Diapositive 1

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US Current Account deficit, extensive margin and
firms heterogeneity
Francesco Pappadà Paris School of Economics May
2007
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Aim of the presentation

• Give some evidence from stylized facts on US
  current account
• Show how the literature approached this subject
• The motivation and the main apport of my model

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US CA some historical evidence
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US Current Account its components
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Global current account imbalances

• US current account and emerging economies
• an export growth- enhancing strategy
• high savings rates
• financing US CA deficit and raising reserves in

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Literature 1 is the US CA deficit sustainable?

• Obstfeld M.,Rogoff K., The unsustainable US
  current account position revisited, NBER, October
  2004.
• Roubini N., Global current account imbalances
  Orderly or Disorderly rebalancing?,
  www.rgemonitor.com, December 2005.
• Hausmann R., Sturzenegger F., US and Global
  Imbalances can Dark matter prevent a big bang?,
  Harvard University, November 2005.

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Literature 2 valuation effects

• Gourinchas P., Rey H., International financial
  adjustment, NBER, September 2004.
• Lane P., Milesi-Ferretti G., The External wealth
  of Nations Mark II revised and extended
  estimates of foreign assets and liabilities, IMF
  working paper, March 2006.

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Literature 3 firms heterogeneity and extensive
margin

• Chaney T., Distorted gravity heterogeneous
  firms, market structure and the geography of
  International Trade, University of Chicago, MIT,
  January 2006.
• Corsetti G., Martin P., Pesenti P., Varieties and
  the transfer problem the extensive margin of
  current account adjustment, forthcoming

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What my work adds

• Look at the extensive margin in US CA how much
  does it account for the adjustment and which is
  its impact on real exchange rate
• The introduction of firms heterogeneity opens
  another interesting field evaluate the effect of
  the adjustment on productivity thresholds
• Consequences of the US CA adjustment on aggregate
  productivity in US and ROW

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model framework

• Two symmetric countries, one tradable good
• Production
• Cost function
• Preferences
• Distribution function of productivity

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model framework

• Prices of goods
• Price indexes

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model framework

• Value of exports for every firm at given prices
• Free entry conditions on profits and cut-offs

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model framework

• Equilibrium price indexes (plugging in the
  cut-offs)
• Equilibrium thresholds and nominal exchange rate

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model framework

• Balanced current account
• Equilibrium value of export for every firm
• Aggregate exports and imports of Home country

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model framework

• Resolving integrals I find the current account
• Then I take the total differential of (5)
• And finally I evaluate it in the neighborhoods of
  the steady-state equilibrium

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What has to be done...

• Look at the impact of the transfer on thresholds
• direct effect (on income)
• indirect effect (through the nominal exchange
  rate)
• Study valuation effects by considering a nominal
  transfer (here its a real transfer of
  ressources)
• Add a non-tradable sector and eventually a
  cut-off on firms active only on domestic market
• What does the transfer imply on aggregate
  productivity, other...