Working Papers

Unlike final-goods trade, intermediate-input trade through Global Value Chains (GVCs) creates supply-side linkages across borders. We show that, even when GVCs themselves are efficient, they have welfare implications because these linkages affect countries’ ability to share risks in incomplete financial markets. This novel interaction between trade and finance arises from a distinct channel of cross-border transmission with GVCs, the marginal cost effect. Productivity shocks, by moving relative prices, impact the marginal cost of production both at home and abroad, and therefore, in equilibrium, their relative supply. When international financial markets are incomplete, these supply side linkages will affect household wealth in both countries, and, in turn, the degree of international risk sharing. The direction and strength of this effect varies with the trade elasticity and the degree of GVC integration, with non-monotonic effects leading to ‘fragmentation traps’ in which small increases in GVC integration reduce risk sharing, while large increases would improve it. We show that in the quantitatively relevant case, GVCs reduce cross-border misalignments, and so endogenously support international risk sharing. 

This paper develops a structural model to study the global trend real interest rate, "Global R*". We focus on five potential drivers: productivity growth, population growth, longevity, government debt, and the relative price of capital. We employ a recursive simulation method in which beliefs about long-run trends are updated gradually. The simulations are guided by estimates of the global trend component of each driver derived from a panel dataset of 31 countries from 1950 to 2020. Global R* rises until the mid-1970s before declining by around 3 percentage points. The decline is driven by slowing productivity growth and increasing longevity.

We study the implications of trade aggregation for macroeconomic dynamics in workhorse open-economy models, deriving sufficient statistics for the impact of the functional form of the trade aggregator on the first-order dynamics of the model. With two countries, for given steady-state trade elasticities and expenditure shares, any aggregator that is homogeneous of degree one is equivalent to the widely used Armington aggregator at first order. Aggregators that are homogeneous of different degree are equivalent to a generalised Armington aggregator. With more countries, alternative aggregators affect macroeconomic dynamics through steady-state differences in bilateral trade elasticities across country-pairs, which Armington rules out.