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This dissertation investigates the importance of the firm-level dynamics driven by the export penetration costs in resolving the consumption correlation puzzle. Existing research finds that firms that engage in export tend to have higher productivity, have higher levels of output, use higher levels of capital and labor inputs, and are efficient enough to overcome higher costs of doing international business. Moreover, firm-level data show that a significant percentage of firms that were exporters in one period cease to export in the next period, and vice versa. This transition of export status is positively correlated across countries. In this dissertation, these special features of the export sector are modeled and embedded in a two-country dynamic general equilibrium model. Due to the trade costs, the model can emphasize that exporters and non-exporters have different firm characteristics that conform to the empirical evidence. A positive home country-wide productivity shock reduces production costs for home producers and increases the demand for foreign goods. This results in positive cross-country co-movements in the turnover ratios in export status as data. The positive cross-country co-movements in the turnover ratios together with the different firm characteristics between exporters and non-exporters contribute additional positive co-movements in investment, employment and output levels across countries. Since all of the home intermediate goods that are produced with high productivity are available at home country whereas only some of them are available at foreign country, the consumption at home increase from the initial period of the shock whereas the consumption at foreign decreases initially for higher future consumption. These result in the cross-country consumption correlation which lies below the output correlation. Hence, the model successfully generates cross-country correlations in international macroeconomic variables with correct signs and magnitudes. A key result of the model is that relatively high costs associated with export penetration generate the cross-country consumption correlation which lies below the output correlation thus providing a resolution to the international consumption correlation puzzle. |
