GTAP Resources: Resource Display
| GTAP Resource #2349 |
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"On the Benefits of Exchange Rate Flexibility under Endogenous Tradedness of Goods" by Naknoi, Kanda, Michael Kumhof and Douglas Laxton Abstract This paper develops a dynamic stochastic general equilibrium model that analyzes how endogenously determined trade integration affects the welfare gains from exchange rate flexibility. The share of trade in output results from the interaction of comparative advantage patterns and trade frictions. We build our model of comparative advantage on the set of tools developed by Naknoi (2004), which is closely related to the classic work on a Ricardian trade model by Dornbusch et al. (1977). The key novelty is that while in principle all goods are exportable, the actual range of exports and nontraded goods is endogenous, depending on production decisions that take into account relative productivities and trading costs. The main difference between our model and alternative models that fix trade shares exogenously is that our approach is capable of generating a much higher long-run elasticity of trade to shocks, because in order to model microeconomic export decisions it becomes necessary to assume high elasticities of substitution between exported varieties, so that both the volume and product range of goods exported respond strongly to shocks. Our goal is to use this model to answer two questions. First, what is the welfare gain of flexible exchange rates over fixed rates, if any? Second, how do the benefits of flexibility vary as we alter the degree of trade integration? Bringing realistic aspects of trade integration into a monetary model to analyze welfare gains from flexible exchange rates is our main contribution. |
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- Calibration and parameter estimation - European Union |
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Public Access  GTAP Resource 2349 (662.0 KB) Replicated: 0 time(s)Restricted Access No documents have been attached. Special Instructions No instructions have been specified. |
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Last Modified: 9/15/2023 1:05:45 PM
