TY  - JOUR
AU  - Corsetti,Giancarlo
AU  - Martin,Philippe
AU  - Pesenti,Paolo
TI  - Varieties and the Transfer Problem: The Extensive Margin of Current Account Adjustment
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13795
PY  - 2008
Y2  - February 2008
UR  - http://www.nber.org/papers/w13795
L1  - http://www.nber.org/papers/w13795.pdf
N1  - Author contact info:
Giancarlo Corsetti
Faculty of Economics
Cambridge University
Sidgwick Avenue
CB3 9DD Cambridge, Cambs
United Kingdom
Tel: +44(0)1223335235
E-Mail: giancarlo.corsetti@gmail.com

Philippe Martin
Sciences Po
27, rue Saint-Guillaume
75007 Paris
France
E-Mail: philippe.martin@sciences-po.fr

Paolo A. Pesenti
Federal Reserve Bank of New York
33 Liberty Street
New York, NY 10045
Tel: 212/720-5493
Fax: 212/720-6831
E-Mail: paolo.pesenti@ny.frb.org
AB  - Most analyses of the macroeconomic adjustment required to correct global imbalances ignore net exports of new varieties of goods and services and do not account for firms' entry in the product market. In this paper we revisit the macroeconomics of trade adjustment in the context of the classic 'transfer problem,' using a model where the set of exportables, importables and nontraded goods is endogenous. We show that exchange rate movements associated with adjustment are dramatically lower when the above features are accounted for, relative to traditional macromodels. We also find that, for reasonable parameterizations, consumption and employment (hence welfare) are not highly sensitive to product differentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.
ER  -