Creator: Kehoe, Timothy Jerome, 1953-, Pujolas, Pau S., and Rossbach, Jack Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 537 Abstract:
Applied general equilibrium (AGE) models, which feature multiple countries, multiple industries, and input-output linkages across industries, have been the dominant tool for evaluating the impact of trade reforms since the 1980s. We review how these models are used to perform policy analysis and document their shortcomings in predicting the industry-level effects of past trade reforms. We argue that, to improve their performance, AGE models need to incorporate product-level data on bilateral trade relations by industry and better model how trade reforms lower bilateral trade costs. We use the least traded products methodology of Kehoe et al. (2015) to provide guidance on how improvements can be made. We provide further suggestions on how AGE models can incorporate recent advances in quantitative trade theory to improve their predictive ability and better quantify the gains from trade liberalization.
Keyword: Trade liberalization, Trade costs, Applied general equilibrium, Armington elasticities, and Input-output linkages Subject (JEL): F14 - Empirical Studies of Trade, F11 - Neoclassical Models of Trade, F13 - Trade Policy; International Trade Organizations, and F17 - Trade: Forecasting and Simulation
Creator: Backus, David, Kehoe, Patrick J., and Kydland, Finn E. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 498 Keyword: Harberger-Laursen-Metzler effect, Net exports , Balance of trade, Terms of trade, J curve, and Marshall-Lerner condition Subject (JEL): F41 - Open Economy Macroeconomics, F11 - Neoclassical Models of Trade, and F30 - International Finance: General
Creator: Bajona, Claustre and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 378 Abstract:
In models in which convergence in income levels across closed countries is driven by faster accumulation of a productive factor in the poorer countries, opening these countries to trade can stop convergence and even cause divergence. We make this point using a dynamic Heckscher-Ohlin model — a combination of a static two-good, two-factor Heckscher-Ohlin trade model and a two-sector growth model — with infinitely lived consumers where international borrowing and lending are not permitted. We obtain two main results: First, countries that differ only in their initial endowments of capital per worker may converge or diverge in income levels over time, depending on the elasticity of substitution between traded goods. Divergence can occur for parameter values that would imply convergence in a world of closed economies and vice versa. Second, factor price equalization in a given period does not imply factor price equalization in future periods.
Keyword: Heckscher–Ohlin, Economic growth, Convergence, and International trade Subject (JEL): F11 - Neoclassical Models of Trade, O15 - Economic Development: Human Resources; Human Development; Income Distribution; Migration, O41 - One, Two, and Multisector Growth Models, and F43 - Economic Growth of Open Economies
Creator: Backus, David and Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 318 Abstract:
These notes are intended as a do-it-yourself course in economic growth along lines suggested by Lucas ("On the Mechanics of Economic Development"). We examine in turn the neoclassical growth model; theories of endogenous growth, including learning-by-doing, increasing returns to scale, and externalities; and dynamic comparative advantage in trade. Salient features of growing economies and microeconomic evidence on production processes are used to evaluate alternatives. Exercises supplement the text.
Keyword: Technical change, Neoclassical growth, Dynamic comparative advantage, Learning-by-doing, and Returns to scale Subject (JEL): F11 - Neoclassical Models of Trade, O33 - Technological Change: Choices and Consequences; Diffusion Processes, and O42 - Monetary Growth Models
Creator: Atkeson, Andrew and Kehoe, Patrick J. Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 256 Abstract:
We show that in a dynamic Heckscher-Ohlin model the timing of a country’s development relative to the rest of the world affects the path of the country’s development. A country that begins the development process later than most of the rest of the world—a late-bloomer—ends up with a permanently lower level of income than the early-blooming countries that developed earlier. This is true even though the late-bloomer has the same preferences, technology, and initial capital stock that the early-bloomers had when they started the process of development. This result stands in stark contrast to that of the standard one-sector growth model in which identical countries converge to a unique steady state, regardless of when they start to develop.
Keyword: Convergence Trade and Growth and Two Sector Growth Models Subject (JEL): O11 - Macroeconomic Analyses of Economic Development, F11 - Neoclassical Models of Trade, and O41 - One, Two, and Multisector Growth Models
Creator: Kehoe, Timothy Jerome, 1953- and Prescott, Edward C. Description:
The worldwide Great Depression of the 1930s was a watershed for both economic thought and economic policymaking. It led to the belief that market economies are inherently unstable and to the revolutionary work of John Maynard Keynes. Its impact on popular economic wisdom is still apparent today.
This book, which uses a common framework to study sixteen depressions, from the interwar period in Europe and America as well as from more recent times in Japan and Latin America, challenges the Keynesian theory of depressions. It develops and uses a methodology for studying depressions that relies on growth accounting and the general equilibrium growth model.
Each chapter of the book is accompanied by a data file that contains all of the data used in the analysis. These files can be found in the Great Depressions of the Twentieth Century: Supporting Data and Code collection.
Table of Contents
Great Depressions of the Twentieth Century by Timothy J. Kehoe and Edward C. Prescott
A Second Look at the U.S. Great Depression from a Neoclassical Perspective by Harold L. Cole and Lee E. Ohanian
The Great U.K. Depression: A Puzzle and Possible Resolution by Harold L. Cole and Lee E. Ohanian
The Great Depression in Canada and the United States: A Neoclassical Perspective by Pedro Amaral and James C. MacGee
The French Depression in the 1930s by Paul Beaudry and Franck Portier
The Role of Real Wages, Productivity, and Fiscal Policy in Germany's Great Depression, 1928-37 by Jonas D. M. Fisher and Andreas Hornstein
The Great Depression in Italy: Trade Restrictions and Real Wage Rigidities by Fabrizio Perri and Vincenzo Quadrini
Argentina's Lost Decade and the Subsequent Recover Puzzle by Finn E. Kydland and Carlos E. J. M. Zarazaga
A Decade Lost and Found: Mexico and Chile in the 1980s by Raphael Bergoeing, Patrick J. Kehoe, Timothy J. Kehoe, and Raimundo Soto
The 1990s in Japan: A Lost Decade by Fumio Hayashi and Edward C. Prescott
The Brazilian Depression in the 1980s and 1990s by Mirta S. Bugarin, Roberto Ellery Jr., Victor Gomes, and Arilton Teixeira
Tariffs and the Great Depression Revisited by Mario J. Crucini and James A. Kahn
Recent Great Depressions: Aggregate Growth in New Zealand and Switzerland by Timothy J. Kehoe and Kim J. Ruhl
What Can We Learn from the 1998-2002 Depression in Argentina? by Timothy J. Kehoe
Prosperity and Depression by Edward C. Prescott
Modeling Great Depressions: The Depression in Finland in the 1990s by Juan Carlos Conesa, Timothy J. Kehoe, and Kim J. Ruhl
Creator: Bajona, Claustre and Kehoe, Timothy Jerome, 1953- Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 377 Abstract:
We contrast the properties of dynamic Heckscher-Ohlin models with overlapping generations with those of models with infinitely lived consumers under both closed and open international capital markets. In both environments, if capital is mobile, factor price equalization occurs after the initial period. If capital is not mobile, the properties of equilibria differ drastically across environments: With infinitely lived consumers, factor prices equalize in any steady state or cycle and, in general, there is positive trade in any steady state or cycle. With overlapping generations, we construct examples with steady states and cycles in which factor prices are not equalized, and any equilibrium that converges to a steady state or a cycle with factor price equalization has no trade after a finite number of periods.
Subject (JEL): F11 - Neoclassical Models of Trade, O15 - Economic Development: Human Resources; Human Development; Income Distribution; Migration, O41 - One, Two, and Multisector Growth Models, and F43 - Economic Growth of Open Economies
Creator: McGrattan, Ellen R. and Waddle, Andrea Series: Staff report (Federal Reserve Bank of Minneapolis. Research Department) Number: 542 Abstract:
Using simulations from a multicountry neoclassical growth model, we analyze several post-Brexit scenarios. First, the United Kingdom unilaterally imposes tighter restrictions on FDI and trade from other EU nations. Second, the European Union retaliates and imposes the same restrictions on the UK. Finally, the United Kingdom reduces restrictions on other nations during the post-Brexit transition. Model predictions depend crucially on the policy response of multinationals’ investment in technology capital, accumulated know-how from investments in R&D, brands, and organizations used simultaneously in their domestic and foreign operations.
Keyword: FDI, European Union, Foreign investment, United Kingdom, and Brexit Subject (JEL): O34 - Intellectual Property and Intellectual Capital, O33 - Technological Change: Choices and Consequences; Diffusion Processes, F41 - Open Economy Macroeconomics, and F23 - Multinational Firms; International Business
Creator: Cole, Harold Linh, 1957- and Ohanian, Lee E. Series: Great depressions of the twentieth century Abstract:
There are two striking aspects of the recovery from the Great Depression in the United States: the recovery was very weak and real wages in several sectors rose significantly above trend. These data contrast sharply with neoclassical theory, which predicts a strong recovery with low real wages. We evaluate whether New Deal cartelization policies designed to limit competition among firms and increase labor bargaining power can account for the persistence of the Depression. We develop a model of the intraindustry bargaining process between labor and firms that occurred with these policies, and embed that model within a multi-sector dynamic general equilibrium model. We find that New Deal cartelization policies are an important factor in accounting for the post-1933 Depression. We also find that the key depressing element of New Deal policies was not collusion per se, but rather the link between paying high wages and collusion.
Keyword: New Deal, Great Depression, Competition, Cartels, Wages, and Collective bargaining Subject (JEL): D50 - General equilibrium and disequilibrium - General and J58 - Labor-management relations, trade unions, and collective bargaining - Public policy
Creator: Kehoe, Patrick J. Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 373 Abstract:
This paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable. It also explains circumstances under which such counterexamples are possible and relates them to the literature on time inconsistency.
Keyword: Cooperation, Policy games, Policy coordination, and Macroeconomics Subject (JEL): F33 - International Monetary Arrangements and Institutions, F11 - Neoclassical Models of Trade, and D46 - Value Theory