How do goods trade and capital investments interact with one another?
Liu et al. develop develop a many-country open-economy Ramsey model, which features goods trade, capital investments, and growth along the transition path to steady-state. Their framework is consistent with three key features of the observed data on trade and capital investments, namely: a) the intra-temporal trade in goods; b) intra-temporal capital mobility; c) intertemporal trade through consumption-saving decisions. The authors use their theoretical framework to derive three main sets of results.
- They provide tractable microfoundations for the gravity equation in bilateral international capital investments. These microfoundations are isomorphic in terms of their predictions for bilateral international capital investments;
- They derive sufficient statistics for the welfare gains from both international trade and international capital investments. In particular, they show that these two sources of welfare gains interact with one another, such that the whole differs systematically from the sum of the parts;
- They analyze how the incidence of productivity and trade costs shocks depends on both international trade and international capital linkages, using exact-hat algebra counterfactuals for the full non-linear model;
- They derive analogous sufficient statistics for the first-order impact of productivity and trade cost shocks, and use these first-order sufficient statistics to understand the mechanisms through which international trade and international capital linkages interact with one another.
Goods Trade and Capital Investments in the Global Economy
Authors: Ernest Liu, Motohiro Yogo, Stephen J. Redding
From: Princeton University
How does the cost of capital affect growth in world trade?
This is the question that Pol Antràs is trying to answer in this paper. He develops a model which incorporates an explicit notion of time and of production length: the time lag between the beginning of production and the delivery of goods to consumers is an endogenously determined outcome. In particular time plays two important roles: a) letting the production process mature for a longer period of time increases labor productivity, but it comes at the cost of higher working capital needs for firms; b) selling to foreign markets provides an additional source of operating profits for firms, but these sales are associated with an additional time lag between production and consumption. In this setting, interest rate changes affect production lengths, labor productivity, and the financial costs of exporting. He concludes:
By incorporating an explicit notion of time, the framework also formalizes how low interest rates reduce the working capital needs for international transactions, which typically involve a disproportionately high time lag between production and consumption. By endogenously reducing trade costs, lower interest rates further boost world trade. The results in this paper suggest that if interest rates continue to rise over the next few years, they could contribute to a deceleration in the growth of world trade.
Interest Rates and World Trade: An ‘Austrian’ Perspective
Author: Pol Antràs
From: Harvard University
