Entry, trade costs, and international business cycles

Abstract

Are entry and fixed exporting costs relevant for understanding the international transmission of business cycles? We revisit this question working with a model that features entry, selection to exporting activity, physical capital accumulation and endogenous labor supply. We find our model to yield minimal departures from the Backus, Kehoe and Kydland (1992) benchmark, sharing most of its failures in terms of international correlations of aggregate variables. We do find a novel interaction between entry of new firms and physical capital investment. Creation of new firms provides households with an additional margin to smooth consumption over time.Having an extensive margin of production dampens the volatility of investment in physical capital, enabling the model to have a high elasticity of substitution between home and foreign goods, and still get plausible values for the volatility of investment and trade balance.

On Quality and Variety Bias in Aggregate Prices

“…Different from the trade literature, we focus on business cycle properties and second moments of the aggregate price bias. Our numerical results are also consistent with the recent theoretical and empirical findings in Atkeson and Burstein () Fattal Jaef and Lopez (), and Burstein and Cravino (). These studies establish the irrelevance of disentangling the empirical‐based measure from the welfare‐based measure since changes in cross‐country variations of product quality and the number of varieties offset each other in the welfare‐based measure.…”

The US–China Phase One trade deal: An economic analysis of the managed trade agreement

“…We set the minimum relative productivity, the productivity of the final goods firms and the market entry costs to 1. The latter can be normalized because only the ratio of fixed export costs and entry costs is relevant for calibrating the share of exporting firms (Jaef and Lopez 2014). Alternatively, the productivity of second‐stage POEs could be set equal to the productivity of the first stage, which would imply a loss in the second stage in China and the rest of the world.…”

International Trade, Non-Trading Firms and their Impact on Labour Productivity

“…The two other related key papers are by Ghironi and Melitz (2005) and Fattel Jaef and Lopez (2014). Although the analyses in Ghironi and Melitz (2005) and Fattel Jaef and Lopez (2014) are conducted in a dynamic, stochastic, general equilibrium model, the distribution of firm-level productivity 1 is exogenously fixed, and therefore, the impact of the entry and exit of firms into the domestic market on the productivity of domestic firms cannot be investigated.…”

“…Limiting their analysis to only the extensive margins of production also limits the impact of any changes in barriers to imports, which as Bloom et al (2016) show operate through both the intensive and extensive margins of production, and thus may underestimate the impact of changes in barriers to imports on productivity relative to the impact of changes in barriers to exports. According to Bloom et al (2016), competition from Chinese imports alone accounts for 14% of European technological growth from 2000 to 2007 through both technological change within firms and reallocated employment between firms, as less productive firms exit the market the latter of which is ignored in Ghironi and Melitz (2005) and Fattel Jaef and Lopez (2014).…”