Federal Reserve System

About: Federal Reserve System is a other organization based out in Washington D.C., District of Columbia, United States. It is known for research contribution in the topics: Monetary policy & Inflation. The organization has 2373 authors who have published 10301 publications receiving 511979 citations.

International Risk Sharing and the Transmission of Productivity Shocks

Abstract: This paper shows that standard international business cycle models can be reconciled with the empirical evidence on the lack of consumption risk sharing. First, we show analytically that with incomplete asset markets productivity disturbances can have large uninsurable effects on wealth, depending on the value of the trade elasticity and shock persistence. Second, we investigate these findings quantitatively in a model calibrated to the U.S. economy. With the low trade elasticity estimated via a method of moments procedure, the consumption risk of productivity shocks is magnified by high terms of trade and real exchange rate (RER) volatility. Strong wealth effects in response to shocks raise the demand for domestic goods above supply, crowding out external demand and appreciating the terms of trade and the RER. Building upon the literature on incomplete markets, we then show that similar results are obtained when productivity shocks are nearly permanent, provided the trade elasticity is set equal to the high values consistent with micro-estimates. Under both approaches the model accounts for the low and negative correlation between the RER and relative (domestic to foreign) consumption in the data—the “Backus–Smith puzzle”.

Estimates of the Trade and Welfare Effects of NAFTA

Abstract: We build into a Ricardian model the role of trade in intermediate inputs, sectoral linkages and differing productivity levels across sectors. We also propose a method to estimate sectoral trade elasticities. In our model, the trade effects due to overall tariff reductions account for most of the observed changes in trade flows for NAFTA members. We decompose the effects of NAFTA and find that 93% of Mexico’s, 58% of Canada’s and 55% of the United States’ trade effects can be attributed to NAFTA’s tariff reductions. Trade in intermediate inputs and input-output linkages can amplify the welfare effects of tariff reductions.