Abstract
We argue that modeling trade imbalances is crucial for understanding transitional dynamics in response to globalization shocks. We build and estimate a general equilibrium, multicountry, multisector model of trade with two key ingredients: (i) endogenous trade imbalances arising from households' consumption and saving decisions; (ii) labor market frictions across and within sectors. We use our model to perform several empirical exercises. We find that the "China shock"accounted for 28% of the decline in U.S. manufacturing between 2000 and 2014 - 1.65 times the magnitude predicted from a model imposing balanced trade. A concurrent rise in U.S. service employment led to a negligible aggregate unemployment response. We benchmark our model's predictions for the gains from trade against the popular ACR sufficient-statistics approach. We find that our predictions for the long-run gains from trade and consumption dynamics significantly diverge.
Original language | English (US) |
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Pages (from-to) | 1109-1171 |
Number of pages | 63 |
Journal | Quarterly Journal of Economics |
Volume | 138 |
Issue number | 2 |
DOIs | |
State | Published - May 2023 |
ASJC Scopus subject areas
- Economics and Econometrics