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Research

The following papers are in pdf format. You need a pdf reader such as Adobe Acrobat Reader, available free from Adobe. Please contact me if you have difficulty downloading ( prbergin@ucdavis.edu ).

Outsourcing and Volatility

(revised April 2008, Joint with Robert Feenstra and Gordon Hanson)

While outsourcing of production from the U.S. to Mexico has been hailed in Mexico as a valuable engine of growth, recently there have been misgivings regarding the fickleness and volatility of this engine. This paper studies the second-moment properties of global outsourcing. It documents a new empirical regularity: outsourcing industries in Mexico experience fluctuations in employment that are twice as volatile as the corresponding industries in the U.S. The paper develops a theoretical model of outsourcing to explain this stylized fact, featuring an extensive margin of outsourcing that responds endogenously to shocks in demand, and transmits those shocks across borders.

The Extensive Margin and Monetary Policy

(revised April 2008, Joint with Giancarlo Corsetti)

The creation of new firms, referred to as the extensive margin, is a significant but overlooked dimension of monetary policy. A monetary VAR documents that monetary policy has significant effects on firm creation. An analytically tractable model combining sticky prices and firm entry shows that entry alters the transmission of monetary policy innovations, acting much like a type of investment in more standard models. Monetary policy rules that offset the uncertainty of productivity shocks can raise the mean level of entry and thereby welfare, suggesting a new motivation for stabilization policy.

Pass-through of Exchange Rates and Competition Between Floaters and Fixers

(Revised Arpil 2008, with Robert Feenstra).

This paper studies how a rise in the share of U.S. imports from China, or any country with a fixed exchange rate, could disproportionately lower pass-through of exchange rates to U.S. import prices. We develop a theoretical model showing that changes in the competitive environment induce exporters from other countries to lower markups in response to a U.S. depreciation, thereby moderating pass-through. The model indicates that particular conditions are necessary for this effect, and that free entry amplifies it. The model also produces an approximately log-linear structural equation for pass-through regressions including the China share. Panel regressions over 1993–2006 support the model’s prediction.

Exchange Rate Regimes and the Extensive Margin of Trade

(First version June 2008, with Ching-Yi Lin).

This paper finds that currency unions and direct exchange rate pegs raise trade through distinct channels. Panel data analysis of the period 1973-2000 indicates that currency unions have raised trade predominantly at the extensive margin, the entry of new firms or products. In contrast, direct pegs have worked almost entirely at the intensive margin, increased trade of existing products. A stochastic general equilibrium model is developed to understand this result, featuring price stickiness and firm entry under uncertainty. Because both regimes tend to reliably provide exchange rate stability over the horizon of a year or so, which is the horizon of price setting, they both lead to lower export prices and greater demand for exports. But because currency unions historically are more durable over a longer horizon than pegs, they encourage firms to make the longer-term investment needed to enter a new market. The model predicts that whenever exchange rate uncertainty is completely and permanently eliminated, all of the adjustment in trade occurs at the extensive margin.

Productivity, Tradability, and the Long-Run Price Puzzle

(June 2005, Joint with Reuven Glick and Alan Taylor, Journal of Monetary Economics 2006)

Long-run cross-country price data exhibit a puzzle. Today, richer countries exhibit higher price levels than poorer countries, a stylized fact usually attributed to the Balassa-Samuelson effect. But looking back fifty years, this effect virtually disappears from the data. What is often assumed to be a universal property is actually quite specific to recent times, emerging a half century ago and growing steadily over time. What might potentially explain this historical pattern? We develop an updated Balassa-Samuelson model inspired by recent developments in trade theory, where a continuum of goods are differentiated by productivity, and where tradability is endogenously determined. Firms experiencing productivity gains are more likely to become tradable and crowd out firms not experiencing productivity gains. As a result the usual Balassa-Samuelson assumption—that productivity gains be concentrated in the traded goods sector—emerges endogenously, and the Balassa-Samuelson effect on relative price levels likewise evolves gradually over time.

Tradability, Productivity, and Economic Integration

(September 2005, Joint with Reuven Glick, Journal of International Economics 2007)

This paper develops a two-country macro model with endogenous tradability to study features of international economic integration. Recent episodes of integration in Europe and North America suggest some surprising observations: while quantities of trade have increased significantly, especially along the extensive margin, price dispersion has not decreased and may even have increased. We propose a way of reconciling these price and quantity observations in a macroeconomic model where the decision of heterogeneous firms to trade internationally is endogenous. Trade is shaped both by the nature of heterogeneity -- trade costs versus productivity -- and by the nature of trade policies -- cuts in fixed costs versus cuts in per unit costs like tariffs. For example, in contrast to tariff cuts, trade policies that work mainly by lowering various fixed costs of trade may have large effects on entry decisions at the extensive margin without having direct effects on price-setting decisions. Whether this entry raises or lowers overall price dispersion depends on the type of heterogeneity that distinguishes the new entrants from incumbent traders.

Global Price Dispersion: Are Prices Converging or Diverging?

(December 2006, with Reuven Glick)

This paper documents significant time-variation in the degree of global price convergence over the last two decades. In particular, there appears to be a general U-shaped pattern with price dispersion first falling and then rising in recent years, a pattern which is remarkably robust across country groupings and commodity groups. This time-variation is difficult to explain in terms of the standard gravity equation variables common in the literature, as these tend not to vary much over time or have not risen in recent years. However, regression analysis indicates that this time-varying pattern coincides well with oil price fluctuations, which are clearly time-varying and have risen substantially since the late 1990s. As a result, this paper offers new evidence on the role of transportation costs in driving international price dispersion.

Does Exchange Rate Variability Matter for Welfare? A Quantitative Investigation of Stabilization Policies

(March 2006, Joint with Hyung-Cheol Shin and Ivan Tchakarov, European Economic Review 2007)

This paper studies what degree of exchange rate stabilization is optimal for several types of open economies. This is accomplished through a quantitative evaluation of optimal monetary policy rules in a two-country sticky-price model. First, a calibrated benchmark model with incomplete asset markets supports past conclusions from simpler models, emphasizing inflation stabilization rather than exchange rate stabilization. It also highlights that the utility gains from optimal stabilization policy are small. Second, while an economy extended to include consumer habits implies greater sensitivity by households to consumption variability, it has only minor effects on the benchmark conclusions and benefits. Finally, these conclusions are altered under an alternative environment where international asset markets exhibit asymmetry in the form of original sin. Such countries can benefit from policies that aggressively stabilize the exchange rate, with utility gains larger than the previous cases.

Understanding International Portfolio Diversification and Turnover Rates

(January 2006, Joint with Amir Amadi)

This paper argues that international trading costs of a fixed type can help explain home bias in international equities markets. Two stylized facts have been widely noted: while the holdings of foreign equities are low, trading volume in foreign equities is high. The second fact has been broadly interpreted to indicate that international trading costs are not an explanation for the home bias. While this argument may rule out trading costs of a proportional type, this paper finds that fixed costs of international trading may nonetheless be at work. The paper first documents that the puzzling pair of stylized facts are valid in recent data. It then uses a simple portfolio allocation model to study the effects on investor decisions of several configurations of per unit and fixed trading costs. One configuration, with per unit costs heterogeneous among agents and a homogeneous fixed cost of entering the foreign market, is found to generate the pair of stylized facts among these agents.

How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account? (February 2006)

This paper advances the new open economy macroeconomic (NOEM) literature in an empirical direction, estimating and testing a two-country model where uncovered interest rate parity is not required to hold. Fit to U.S and G-7 data, the model performs moderately well for the exchange rate and current account. Results offer guidance for future theoretical work. Parameter estimates lend support to some common assumptions in the theoretical literature, such as local currency pricing and risk sharing. Estimates are found for key parameters commonly calibrated in the theoretical literature, such as the elasticity of substitution between home and foreign composite goods, and the response of a country risk premium to the net foreign asset position. Results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks, as recently hypothesized. Further, results suggest that inserting explicit interest rate parity shocks into a NOEM model may be more helpful in explaining movements in the current account than the exchange rate.

A Model of Endogenous Nontradability and its Implications for The Current Account
(June 2003, Joint with Reuven Glick)

This paper analyzes how a model where goods are endogenously nontraded can help explain the relationship between the current account and real exchange rate fluctuations. We formulate a small open economy two-period model in which goods switch endogenously between being traded or nontraded. The model demonstrates how movements in the real exchange rate and real interest rate can impose significant costs on intertemporal trade. The model also shows that a variety of nonlinear relationships is possible between the current account and real exchange rate, depending on the relative transport costs and substitutability in preferences between goods. In contrast to recent work, our analysis implies that such costs of intertemporal trade may be a concern for many countries, not just those with large current account imbalances.

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