Sudden Sops, Secoral Reallocaions, and Real Exchange Raes Timohy J. Kehoe Universiy of Minnesoa Federal Reserve Bank of Minneapolis and Kim J. Ruhl NYU Sern School of Business
Wha Happens During a Sudden Sop? Mexico 1994-95 Opens o capial flows: lae 1980s rade deficis real exchange rae appreciaion Sudden sop: 1994-95 rade surplus real exchange rae depreciaion reallocaion from nonraded goods o raded goods fall in GDP, TFP End of sudden sop rade deficis real exchange rae appreciaion recovery of GDP, TFP
Mexico: rade balance 4.0 2.0 share of GDP (%) 0.0-2.0-4.0-6.0 1988 1990 1992 1994 1996 1998 2000
Mexico-U.S. real exchange rae 0.30 0.20 rer log(rer) 0.10 0.00 rer N -0.10-0.20 1988 1990 1992 1994 1996 1998 2000
Value added by secor 140 130 index (1994 = 100) 120 110 100 90 Traded Nonraded 80 70 1988 1990 1992 1994 1996 1998 2000
Mexico: oupu and TFP 110 index (1994 = 100) 105 100 95 GDP/N TFP 90 1988 1990 1992 1994 1996 1998 2000
Candidae Explanaions labor hoarding variable capial uilizaion Measured TFP mus decline! Growh Accouning Discipline
Our model Small open economy mulisecor: raded, nonraded cosly o adjus labor across secors Sudden sop radable good price increase, increase producion capial and labor misallocaed Model accouns for: real exchange rae, relaive prices rade balance Misses: TFP, GDP
Model overview Growh model: small open economy Nonraded good, y N, and domesic raded good, y D producion use inermediaes, capial, and labor Composie raded y = f ( y, m ) T D Fricions: cosly o move labor across secors Quaniaive model
Consumers max β u (,, ) 1980 ct c = N s.. ptct + pncn + qi + b + 1 = w + ( 1+ r ) b + rk + T, k = 1 k( 1 + δ ) + i iniial condiions on k 1988, b 1988 where ηψ ρ ρ ρ ( 1 η) ψ 1 c T c N u( ct, cn, ) = ε ( 1 ε) 1 ψ + n n.
We also experimen wih a quasi-linear uiliy funcion 1 ψ ρ ρ η 1 ρ c c uc (,, ) T ( 1 ) N T cn = ε ε λg 1 ψ + n n. which, when ψ = 0, is c uc ( T, cn, ) = log ε + ( 1 ε) λg n n No income effecs on labor supply. 1 ρ ρ η T c ρ N.
Producion funcions Domesically produced raded good ( ) 1 α D y = min z / a, z / a, A k g Θ (, ) αd D TD TD ND ND D D D D D 1 D D 1 Nonraded good D D 1 ΘD D 1, D = g θd D 1 where ( ) ( ) 1 α N y = min z / a, z / a, A k g Θ (, ) α N N TN TN NN NN N N N N N 1 N N 1 N N 1 ΘN N 1, N = g θn N 1 where ( ) Θ, = Θ, = 0. Base case ses ( ) ( ) D D 1 D N N 1 N 2 2
Composie raded good (Armingon aggregaor) Foreign demand Invesmen good Balance of paymens Marke clearing. ( ( ) ) 1 μ + μ y = M x 1 m ζ ζ T D ζ (( ) ) 1 1 τ 1 x = D + p ζ F F T i + i = Gz z γ 1 γ D N TI NI ( δ ) ( δ ) k i k = + D+ 1 D 1 D k i k = + N+ 1 N 1 N ( ) b + r b = + p x m 1 1 T F
Exogenous processes Counry ineres rae premia, mex σ 1. wih access o inernaional capial mex r = r* + σ mex 2. wihou access o inernaional capial mex r is domesically deermined Adul equivalen populaions, n, and working age populaion, Mexican ariff raes, τ D, and world ariff raes, τ F
Ineres rae premia 18.0 annual ineres rae 15.0 12.0 9.0 6.0 Daa Beliefs in sudden sop case 3.0 0.0 Beliefs in no sudden sop case 1988 1992 1996 2000 2004 2008 2012
Calibraion Res of world is U.S. 72% of impors o Mexico from U.S. (1988-2000) 60% of foreign direc invesmen from U.S. (1988-2000) r* = 0.04 β Elasiciies raded versus nonraded consumpion: 0.5 (Kravis, e al.) ineremporal elasiciy: 0.5 domesic raded versus impors: 2.0 Labor Adjusmen ( θ = θ ) labor shif from sudden sop: 6.7% D N
Calibraion coninued Se δ = 0.06 so ha δ K1988 / Y1988 = 0.11 Normalize prices in 1988 o 1 1988 Mexican inpu-oupu marix share parameers: atd, and, atn, ann, α D, αn, ε, μ scale parameers: A, A, M, D mex Ineres rae in 1988: r 1988 = 0.1574 D N Tax on capial income in 1989 o mach 1988 invesmen: τ K1989 = 0.20 Exogenous growh: g = 1.02
Commodiy 1988 Inpu-Oupu Marix Traded Inpu Final Demand Nonraded Toal in. demand Consumpion Invesmen Expors Toal final demand Traded 33.54 9.28 42.82 27.05 10.16 19.93 57.14 99.96 Nonraded 13.13 20.53 33.66 49.00 12.40 0.00 61.40 95.06 Toal inermediae consumpion 46.67 29.81 76.48 76.05 22.56 19.93 118.54 195.02 Employee compensaion 22.11 38.74 60.85 60.85 Reurn o capial 10.79 26.51 37.30 37.30 Value added 32.89 65.26 98.15 98.15 Impors 18.54 0.00 18.54 18.54 Tariffs 1.85 0.00 1.85 1.85 Toal Gross Oupu 99.96 95.06 195.02 76.05 22.56 19.93 118.54 313.56 Toal Demand a TN z = TN1988 = = = y N1988 inermediae inpu raded gross oupu nonraded 9.28 95.06 w 1988 = 1 D1988 = 22.11, N 1989 = 38.74 0.10
Calibraion of model Parameer Value Saisic Targe Consumer parameers b 1988-8.831 Trade balance o GDP in 1988, in percen 1.390 k 1988 169.817 Real ineres rae in 1988, in percen 15.740 β 0.987 U.S. real ineres rae, in percen 4.000 ε 0.234 Traded good share in consumpion in 1988 0.356 ρ -1.000 Elasiciy of subsiuion: raded o nonraded 0.500 η 0.306 Raio of hours worked o available hours in 1988 0.267 ψ -1.000 Ineremporal elasiciy of subsiuion 0.500 δ 0.062 Depreciaion o GDP in 1988, in percen 10.566 τ K1989 0.201 Invesmen in 1988 22.561 Producer parameers a TD 0.422 Share of raded inpus in domesic raded in 1988 0.422 a ND 0.165 Share of nonraded inpus in domesic raded in 1988 0.165 a TN 0.098 Share of raded inpus in domesic nonraded in 1988 0.098 a NN 0.216 Share of nonraded inpus in domesic nonraded in 1988 0.216 A D 2.770 Traded gross oupu in 1988 79.564 A N 1.546 Nonraded gross oupu in 1988 95.065 α 0.328 Capial s share of domesic raded value added in 1988 0.328 D
α N 0.406 Capial s share of nonraded value added in 1988 0.406 γ 0.450 Share of raded inpus in invesmen good producion in 1988 0.450 G 1.990 Invesmen in 1988 22.561 g 1.020 Growh rae of U.S. GDP per working age person, percen 2.000 Trade parameers M 1.866 Toal raded goods in 1988 99.955 μ 0.653 Raio of impors o domesic raded good in 1988 0.233 ζ 0.500 Elasiciy of subsiuion: domesic raded o impors 2.000 D 1988 21.141 Expors in 1988 19.928 Time series of parameers Mexican working age populaion daa and projecions n Mexican adul equivalen populaion daa and projecions σ Mexican ineres premia D U.S. working age populaion daa and projecions τ Mexican ariffs on U.S. imposs τ U.S. ariffs on Mexican impors F
Model wihou sudden sop 6.0 5.0 4.0 Trade balance (lef scale) 2.0 4.0 percen GDP 0.0-2.0 Capial-oupu raio (righ scale) 3.0 raio -4.0 2.0-6.0-8.0 1988 1998 2008 2018 2028 2038 2048 2058 1.0
Sudden sop! b, 1995,1996 = b 1 = agens do no foresee sudden sop agens do foresee lengh of sudden sop domesic ineres rae is endogenously deermined mex mex ineres paymens on foreign deb made a r 1994 = r* + σ 1994
Trade balance 6.0 4.0 percen GDP 2.0 0.0-2.0-4.0 Daa -6.0 Model -8.0 1988 1990 1992 1994 1996 1998 2000
Real exchange rae 0.30 0.20 RER daa RER model 0.10 RER N model log(rer) 0.00-0.10-0.20 RER N daa -0.30 1988 1990 1992 1994 1996 1998 2000
Terms of rade 140 130 RER T daa Model index (1994 = 100) 120 110 100 To daa 90 80 1988 1990 1992 1994 1996 1998 2000
Oupu and TFP 130 120 GDP/N model index (1994 = 100) 110 100 90 80 GDP/N daa TFP model TFP daa 70 1988 1990 1992 1994 1996 1998 2000
Labor inpu 120 110 model index (1994=100) 100 90 daa 80 70 1988 1990 1992 1994 1996 1998 2000
Value added by secor 160 Traded model 140 index (1994 = 100) 120 100 80 Nonraded model Nonraded daa Traded daa 60 40 1988 1990 1992 1994 1996 1998 2000
Traded labor/oal labor (derended) 24.0 20.0 model 16.0 index (1994=0) 12.0 8.0 4.0 0.0 daa -4.0 1988 1990 1992 1994 1996 1998 2000
no populaion growh no ariffs no ineres rae premia exogenous TFP drop Alernaive specificaions increase in foreign demand in 1995 o moderae deerioraion in erms of rade labor marke fricions variable capial uilizaion quasi-linear period uiliy perfec foresigh sudden sop is no a surprise
law of moion where Variable capial uilizaion ( 1 δ ( )) ( 1 δ ( )) k = u k + i D+ 1 D D D k = u k + i N+ 1 N N N δ χ ω ( u) = δ + ( u ω 1) during crisis uilizaion of nonradable capial falls sandard growh accouning: falling uilizaion = fallingtfp
TFP drop as exogenous robusness check: TFP drops DO NOT cause sudden sops ( τ ( ) ) 1 α D y = min z / a, z / a, A k νγ Θ (, ) αd Dτ TDτ TD NDτ ND D Dτ τ Dτ D D 1 D D 1 ( τ ( ) ) 1 α N α N yn τ = min ztn τ / atn, znn τ / ann, ANkN τ νγ τ N τ ΘN( N 1, N) N 1. ν 1.0 < 1995 = 0.89 1995 All else same
Increase in foreign demand in 1995 o moderae deerioraion in erms of rade
Terms of rade 115 Model 110 index (1994 = 100) 105 100 95 Daa 90 1988 1990 1992 1994 1996 1998 2000
Real exchange rae 0.30 0.20 RER daa log(rer) 0.10 0.00-0.10 RER model RER N model RER N daa -0.20-0.30 1988 1990 1992 1994 1996 1998 2000
Labor marke fricions and variable capial uilizaion
Traded labor/oal labor (derended) 10.0 8.0 6.0 index (1994=0) 4.0 2.0 0.0-2.0-4.0 1988 1990 1992 1994 1996 1998 2000
Oupu and TFP 130 120 GDP/N model index (1994 = 100) 110 100 90 80 GDP/N daa TFP daa TFP model 70 60 1988 1990 1992 1994 1996 1998 2000
Mexico: rade balance 25 20 15 share of gdp (%) 10 5 0-5 Daa -10 Model -15 1988 1990 1992 1994 1996 1998 2000
Capial uilizaion by secor 110 105 Traded index (1994=100) 100 95 90 85 Nonraded 80 1988 1990 1992 1994 1996 1998 2000
Exogenous TFP drop and quasi-linear period uiliy
Oupu and TFP 110 100 TFP daa GDP/N daa index (1994 = 100) 90 80 70 TFP model GDP/N model 60 1988 1990 1992 1994 1996 1998 2000
Aggregae labor inpu 120 110 Daa index (1994 = 100) 100 90 80 Model 70 1988 1990 1992 1994 1996 1998 2000
Why doesn he deerioraion in he erms of rade cause TFP and real GDP o fall? Kehoe and Ruhl (2008), Are Shocks o he Terms of Trade Shocks o Produciviy?
Inernaional rade as a producion echnology Inpus are expors and oupus are impors. 1 p M = X M = X p A deerioraion in he erms of rade (an increase in p ) acs as a produciviy shock.
Inernaional rade as a producion echnology Inpus are expors and oupus are impors. 1 p M = X M = X p A deerioraion in he erms of rade (an increase in p ) acs as a produciviy shock. Or does i?