Trade models and macroeconomics

Abstract

This paper discusses some macro links that are missing from trade models. A multicountry macroeconometric model is used to analyze the ei¬€ects on the United States of increased import competition from China, an experiment that is common in the recent trade literature. In the macro story a fall in Chinese export prices is stimulative. Domestic prices fall, which increases real wage rates and real wealth, which increases household expenditures. In addition, the Fed may lower the interest rate because of the lower prices, which is stimulative. Trade models do not have these channels, and they likely overestimate the negative ei¬€ects or underestimate the positive ei¬€ects on total output and employment from increased Chinese import competition. They lack some important aggregate demand channels, which are not likely second order.