The Extensive Margin of Trade and Monetary Policy · 2016-11-08 · The Extensive Margin of Trade...

The Extensive Margin of Trade and Monetary Policy

Yuko Imura Malik Shukayev

Bank of Canada University of Alberta

June 20, 2016

The views expressed in this presentation are our own, and do not represent those of the Bank of Canada.

Exporter dynamics: long-run versus short-run

Persistence in long-run export participation

Export continuation rate = 87.4%/yr

Non-participation rate = 86.1%/yr

(U.S. manufactures 1984-1992, Bernard and Jensen, 2004)

Little evidence of growth in extensive margin of trade amongadvanced economies (Kehoe and Ruhl, 2013)

Different picture at the business cycle frequency (Naknoi, 2015)

Extensive margin of exports is three times as volatile as output

Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June 2016 1 / 17

New dimension for monetary policy and trade

The high volatility of the extensive margin over business cycles raisesnew questions for policy makers of open economies.

What are the channels through which monetary policy mightaffect intensive and extensive margins of international trade?

Does monetary policy affect the two margins in the same way?


This paper

develop a two-country DSGE model with

nominal rigidities

state-dependent decisions on whether to enter/exit export market

firm heterogeneity in productivity, export costs, prices

calibrate the model to match micro-level exporter characteristics

examine the effects of monetary policy on the intensive andextensive margins of trade


Main Findings

Exporter entry/exit is sensitive to firms’ price competitivenessrelative to other exporters and firms in the destination market

Expansionary monetary policy shocks support the intensivemargin of trade, but can deter export participation.

Currency depreciation and lower interest rates are favorable toexport sales and export participation.

However, higher expected inflation discourages exportparticipation

Monetary policy that is more aggressive toward inflation reducesfluctuations in export participation.


Related Literature

Export hysteresis in partial equilibrium

Baldwin (1988), Baldwin and Krugman (1989), Dixit (1989)

Firm heterogeneity and export decisions

Melitz (2003), Bernard et al. (2003), Das et al. (2007),Chaney (2008)

Business cycles and exporter entry/exit in general equilibrium

Ghironi and Melitz (2005), Alessandria and Choi (2007),Ruhl (2008), Imura (2016)

Optimal monetary policy with exporter entry and exit

Cooke (2015)


Model overview

Two symmetric countries, each with

Representative household

maxEt

∞∑t=0

βt [εct logCt + χ2(1− Lt)]

Competitive final-good producers

maxyHt (i),yFt (i)

PtDt −∫ 1

0

PDt (i)yHt (i)di−∫i∈Θt

PX∗t (i)yFt (i)di

Monopolistically competitive intermediate-good producers

Probability of price adjustment increasing in the age of price

Entry and exit in the export market, subject toentry/continuation costs

Monetary authority

ipt = ρiipt−1 + (1− ρi)

[φππt + φY Yt + φQQt

]+ µt


Intermediate-good firms

Each producing a differentiated product

yt(i) = zt(i)AtKt(i)νLt(i)

1−ν

zt(i) = firm-specific productivity, At = country-specific productivity

All intermediate-good producers sell in their own country.

Export participation

To enter the export market, a firm pays entry cost, η ∼ GE(η).

Upon entering, an entrant sets a new price for its exports.

To continue exporting, a firm pays continuation cost, ξ ∼ G(ξ).

All export costs are paid in advance of production.

Probability of price adjustment increases as price gets older


Potential entrant

Potential entrant with productivity zc and entry cost η solves

V Et (zc, η) = max

{maxPX0,t(zc)

[QtPX0,t(zc)

P ∗tyX0,t(zc)− wtLX0,t(zc)− rtKX

0,t(zc)− iptηwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

where

H1,t (zc, zs, ξ) = α1V0,t(zc, ξ) + (1− α1)V1,t (zc, zs, ξ)

⇒ Maximum entry cost this firm would pay to start exporting, ηEt (zc),equates the value of entry and the value of no entry.


Price-adjusting incumbent

Price-adjusting incumbent exporter with current productivity zcdrawing export cost ξ solves

V0,t(zc, ξ) = max

{maxPX0,t(zc)

[QtPX0,t(zc)


0,t(zc)− ipt ξwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

⇒ Max export cost this firm would pay to continue exporting, ξ0t (zc),equates the value of continuation and the value of exit.


Non-price-adjusting incumbent

Value of non-price-adjusting incumbent of type (zc, j, zs) drawingcontinuation cost ξ

Vj,t (zc, zs, ξ) = max

[QtPXj,t(zs)

PXtyXj,t(zc, zs)− wtLXj,t(zc, zs)− rtKX

j,t(zc, zs)− ipt ξwt

+βEtλt+1

λt

nz∑c=1

πccHj+1,t+1

(zc, zs, ξ

′) , βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

]

⇒ Maximum export cost for this firm to continue exporting, ξjt (zc, zs),equates the value of continuation and the value of exit.


Export participation decisions

Export decisions depend directly on

V Et (zc, η) = max

{maxPX0,t(zc)

[Qt

PX0,t(zc)


0,t(zc)− ipt ηwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

Exchange rate

Relative export price

Production costs

Interest rate (export cost)

Demand for home exports, yH∗t (i) = (1− ω)ρ(PXt (i)

PXt

)−γ (PXtP∗t

)−ρD∗t




V Et (zc, η) = max

{maxPX0,t(zc)

[Qt

PX0,t(zc)

P∗t

yX0,t(zc)− wtLX0,t(zc)− rtKX0,t(zc)− ipt ηwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

Exchange rate


Production costs



PXt

)−γ (PXtP∗t

)−ρD∗t




V Et (zc, η) = max

{maxPX0,t(zc)

[QtPX0,t(zc)

P ∗tyX0,t(zc)−wtL

X0,t(zc)− rtKX

0,t(zc)− ipt ηwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

Exchange rate


Production costs



PXt

)−γ (PXtP∗t

)−ρD∗t




V Et (zc, η) = max

{maxPX0,t(zc)

[QtPX0,t(zc)


0,t(zc)− ipt ηwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

Exchange rate


Production costs



PXt

)−γ (PXtP∗t

)−ρD∗t




V Et (zc, η) = max

{maxPX0,t(zc)

[QtPX0,t(zc)


0,t(zc)− ipt ηwt

+βEtλt+1

λt

nz∑c=1

πccH1,t+1

(zc, zc, ξ

′) ], βEtλt+1

λt

nz∑c=1

πccVEt+1(zc, η

′)

}

Exchange rate


Production costs



PXt

)−γ (PXtP∗t

)−ρD∗t


Calibration

Home bias, ω

Entry costs, U (0, ηU )

Continuation costs, U (0, ξU )

Price adjustment probabilities, αj

Firm-specific productivity process

log z′ = ρz log z + ε′, ε ∼ N(0, σε)

Data Model

Mass of exporters 0.21 0.23 Bernard et al. (2003)

Continuation rate 0.97 0.87 Bernard & Jensen (2004)

Entry rate 0.04 0.04 Bernard & Jensen (2004)

Imports/GDP 0.12 0.13 Drozd & Nosal (2011)

Productivity relative to 1.12-18 1.13 Bernard & Jensen (1999)nonexporters

Mean price adjustment 1.07-3.27 2.66 Bils & Klenow (2004)frequency (qtr) Nakamura & Steinsson (2008)


Negative home aggregate TFP shock

0 5 10 15 20-1

-0.5

0Exports (H)

% d

evia

tion

0 5 10 15 20-3

-2

-1

0Mass of exporters (H)

0 5 10 15 200

0.5

1

Export price index (H)

0 5 10 15 20-0.4

-0.2

0

0.2

Real exchange rate

% d

evia

tion

0 5 10 15 200

0.2

0.4

0.6Interest rate (H)

0 5 10 15 20-0.8

-0.6

-0.4

-0.2

Consumption (F)

0 5 10 15 20-1

-0.5

0

% d

evia

tion

TFP shock (H)TFP shock (F)

0 5 10 15 20-1

-0.5

0

0.5

1

% d

evia

tion

Monetary policy shock (H)Monetary policy shock (F)

0 5 10 15 20-1

-0.5

0

0.5

1

% d

evia

tion

Demand shock (H)Demand shock (F)


Negative aggregate TFP shock and monetary stimulus

0 5 10 15 20-1

-0.5

0 Exports (H)

% d

evia

tion

0 5 10 15 20-6

-4

-2

0 Mass of exporters (H)

0 5 10 15 200

1

2


0 5 10 15 20

0

1

2 Real exchange rate

% d

evia

tion

0 5 10 15 20

0

0.2

0.4


0 5 10 15 20-0.8

-0.6

-0.4

-0.2

Consumption (F)

0 5 10 15 20-1

-0.5

0TFP shock (H)

0 5 10 15 20-1

-0.5

0

% d

evia

tion

Monetary policy shock (H)

TFP shockTFP shock + Monetary stimulus

Monetary stimulus to counter negative TFP shock is effective onintensive margin, but worsens initial decline in extensive margin.


Monetary policy rule and extensive margin of trade

0 5 10 15 20-1

-0.5

0 Exports (H)

% d

evia

tion

0 5 10 15 20-3

-2

-1


0 5 10 15 200

0.5

1


0 5 10 15 20-0.5

0

0.5 Real exchange rate

% d

evia

tion

0 5 10 15 200

0.2

0.4


0 5 10 15 20

-0.2

-0.1

0 Consumption (F)

Benchmark (=2)

More aggressive on inflation stabilization (=4)

Response of extensive margin is dampened when monetary policy ismore aggressive on inflation


Without extensive margin adjustment

0 5 10 15 20-1

-0.5

0 Exports (H)

% d

evia

tion

0 5 10 15 20-1

0


0 5 10 15 200

0.5

1


0 5 10 15 20-0.5

0

0.5 Real exchange rate

% d

evia

tion

0 5 10 15 200

0.2

0.4


0 5 10 15 20

-0.2

-0.1

0 Consumption (F)

Benchmark (=2)

More aggressive on inflation stabilization (=4)

Aggressive inflation stabilization increases volatility of exports


Conclusion

Monetary stimulus may have different implications for intensivemargin and extensive margin of trade.

Currency depreciation and lower interest rates are favorable toexport sales and, to some extent, export participation.

However, inflationary effects deter entry of new firms and erodecompetitiveness of some incumbent exporters.

Monetary policy that is more aggressive toward inflationstabilization reduces fluctuations in extensive margin.


Appendix


Parameter Values

Discount factor β 0.99 4% annual interest rate

Weight on leisure in utility χ2 1.8 s.s. labor = 0.33

Elasticity of substitution γ 3.8 Ghironi & Melitz (2005)

Armington elasticity ρ 1.5 Backus et al. (1995)

Labor income share 1− ν 0.6 Cooley & Prescott (1995)

Depreciation rate of capital δ 0.025 10% depreciation/year

# of firm-specific productivity nz 2

Monetary policy rule (Clarida, Gali, Gertler, 1998)

inflation φπ 2

output φY 0.5

real exchange rate φQ 0.1

persistence ρi 0.8


Household

Representative household chooses Ct, Lt, Kt+1, Bt+1(st+1), BDt+1

maxEt

∞∑t=0

βt [εct logCt + χ2(1− Lt)]

subject to

Ct + It +∑st+1

q(st+1|st)B(st+1)

Pt+BDt+1

Pt≤ wtLt + rtKt + dt +

B(st)

Pt+ ipt

BDtPt

Kt+1 = (1− δ)Kt + It −κ

2

(ItKt− δ)2

Kt

where

B(st+1) = state-contingent international bond

q(st+1|st) = price of B(st+1) in units of home currency in state st

BDt = non-contingent domestic bonds

εct = demand shock


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The Extensive Margin of Trade and Monetary Policy · 2016-11-08 · The Extensive Margin of Trade...

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