NBER Working Papers by Ina Simonovska

We study optimal portfolio choice in a two-country model where assets represent claims on future consumption and facilitate trade in markets with imperfect credit. Assuming that foreign assets trade at a cost, agents hold relatively more domestic assets. Consequently, agents have larger claims to domestic over foreign consumption. Moreover, foreign assets turn over faster than domestic assets because the former have desirable liquidity properties, but represent inferior saving tools. Our mechanism offers an answer to a long-standing puzzle in international finance: a positive relationship between consumption and asset home bias coupled with higher turnover rates of foreign over domestic assets.

Quantitative results from a large class of international trade models depend critically on the elasticity of trade with respect to trade frictions. We develop a simulated method of moments estimator to estimate this elasticity from disaggregate price and trade-flow data using the Ricardian model. We motivate our estimator by proving that the estimator developed in Eaton and Kortum (2002) is biased in any finite sample. We quantitatively show that the bias is severe and that the data requirements necessary to eliminate it in practice are extreme. Applying our estimator to new disaggregate price and trade-flow data for 123 countries in the year 2004 yields a trade elasticity of roughly four, nearly fifty percent lower than Eaton and Kortum’s (2002) approach. This difference doubles the welfa...

I study the positive relationship between prices of tradable goods and per-capita income. I present a heterogeneous-firm model of international trade with non-homothetic consumer preferences that outperforms existing frameworks in accounting for observed cross-country variation in prices along three key dimensions. The model yields a testable prediction that relates prices to macroeconomic variables. I use the prediction to provide an unbiased estimate of the price elasticity with respect to per-capita income from unique data featuring prices of 180 identical goods sold online in eighteen countries. The estimated elasticity is 0.08 and the result is robust across a variety of specifications.