FMV Seminar: “Capital Accumulation and the Dynamic Gains from Trade”

Research Cluster

Speaker:Michael Sposi, Federal Reserve Bank of Dallas
Date: Wednesday 6 July 2016
Time: 13.30
Location: Matrix Lecture Theatre, Building One

Further details

We compute welfare gains from trade in a dynamic, multi-country Ricardian model where international trade affects the factors of production in each period. We calibrate the model for 93 countries and analyze the impact of a permanent, uniform trade liberalization and examine transition paths between steady states. The median country gains 53 percent in consumption-equivalent units during the transition. The gains vary by a factor of 5 across countries, with small and poor countries gaining the most. In every country TFP jumps on impact roughly to its new steady-state level while capital adjusts gradually. The model features two novel ingredients inspired by the data (i) The endogenous relative price of investment allows countries to attain permanently higher capital-output ratios, yielding higher output and consumption. (ii) The endogenous investment rate yields higher growth rates, induced by temporarily high real rates of return to investment.