Capital accumulation and dynamic gains from trade

Abstract

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.

Demographics and the Evolution of Trade Imbalances

“…In each case, I compute the dynamic equilibrium under perfect foresight from 1970-2060. Appendix C provides the details of the algorithm for solving for the transition, which builds on Ravikumar, Santacreu, and Sposi (2019).…”

“…The solution procedure is boils down to two loops, similar to the algorithm in Ravikumar, Santacreu, and Sposi (2019). The outer loop consists of iterating on the labor supply decision and the rate of investment in physical capital.…”

“…In addition, the presence of trade costs complicates matters since the mapping from the world distribution of state variables to prices differs across countries; this is the not case in a model of frictionless trade or in a model of net trade flows. 7 In order to make progress, I reduce the dimensionality to 2 × 28 = 56 state variables and make 6 Other papers that feature capital accumulation in a multicountry trade model include (Alvarez, 2017;Anderson, Larch, and Yotov, 2019;Eaton, Kortum, Neiman, and Romalis, 2016;Ravikumar, Santacreu, and Sposi, 2019;Zylkin, 2016).…”

“…use of annual data by modeling intertemporal decisions using a representative household framework. As a result, I can efficiently compute transitional dynamics by extending the methods developed in Ravikumar, Santacreu, and Sposi (2019).…”

“…Some papers incorporate trade imbalances as exogenous transfers in the context of static models(Caliendo, Parro, Rossi-Hansberg, and Sarte, 2017;Dekle, Eaton, and Kortum, 2007). Only a few papers model trade imbalances between many countries via international borrowing and lending in a dynamic settingEaton, Kortum, Neiman, and Romalis, 2016;Reyes-Heroles, 2016;Ravikumar, Santacreu, and Sposi, 2019;Sposi, 2012).5 This intuition is articulated byObstfeld and Rogoff (2001) who postulate that trade costs have the potential to help reconcile six different puzzles in international macroeconomics (they do not discuss the allocation puzzle). find that trade costs do indeed quantitatively help account for a few of those puzzles, including two directly related to international capital flows Alessandria and Choi (2019).…”