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Understanding the effect of productivity changes on international relative prices: the role of news shocks

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  • Deokwoo Nam
  • Jian Wang

Abstract

The terms of trade and the real exchange rate of the US appreciate when the US labor productivity increases relative to the rest of the world. This finding is at odds with predictions from standard international macroeconomic models. In this paper, we find that incorporating news shocks to total factor productivity (TFP) in an otherwise standard dynamic stochastic general equilibrium (DSGE) model with variable capital utilization can help the model replicate the above empirical finding. Labor productivity increases in our model after a positive news shock to TFP because of an increase in capital utilization. Under some plausible calibrations, the wealth effect of good news about future productivity can increase domestic demand strongly and induce an increase in home prices relative to foreign prices.

Suggested Citation

  • Deokwoo Nam & Jian Wang, 2010. "Understanding the effect of productivity changes on international relative prices: the role of news shocks," Globalization Institute Working Papers 61, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:61
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    File URL: http://dallasfed.org/assets/documents/institute/wpapers/2010/0061.pdf
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    References listed on IDEAS

    as
    1. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
    2. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, vol. 61(1), pages 163-185, October.
    3. Schmitt-Grohe, Stephanie & Uribe, Martin, 2007. "Optimal simple and implementable monetary and fiscal rules," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1702-1725, September.
    4. Luis Opazo, 2006. "The Backus-Smith Puzzle: The Role of Expectations," Working Papers Central Bank of Chile 395, Central Bank of Chile.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Hedging Income Fluctuations with Foreign Currency Assets
      by Blog Author in Liberty Street Economics on 2016-01-06 18:00:00

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    Cited by:

    1. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "The international risk sharing puzzle is at business cycle and lower frequency," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(2), pages 448-471, May.
    2. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
    3. Rabanal, Pau & Rubio-Ramírez, Juan F., 2015. "Can international macroeconomic models explain low-frequency movements of real exchange rates?," Journal of International Economics, Elsevier, vol. 96(1), pages 199-211.
    4. D. Siena, 2014. "The European Monetary Union and Imbalances: Is it an Anticipation Story ?," Working papers 501, Banque de France.
    5. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "Traded and Nontraded Goods Prices, and International Risk Sharing: An Empirical Investigation," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 8(1), pages 403-466.
    6. Ansgar Belke & Steffen Elstner & Svetlana Rujin, 2022. "Growth Prospects and the Trade Balance in Advanced Economies," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(5), pages 1209-1234, October.
    7. Bianca De Paoli & Hande Küçük, 2015. "News shocks, monetary policy, and foreign currency positions," Staff Reports 750, Federal Reserve Bank of New York.
    8. Claudio, João C. & von Schweinitz, Gregor, 2020. "On the international dissemination of technology news shocks," IWH Discussion Papers 25/2020, Halle Institute for Economic Research (IWH).
    9. Kyriacos Lambrias, 2013. "News Shocks, Real Exchange Rates and International Co-Movements," BCL working papers 83, Central Bank of Luxembourg.
    10. Nam, Deokwoo & Wang, Jian, 2015. "The effects of surprise and anticipated technology changes on international relative prices and trade," Journal of International Economics, Elsevier, vol. 97(1), pages 162-177.
    11. Romero, Jaime & Cruz-Roche, Ignacio & Charron, Jean-Philippe, 2020. "The myth of price convergence under economic integration: A proposed explanation for the difference in food prices across European countries," European Management Journal, Elsevier, vol. 38(2), pages 267-276.
    12. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do Mood Swings Drive Business Cycles and is it Rational?," NBER Working Papers 17651, National Bureau of Economic Research, Inc.

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    Keywords

    Business cycles - Econometric models; International finance; International trade - Econometric models; Labor productivity;
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