The Elasticity of Trade for Developing Nations: Estimates and Evidence
(Old Version. Currently under revision.)
joint with Michael Waugh
Quantitative results from structural gravity models of international trade depend critically on a single parameter governing the elasticity of trade with respect to trade frictions. Despite its importance, the current literature provides little evidence regarding this parameter for developing nations, which are responsible for a rising portion of world trade. We estimate this value for 123 developed and developing countries for the year 2004 using new disaggregate price and trade flow data. We find little evidence that the elasticity of trade differs dramatically across developed and developing nations. However, the newly estimated elasticity of trade falls within a tight range of existing estimates obtained using firm-level sales, rather than price data.
Income Differences and Prices of Tradables (job market paper)
Empirical studies find a strong positive relationship between a country's per-capita income and price level of final tradable goods. Among alternative explanations of this observation, I focus on variable mark-ups by firms. Mark-ups that vary with destinations' incomes are evident from a clothing manufacturer's online catalogue featuring unit prices of identical goods sold in 28 countries. Such price discrimination on the basis of income suggests that firms exploit lower price elasticity of demand for identical goods in richer countries. In order to capture that, I introduce non-homothetic preferences in a model of trade with product differentiation and firm productivity heterogeneity. The model helps bring theory and data closer along a key dimension: it generates positively related prices and incomes, while preserving desirable features of firm behavior and trade flows of existing frameworks. Quantitatively, the model suggests that variable mark-ups can account for at least a half of the observed positive relationship between prices of tradables and income across a large sample of countries.
Business Cycle Accounting For Chile, joint with Ludvig Söderling
IMF Working Paper No. 08/61, March 2008
We investigate sources of economic fluctuations in Chile during 1998-2007 within the framework of a standard neoclassical growth model with time-varying frictions (wedges). We analyze the relative importance of efficiency, labor, investment, and government/trade wedges for business cycles in Chile. The purpose of this exercise is twofold: (i) focus the policy discussion on the most important wedges in the economy; and (ii) identify which broad class of models would present fruitful avenues for further research. We find that different wedges have played different roles during our studied period, but that the efficiency and labor wedges have had the greatest impact. We also compare our results with existing studies on Argentina, Brazil, and Mexico.
Endogenous Trade Policy with Heterogeneous Firms (in progress)
This paper studies the choice of trade policy in a Lucas 'span-of-control' model of trade. Agents derive utility from consuming differentiated varieties originating from different countries. Each variety is in turn produced by a firm of heterogeneous productivity, stemming from the ability of the firm's manager. An agent decides to become an entrepreneur rather than a worker at the prevailing wage, only if she is sufficiently skilled. Once a manager, her firm sells abroad only if its productivity is high enough to overcome trade barriers, namely tariffs. Moreover, each agent, whether worker or manager, decides on the optimal tariff she wishes to impose on her country's trading partners. Ultimately, the prevailing tariff is chosen by the median voter. I find that workers and exporting firm managers prefer free trade, while domestic firm managers choose autarky. If managers' abilities are Pareto-distributed, free trade prevails.