Real Exchange Rate and Net Trade Dynamics: Financial and Trade Shocks

Figure 1: Real Exchange Rate and Net Trade Flows

Notes: RER is the log of the quarterly real exchange rates of the United States. Normalized with $$1980\mathrm{q}1=0$$. Effective exchange rate indices, Real, Narrow (BIS). NT is the log of Exports to Imports ratio for the United States. Exports and Imports are from Quarterly National Accounts (OECD). Solid lines plot the trend component of each variable from the Hodrick-Prescott filter with a smoothing parameter of 1600.

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Figure 2: Dynamic Correlation between RER and NT Flows

Notes: We calculate the dynamic correlations as cor$$(\Delta_h q_t, \Delta_h nt_t)$$, where $$q_t$$ and $$nt_t$$ are log of the RER and the export-import ratio, respectively, and $$\Delta_h$$ denotes $$h$$-quarter difference. 'No Dynamics & No Trade Shocks' corresponds to the model without fixed exporting costs, firm heterogeneity, and trade shocks.

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Figure 3: Figure 3: Spectrum of the RER

Notes: The graph is enlarged for the frequency of [0, 1], as the spectrum on $$[1, \pi]$$ is near zero. The full graph is presented in Figure B.1. Gray area shows the range of the frequencies for the business cycle. The blue line with circles shows the result in the benchmark model, while the violet line with crosses shows the result of the model recalibrated with no sunk cost of exporting.

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Figure 4: Selected IRFs to Trade and Financial Shocks (%)

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Figure 5: IRFs to Trade Shock for Different Values of $$\tau $$ (%)

Notes: The rest of the parameters are set as in Table 1.

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Figure 6: Identification of $$\tau $$

Notes: Correlation of the cross country growth rates of domestic absorption between the US and ROW given different values of $$\tau $$. The other parameters are set as in Table 1. Based on model simulation of 10,000 periods. Black dashed line is the correlation in the data.

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Figure B.1: Spectrum of the RER