Essays on the Macroeconomics of Trade Flows.

Abstract

Many macroeconomic forces affect international trade. These include nominal uncertainty, exchange rate movements, and each country's business cycle. This dissertation consists of three essays which explore the impact of these macroeconomic forces.

In the first chapter, I consider the choice firms face between serving a foreign market through exports or producing abroad as a multinational. They face volatile nominal conditions in the foreign market, and I show how rising volatility shifts firms away from multinational production towards exporting. Exporting firms gain a greater advantage from foreign contractions because their goods become relatively cheaper in foreign currency terms. I use U.S. trade and multinational sales data and show that in countries with greater inflation volatility, we observe a higher proportion of exports.

In the second chapter, I examine whether our improved understanding of international price setting helps to explain international trade flows themselves when subject to exchange rate shocks. While menu cost models with strategic complementarities are capable of matching the observed characteristics of international prices, I find that they still perform relatively poorly in explaining trade flows. This class of models, despite having fairly low short-run pass-through to import prices, still implies a large trade value response to exchange rate changes. Furthermore, sectors with more flexible prices or more substitutable goods respond very similarly to those with stickier prices or less substitutable goods, contrary to the implications of the model.

Finally, in joint work with Andrei Levchenko and Linda Tesar, the third chapter studies the collapse of international trade during 2008-2009. We show how the composition of trade is important for understanding why it is so much more volatile over the business cycle. The U.S. trades disproportionately in sectors where domestic production or consumption also dropped significantly, like durable consumption and capital goods. On the other hand, we find no evidence for other commonly cited factors, like credit conditions or inventories.