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Fantastic beasts and where to find them

Author

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  • Gianmarco I. P. Ottaviano
  • Davide Suverato

Abstract

Fantastic beasts are magical creatures that cannot be seen unless one looks for them with the eye of the wizard, but that still play a significant role in the world. The fantastic beasts we hunt and find in the present paper are welfare changes induced by resource shocks that are invisible in quantitative trade models with monopolistic competition and heterogeneous firms if one relies on the pervasive assumption of demand exhibiting constant elasticity of substitution. We argue that, for fantastic beasts to materialize, markups have to vary across firms and firm heterogeneity has to vary across sectors. This is shown both theoretically and empirically exploiting a panel of 76 countries and 17 manufacturing industries for the period 1995-2020.

Suggested Citation

  • Gianmarco I. P. Ottaviano & Davide Suverato, 2024. "Fantastic beasts and where to find them," CEP Discussion Papers dp1989, Centre for Economic Performance, LSE.
    • Handle: RePEc:cep:cepdps:dp1989
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    References listed on IDEAS

    as
    1. Melitz, Marc J. & Redding, Stephen J., 2014. "Heterogeneous Firms and Trade," Handbook of International Economics, in: Gopinath, G. & Helpman, . & Rogoff, K. (ed.), Handbook of International Economics, edition 1, volume 4, chapter 0, pages 1-54, Elsevier.
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    More about this item

    Keywords

    quantitative trade models; variable markups; incomplete pass-through; resource shocks; immiserizing growth;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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