International Trade and Macroeconomic Dynamics with Heterogeneous Firms

We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relative...

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Bibliographic Details
Published inThe Quarterly journal of economics Vol. 120; no. 3; pp. 865 - 915
Main Authors Ghironi, Fabio, Melits, Marc J.
Format Journal Article
LanguageEnglish
Published Oxford MIT Press 01.08.2005
Oxford University Press
Subjects
Average prices
Bonds
Business cycles
Cost of entry
Economic models
Exports
Homes
International trade
Macroeconomic modeling
Macroeconomics
Productivity
Real exchange rates
Stochastic models
Studies
Trade policy
United States > US
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Summary:We develop a stochastic, general equilibrium, two-country model of trade and macroeconomic dynamics. Productivity differs across individual, monopolistically competitive firms in each country. Firms face a sunk entry cost in the domestic market and both fixed and per-unit export costs. Only relatively more productive firms export. Exogenous shocks to aggregate productivity and entry or trade costs induce firms to enter and exit both their domestic and export markets, thus altering the composition of consumption baskets across countries over time. In a world of flexible prices, our model generates endogenously persistent deviations from PPP that would not exist absent our microeconomic structure with heterogeneous firms. It provides an endogenous, microfounded explanation for a Harrod-Balassa-Samuelson effect in response to aggregate productivity differentials and deregulation. Finally, the model successfully matches several moments of U. S. and international business cycles.
Bibliography:ark:/67375/HXZ-49T4TR6J-2
istex:632447ECC7729E04AB9F7020A00292571E993ECC
For helpful comments, we thank the editor (Robert Barro), two anonymous referees, Philippe Bacchetta, Marianne Baxter, Paul Bergin, Lawrence Christiano, Giancarco Corsetti, Jonathan Eaton, Pierre-Olivier Gourinchas, Gene Groossman, Elhanan Helpman, Hugo Hopenhayn, Andreas Hornstein, Jean Imbs, Paolo Pesenti, Kenneth Rogoff, Kei-Mu Yi, and seminar and conference participants at several institutions. We are grate to Kolver Hernandez for excellent research assistance. Remaining errors are our responsibility. We thank the NSF for financial support (SES 0417757). Ghironi also acknowledges funding for this project from Boston College and the European University Institute, through a Jean Monnet Fellowship in the General Programme of the Robert Schuman Centre for Advanced Studies.
ISSN:0033-5533
1531-4650
DOI:10.1093/qje/120.3.865