We develop a model in which innovations in an economy's growth potential are an important driving force of the business cycle. The framework shares the emphasis of the recent new shock literature on revisions of beliefs about the future as a source of uctuations, but diers by tieing these beliefs to fundamentals of the evolution of the technology frontier. An important feature of the model is that the process of moving to the frontier involves costly technology adoption. In this way, news of improved growth potential has a positive eect on current hours. As we show, the model also has reasonable implications for stock prices. We estimate our model for data post-1984 and show that the innovations shock accounts for nearly a third of the variation in output at business cycle frequencies. The estimated model also accounts reasonably well for the large gyration in stock prices over this period. Finally, the endogenous adoption mechanism plays a signicant role in amplifying other shocks.
We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition paths following a trade liberalization. We find that (i) larger countries accumulate a current account surplus, and financial resources flow from larger countries to smaller countries, boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset position before the liberalization is positively correlated with the gains. The tradables intensity in consumption goods production determines the static gains, and the tradables intensity in investment goods production determines the dynamic gains that include capital accumulation.
We compute welfare gains from trade in a dynamic, multicountry model with capital accumulation and trade imbalances. We develop a gradient-free method to compute the exact transition paths for 44 countries following a trade liberalization. We find that (i) larger countries accumulate a current account surplus and financial resources flow from larger countries to smaller countries boosting consumption in the latter, (ii) countries with larger short-run trade deficits accumulate capital faster, (iii) the gains are nonlinear in the reduction in trade costs, and (iv) capital accumulation accounts for substantial gains. The net foreign asset (NFA) position before the liberalization and the tradables intensity in investment goods production and consumption goods production are quantitatively important for the gains.JEL codes: E22, F11, O11
We study the international propagation of long-run risk in the context of a general equilibrium model with endogenous growth. Innovation and international diffusion of technologies are the channels at the core of our mechanism. A calibrated version of the model matches several asset pricing and macroeconomic quantity moments, alleviating some of the puzzles highlighted in the international macro-finance literature. Our model predicts that country-pairs that share more R&D have less volatile exchange rates and more correlated stock market returns. Using data from a sample of 19 developed countries, we provide suggestive empirical evidence in favor of our model's predictions.
The COVID-19-pandemic recession and recovery have been unique compared with previous recessions, largely due to policies that led to behavioral changes. Lockdowns meant people were traveling less both for work and for leisure, eating out less, and going to fewer entertainment venues, among other things. At the same time, work from home and fiscal stimulus packages increased the demand for certain goods such as technological goods, cars, and furniture. These changes resulted in an overall shift away from consumption of services and toward consumption of durable goods.The rapid increase in the demand for durable goods, together with the global nature of the pandemic, has exposed vulnerabilities in the current production structure of these goods. Over the past several decades, production of durable goods has become more fragmented, relying heavily on global value chain (GVCs). 1 Instead of doing everything in-house, firms can outsource parts of their production processes to other countries. Figure 1 shows that GVC participation has been rising steadily over time, though it has plateaued in recent years (see Antrás, 2020).While GVC participation has advantages, as firms can benefit from outsourcing production to regions with a comparative advantage, it comes with risks (Santacreu and LaBelle, 2021a,b). ShocksWe investigate the role supply chain disruptions during the COVID-19 pandemic played in U.S. producer price index (PPI) inflation. We exploit pre-pandemic cross-industry variation in sourcing patterns across countries and interact it with measures of international supply chain bottlenecks during the pandemic. We show that exposure to global supply chain disruptions played a significant role in U.S. cross-industry PPI inflation between January and November 2021. If bottlenecks had followed the same path as in 2019, PPI inflation in the manufacturing sector would have been 2 percentage points lower in January 2021 and 20 percentage points lower in November 2021. (JEL F13, F14, F44) Federal Reserve Bank of St. Louis Review, forthcoming 2022.
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