Modeling Demand in International and Macro Economics.

Abstract

Chapter 1: Empirical studies show that tradable consumption goods are more expensive in rich countries. This paper proposes a novel explanation for this apparent failure of the law of one price: Consumers’ utility from tradable goods depends on their consumption of complementary goods and services. Monopolistically competitive firms charge higher prices in countries with more complementary goods and services because consumer demand is less elastic there. The paper provides direct evidence in support of this new explanation. Using free-alongside-ship prices of U.S. and Chinese exports, I demonstrate that prices of specific subsets of tradable goods are higher in countries with high consumption of relevant complementary goods, conditional on per capita income and other country-level determinants of consumer goods prices.

Chapter 2: A common presumption in macroeconomics and development economics is that increased growth in the aggregate enhances welfare for everyone in the economy. I show that instead, if the underlying growth is a productivity increase in the sector consumed primarily by one group, the welfare of a second group may fall. I demonstrate this effect in two cases. In the first case, skill-biased technological change in sectors consumed by the skilled rich increases their income beyond the increase in economic wealth, causing a decline in the consumption and welfare of the low-skilled poor. The second case examines trade between two countries, and demonstrates circumstances under which an increase in productivity in the nontradable sector of one country causes a welfare decline for the other country.

Chapter 3 (with Lutz Kilian): We develop a structural model of the global market for crude oil that for the first time explicitly allows for shocks to the speculative demand for oil as well as shocks to flow demand and flow supply. Our estimates rule out explanations of the 2003-08 oil price surge based on unexpectedly diminishing oil supplies and based on speculative trading. Instead, this surge was caused by unexpected increases in world oil consumption driven by the global business cycle. There is evidence, however, that speculative demand shifts played an important role during earlier oil price shock episodes including 1979, 1986, and 1990.