Trade Response to Policy Changes and Uncertainty
Paper Session
Sunday, Jan. 7, 2024 8:00 AM - 10:00 AM (CST)
- Chair: George Alessandria, University of Rochester
Production Networks and Firm-Level Elasticities of Substitution
Abstract
We provide one of the first estimates of elasticities of substitution across inputs supplied by suppliers within the same industry. This elasticity is particularly relevant for the transmission and amplification of supply shocks across the production network. We obtain new real-time administrative tax data on product-level prices and quantities with firm-to-firm transactions. We leverage geographic and temporal variation from the Covid-19 lockdowns in India to estimate these firm-level elasticities of substitution and quantify the fall in trade. If suppliers are complements rather than substitutes in production, this shock can amplify by further transmitting downstream and upstream through the supply chain. We find that even at this very granular supplier level, inputs are highly complementary, with an estimated elasticity of 0.55. Causally estimating these micro-level elasticities of substitution at the firm level allows us to understand how shocks propagate through supply chains, affecting aggregate GDP. We use our elasticities and simulate the impact of the Covid-19 lockdowns to find that under our estimated elasticities, the overall fall in output is substantial and widespread.Trade Elasticities in General Equilibrium: Demand, Supply, and Aggregation
Abstract
We develop a model of international trade that simultaneously incorporates three important microeconomic channels, imperfect factor mobility, internal and external returns to scale, into a unified framework. Directly estimating the parameters governing these channels is infeasible given existing data and methodologies. We thus recast the model from the standard treatment of supply and demand in factor markets to a new solution based on product markets. We demonstrate composite export supply and import demand elasticities along with readily observable product market outcomes are sufficient for general equilibrium analysis. We estimate the sufficient elasticities by developing a heteroskedastic estimator for international product markets. Our methodology allows these elasticities to vary across both countries and industries, and requires only publicly available data on trade, production, and tariffs. Employing our estimated model, we evaluate the impact of recent US protectionist policies, and highlight the importanceof our estimates and general equilibrium linkages.
Real Exchange Rate Uncertainty Matters: Trade, Shipping Lags, and Default
Abstract
Using a new time-varying measure of real exchange rate uncertainty, I show that there is a negative relation between real exchange rate uncertainty and international trade at the aggregate level. A one standard deviation increase in the real exchange rate uncertainty is associated with a 5% drop in total trade over GDP. Then, using Colombian firm-level data, I document 3 firm-level facts consistent with the existence of a precautionary margin in international trade. When real exchange rate uncertainty increases exporters, 1) reduce their export intensity; 2) are more likely to stop exporting and 3) less likely to start exporting to new markets. Additionally, I find that this behavior is mostly explained by those exporters paying higher interest rates and facing higher shipping lags. These results contrast with the predictions from standard sunk cost models of international trade. As a consequence, these models will under-estimate the effects that real exchange uncertainty has on international trade flows. To overcome this issue, I incorporate firmlevel debt default and international shipping lags into a standard dynamic model of trade. In the new model, an increase in the real exchange rate uncertainty increases the probability for exporters to end up in a financially vulnerable situation. To hedge against this risk, exporters respond by increasing mark-ups or quitting the export market, generating a drop in aggregate exports through both the intensive and the extensive margin of trade. Once this extension is calibrated to match firm-level Colombian data, it predicts that a one standard deviation increase in the real exchangerate uncertainty generates a drop in total exports of around 6%.
Discussant(s)
Kim Ruhl
,
University of Wisconsin-Madison
Anson Soderberry
,
Purdue University
Michael Sposi
,
Southern Methodist University
Christoph Boehm
,
University of Texas-Austin
JEL Classifications
- F1 - Trade
- F4 - Macroeconomic Aspects of International Trade and Finance