Corsetti G., Martin, P. and Pesenti, P.

Varieties and the transfer problem

Journal of International Economics

Vol. 89(1) pp. 1-12 (2013)

Abstract: We revisit the classic transfer problem, accounting for two channels of adjustment: increased trade in existing goods and services (the intensive margin) and net creation and destruction of product varieties (the extensive margin). Over the medium term, the latter reduces the scope for real exchange rate and terms of trade variability in response to cross-border flows. We embed our transfer analysis in popular models of current account adjustment, where initial imbalances are driven by domestic demand for — or foreign supply of — net saving, possibly associated with over-optimistic expectations. Simulation exercises based on 2006 data suggest that a transfer of the size of the pre-crisis U.S. current account deficit may require only moderate trend depreciation in real terms, and that the aggregate welfare impact of the transfer is disconnected from the size of the relative price correction.

Keywords: Transfer problem, current account imbalances, extensive margin

JEL Codes: F32, F41

Author links: Giancarlo Corsetti  

Publisher's Link: http://dx.doi.org/10.1016/j.jinteco.2012.05.011