The Extensive Margin of Trade and Monetary Policy

Transcription

1 The Extensive Margin of Trade and Monetary Policy Yuko Imura Bank of Canada Malik Shukayev University of Alberta June 2, 216 The views expressed in this presentation are our own, and do not represent those of the Bank of Canada.

2 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 , Bernard and Jensen, 24) Little evidence of growth in extensive margin of trade among advanced economies (Kehoe and Ruhl, 213) Different picture at the business cycle frequency (Naknoi, 215) Extensive margin of exports is three times as volatile as output Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

3 New dimension for monetary policy and trade The high volatility of the extensive margin over business cycles raises new questions for policy makers of open economies. What are the channels through which monetary policy might affect intensive and extensive margins of international trade? Does monetary policy affect the two margins in the same way? Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

4 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 and extensive margins of trade Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

5 Main Findings Exporter entry/exit is sensitive to firms price competitiveness relative to other exporters and firms in the destination market Expansionary monetary policy shocks support the intensive margin of trade, but can deter export participation. Currency depreciation and lower interest rates are favorable to export sales and export participation. However, higher expected inflation discourages export participation Monetary policy that is more aggressive toward inflation reduces fluctuations in export participation. Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

6 Related Literature Export hysteresis in partial equilibrium Baldwin (1988), Baldwin and Krugman (1989), Dixit (1989) Firm heterogeneity and export decisions Melitz (23), Bernard et al. (23), Das et al. (27), Chaney (28) Business cycles and exporter entry/exit in general equilibrium Ghironi and Melitz (25), Alessandria and Choi (27), Ruhl (28), Imura (216) Optimal monetary policy with exporter entry and exit Cooke (215) Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

7 Model overview Two symmetric countries, each with Representative household y H t max E t t= 1 Pt D β t [ε c t log C t + χ 2(1 L t)] Competitive final-good producers max P td t (i)y H (i),yf t (i) t (i)di Pt X i Θ t (i)y F t (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 to entry/continuation costs Monetary authority î p t = ρ i î p t 1 + (1 ρ i) [φ π ˆπ t + φ Y Ŷ t + φ Q ˆQt ] + ˆµ t Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

8 Intermediate-good firms Each producing a differentiated product y t (i) = z t (i)a t K t (i) ν L t (i) 1 ν z t (i) = firm-specific productivity, A t = 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 G E (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 Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

9 Potential entrant Potential entrant with productivity z c and entry cost η solves Vt E (z c, η) = max where { +βe t max P X,t (zc) [ P,t(z X c) Q t y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p Pt t ηw t } π c ch 1,t+1 ( z c, z c, ξ ) ], βe t H 1,t (z c, z s, ξ) = α 1 V,t (z c, ξ) + (1 α 1 )V 1,t (z c, z s, ξ) π c cv E t+1(z c, η ) Maximum entry cost this firm would pay to start exporting, η E t (z c ), equates the value of entry and the value of no entry. Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

10 Price-adjusting incumbent Price-adjusting incumbent exporter with current productivity z c drawing export cost ξ solves V,t(z c, ξ) = max { +βe t max P X,t (zc) [ P,t(z X c) Q t y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p Pt t ξw t } π c ch 1,t+1 ( z c, z c, ξ ) ], βe t π c cv E t+1(z c, η ) Max export cost this firm would pay to continue exporting, ξ t (z c ), equates the value of continuation and the value of exit. Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

11 Non-price-adjusting incumbent Value of non-price-adjusting incumbent of type (z c, j, z s ) drawing continuation cost ξ V j,t (z c, z s, ξ) = max [ +βe t Pj,t(z X s) Q t yj,t(z X c, z s) w tl X j,t(z c, z s) r tkj,t(z X c, z s) i p Pt X t ξw t ] π c ch j+1,t+1 ( z c, z s, ξ ), βe t π c cv E t+1(z c, η ) Maximum export cost for this firm to continue exporting, ξ j t (z c, z s ), equates the value of continuation and the value of exit. Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

12 Export participation decisions Export decisions depend directly on Vt E (z c, η) = max { +βe t max P X,t (zc) [ P,t(z X c) Q t y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p Pt t ηw t } π c ch 1,t+1 ( z c, z c, ξ ) ], βe t π c cv E t+1(z c, η ) Exchange rate Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

13 Export participation decisions Export decisions depend directly on Vt E (z c, η) = max { +βe t max P X,t (zc) [ P,t Q X (zc) t Pt y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p t ηw t π c ch 1,t+1 ( z c, z c, ξ ) ], βe t π c cv E t+1(z c, η ) } Exchange rate Relative export price Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

14 Export participation decisions Export decisions depend directly on Vt E (z c, η) = max { max P X,t (zc) +βe t [ P,t(z X c) Q t y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p Pt t ηw t } π c ch 1,t+1 ( z c, z c, ξ ) ], βe t π c cv E t+1(z c, η ) Exchange rate Relative export price Production costs Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

15 Export participation decisions Export decisions depend directly on Vt E (z c, η) = max { +βe t max P X,t (zc) [ P,t(z X c) Q t y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p Pt t ηw t } π c ch 1,t+1 ( z c, z c, ξ ) ], βe t π c cv E t+1(z c, η ) Exchange rate Relative export price Production costs Interest rate (export cost) Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

16 Export participation decisions Export decisions depend directly on Vt E (z c, η) = max { +βe t max P X,t (zc) [ P,t(z X c) Q t y,t(z X c) w tl X,t(z c) r tk,t(z X c) i p Pt t ηw t } π c ch 1,t+1 ( z c, z c, ξ ) ], βe t π c cv E t+1(z c, η ) Exchange rate Relative export price Production costs Interest rate (export cost) ( ) Demand for home exports, yt H (i) = (1 ω) ρ P X γ ( t (i) P X t Pt X Pt ) ρ D t Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

17 Calibration Home bias, ω Entry costs, U (, η U ) Continuation costs, U (, ξ U ) Price adjustment probabilities, α j Firm-specific productivity process log z = ρ z log z + ɛ, ɛ N(, σ ɛ ) Data Model Mass of exporters Bernard et al. (23) Continuation rate Bernard & Jensen (24) Entry rate.4.4 Bernard & Jensen (24) Imports/GDP Drozd & Nosal (211) Productivity relative to Bernard & Jensen (1999) nonexporters Mean price adjustment Bils & Klenow (24) frequency (qtr) Nakamura & Steinsson (28) Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

18 Negative home aggregate TFP shock Exports (H) Mass of exporters (H) Export price index (H) % deviation % deviation Real exchange rate Interest rate (H) Consumption (F) % deviation -.5 TFP shock (H) TFP shock (F) % deviation Monetary policy shock (H) Monetary policy shock (F) % deviation Demand shock (H) Demand shock (F) Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

19 Negative aggregate TFP shock and monetary stimulus % deviation -.5 Exports (H) -2-4 Mass of exporters (H) 2 1 Export price index (H) % deviation Real exchange rate Interest rate (H) Consumption (F) TFP shock TFP shock + Monetary stimulus Monetary stimulus to counter negative TFP shock is effective on intensive margin, but worsens initial decline in extensive margin. TFP shock (H) Monetary policy shock (H) Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

20 Monetary policy rule and extensive margin of trade Exports (H) Mass of exporters (H) Export price index (H) % deviation Real exchange rate.6 Interest rate (H) Consumption (F) % deviation Benchmark ( =2) More aggressive on inflation stabilization ( =4) Response of extensive margin is dampened when monetary policy is more aggressive on inflation Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

21 Without extensive margin adjustment Exports (H) 1 Mass of exporters (H) Export price index (H) % deviation Real exchange rate.6 Interest rate (H) Consumption (F) % deviation Benchmark ( =2) More aggressive on inflation stabilization ( =4) Aggressive inflation stabilization increases volatility of exports Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

22 Conclusion Monetary stimulus may have different implications for intensive margin and extensive margin of trade. Currency depreciation and lower interest rates are favorable to export sales and, to some extent, export participation. However, inflationary effects deter entry of new firms and erode competitiveness of some incumbent exporters. Monetary policy that is more aggressive toward inflation stabilization reduces fluctuations in extensive margin. Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 17

23 Appendix Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June 216 / 2

24 Parameter Values Discount factor β.99 4% annual interest rate Weight on leisure in utility χ s.s. labor =.33 Elasticity of substitution γ 3.8 Ghironi & Melitz (25) Armington elasticity ρ 1.5 Backus et al. (1995) Labor income share 1 ν.6 Cooley & Prescott (1995) Depreciation rate of capital δ.25 1% depreciation/year # of firm-specific productivity n z 2 Monetary policy rule (Clarida, Gali, Gertler, 1998) inflation φ π 2 output φ Y.5 real exchange rate φ Q.1 persistence ρ i.8 Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 2

25 Household Representative household chooses C t, L t, K t+1, B t+1 (s t+1 ), B D t+1 subject to max E t t= β t [ε c t log C t + χ 2(1 L t)] C t + I t + q(s t+1 s t ) B(st+1 ) + BD t+1 w tl t + r tk t + d t + B(st ) + i p Bt D t P t P t P t P t s t+1 where K t+1 = (1 δ)k t + I t κ 2 B(s t+1 ) = state-contingent international bond ( ) 2 It δ K t K t q(s t+1 s t ) = price of B(s t+1 ) in units of home currency in state s t Bt D = non-contingent domestic bonds ε c t = demand shock Imura (BoC) and Shukayev (UAlberta) Extensive margin of trade June / 2