The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?

Maurice Obstfeld, Kenneth Rogoff

NBER Working Paper No. 7777
Issued in July 2000
NBER Program(s):   EFG   IFM   ITI   ME

The central claim in this paper is that by explicitly introducing costs of international trade (narrowly, transport costs but more broadly, tariffs, nontariff barriers and other trade costs), one can go far toward explaining a great number of the main empirical puzzles that international macroeconomists have struggled with over twenty-five years. Our approach elucidates J. McCallum's home bias in trade puzzle, the Feldstein-Horioka saving-investment puzzle, the French-Poterba equity home bias puzzle, and the Backus-Kehoe- Kydland consumption correlations puzzle. That one simple alteration to an otherwise canonical international macroeconomic model can help substantially to explain such a broad arrange of empirical puzzles, including some that previously seemed intractable, suggests a rich area for future research. We also address a variety of international pricing puzzles, including the purchasing power parity puzzle emphasized by Rogoff, and what we term the exchange-rate disconnect puzzle.' The latter category of riddles includes both the Meese-Rogoff exchange rate forecasting puzzle and the Baxter-Stockman neutrality of exchange rate regime puzzle. Here although many elements need to be added to our extremely simple model, we can still show that trade costs play an essential role.

download in pdf format
   (957 K)

email paper

A non-technical summary of this paper is available in the December 2000 NBER digest.  You can sign up to receive the NBER Digest by email.

This paper is available as PDF (957 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7777

Published: The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?, Maurice Obstfeld, Kenneth Rogoff. in NBER Macroeconomics Annual 2000, Volume 15, Bernanke and Rogoff. 2001

Users who downloaded this paper also downloaded these:
Obstfeld and Rogoff The Unsustainable U.S. Current Account Position Revisited
Reinhart and Rogoff w13882 This Time is Different: A Panoramic View of Eight Centuries of Financial Crises
Obstfeld and Rogoff w4893 The Intertemporal Approach to the Current Account
Lewis w4951 Puzzles in International Financial Markets
Bruno and Easterly w5209 Inflation Crises and Long-Run Growth

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us