prices.Petroleum products - Prices ; Vector autoregression ; Speculation

Trade and synchronization in a multi-country economy

Substantial evidence suggests that countries with stronger trade linkages have more synchro- nized business cycles. The standard international business cycle framework cannot replicate this finding, uncovering the trade-comovement puzzle. We show that under certain macro-level conditions but irrespective of the micro-level assumptions concerning trade the puzzle arises because trade fails to substantially increase the correlation between each country's import penetration ratio and the trade partner's technology shock. Within a large class of trade models, there are three channels through which bilateral trade may increase business cycle synchronization. Specifically, increased bilateral trade may (i) raise the correlation between each country's tech- nology shocks, (ii) raise the correlation between each country's share of expenditure on domestic goods, and (iii) raise the response of the domestic import penetration ratio to foreign technology shocks. Empirical evidence strongly supports the first and second channels. We show that the trade-comovement puzzle can be resolved if productivity shocks are more correlated between country-pairs that trade more

Why "fixing" China's currency is no quick fix

Even if China does revalue its currency, jobs aren’t likely to come flooding back to the United States. Much of what China exports to the U.S. originates in other Asian countries.Foreign exchange rates ; International finance ; China