Obstfeld and Rogoff׳s international macro puzzles

a quantitative assessment

Jonathan W. Eaton, Samuel Kortum, Brent Neiman

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

Obstfeld and Rogoff (2001) propose that trade frictions lie behind key puzzles in international macroeconomics. We take a dynamic multicountry model of international trade, production, and investment to data from 19 countries to assess this proposition quantitatively. Using the framework developed in Eaton et al. (2016), we revisit the puzzles in a counterfactual world without trade frictions in manufactures. Removing these trade frictions goes a long way toward resolving a number of puzzles. The dependence of domestic investment on domestic saving falls by half or disappears entirely, mitigating the Feldstein and Horioka (1980) puzzle. Changes in nominal GDPs in U.S. dollars become less variable across countries and line up with changes in real GDPs as much as with real exchange rates, mitigating the exchange rate disconnect puzzle. Less dramatically, changes in consumption become more correlated across countries, mitigating the consumption correlations puzzle and changes in real exchange rates become less variable across countries, mitigating the relative purchasing power parity puzzle.

Original languageEnglish (US)
Pages (from-to)5-23
Number of pages19
JournalJournal of Economic Dynamics and Control
Volume72
DOIs
StatePublished - Nov 1 2016

Fingerprint

Macros
Real Exchange Rate
Friction
International trade
Purchasing Power Parity
Purchasing
Dynamic models
Exchange rate
Macroeconomics
Proposition
Categorical or nominal
Dynamic Model
Trade
Line
Trade frictions

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Cite this

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Obstfeld and Rogoff׳s international macro puzzles : a quantitative assessment. / Eaton, Jonathan W.; Kortum, Samuel; Neiman, Brent.

In: Journal of Economic Dynamics and Control, Vol. 72, 01.11.2016, p. 5-23.

Research output: Contribution to journalArticle

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