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Briefing
Should We Worry about Trade Imbalances?
Trade imbalances are a perennial concern for policymakers and the public. But what does it mean for a country to have a trade surplus or deficit? The United States has run persistent trade deficits since the late 1970s, while Germany has had trade surpluses since the 1990s. Is either position inherently good or bad? The answer to this fundamental question of economic policy is a resounding "no" ? up to a point.
Working Paper
Exchange Rate Misalignment and External Imbalances: What is the Optimal Monetary Policy Response?
How should monetary policy respond to capital inflows that appreciate the currency, widen the current account deficit and cause domestic overheating? Using the workhorse open-macro monetary model, we derive a quadratic approximation of the utility-based global loss function in incomplete market economies, solve for the optimal targeting rules under cooperation and characterize the constrained-optimal allocation. The answer is sharp: the optimal monetary stance is contractionary if the exchange rate pass-through (ERPT) on import prices is incomplete, expansionary if ERPT is complete–implying ...
Working Paper
Capital Accumulation and Dynamic Gains from Trade
We compute welfare gains from trade in a dynamic, multi-country Ricardian model where international trade affects capital accumulation. We calibrate the model for 93 countries and examine transition paths between steady-states after a permanent, uniform trade liberalization across countries. Our model allows for both the relative price of investment and the investment rate to depend on the world distribution of trade barriers. Accounting for transitional dynamics, welfare gains are about 60 percent of those measured by comparing only the steady-states, and three times larger than those with ...
Discussion Paper
The Evolution of Mexico’s Merchandise Trade Balance
Mexico runs a trade surplus with the United States owing to oil exports and cross-border supply chains, with imported U.S. components assembled in Mexico and then exported back to the United States. At the same time, Mexico runs a large trade deficit with Asia, the result of a surge of imports from that region over the past two decades. From Mexico’s perspective, this growing deficit with Asia has worked to offset an increasing trade surplus with the United States. More recently, the country’s merchandise balance suffered a substantial deterioration with the collapse of petroleum prices ...