Research

Publications

Working Papers

Bilateral trade is considered a key driver of business-cycle transmission, as countries with higher bilateral trade have more correlated business cycles.  We show, however, that when we account for the common trade exposure of a country pair to similar foreign cycles, the effect of bilateral trade on comovement falls by about half.  Furthermore, common trade exposure is also a robust predictor of comovement.  We conclude that trade is indeed a driver of business-cycle transmission, but often through common exposure to foreign cycles rather than just bilateral linkages.  Finally, we consider the implications of these empirical results for the ``trade-comovement puzzle.''  


We evaluate the aggregate effects of changes in trade barriers when these changes can be implemented with a lag and trade responds gradually to changes in trade barriers because firm-level trade costs make exporting a dynamic decision. Our model shows how expectations of changes in trade barriers affect the economy. We find that while decreases in trade barriers increase economic activity, expectations of lower future trade barriers temporarily decrease investment, hours worked, and output. Furthermore, canceling an expected decline in future trade barriers raises investment and output in the short-run but substantially lowers medium-run growth. These effects are larger for larger expected reforms. In the data, we find that countries with more trade growth after GATT rounds decreased investment and hours worked in the years leading to the tariff cuts as predicted by our model.


We evaluate the aggregate effects of changes in trade barriers in the U.S. and global economy from the mid-1960s to the present. Our analysis provides an accounting of the timing of these changes and their role in business cycle fluctuations. Our analysis is done in a stochastic model in which trade responds gradually to changes in trade policy from a dynamic exporting decision and trade policy changes can be implemented with a lag. We capture the growth and trade factors driving the economy with movements in productivity, investment efficiency, the labor wedge, and trade costs. Business cycle shocks generate persistent fluctuations in trade flows as trade lags the demand for tradables, making trade-based approaches to measure trade costs suspect. We estimate the model to match US aggregate fluctuations and trade integration since 1970. Our estimation yields a time series of trade costs and expected future trade costs. Forward-looking variables such as export participation help to identify future trade costs. Our model is well-suited to studying alternative unilateral and bilateral changes in current and future trade barriers  being contemplated.


This paper studies the role of expectations in driving export adjustment. We assemble bilateral data on spot exchange rates, one year ahead exchange rate forecasts and HS2-product export data for 11 exporting countries and 64 destinations, covering the 2006--2014 period. Results from fixed effects regressions and an instrumental variables approach show that expectations of exchange rate changes are an important channel for export adjustment. A one percent expected exchange rate depreciation over the next year is associated with a 0.96 percent increase in the extensive margin (entry of new exporters) in the 2SLS regression, with statistically insignificant effects on total exports or the intensive margin. We provide intuition for these findings with a simple model with heterogeneous firms and sticky prices, and use our model to discuss the implications of anticipation for subsequent export growth and trade elasticity measurement.

Work in Progress