research

We study how the dynamics of trade policy affect the dynamics of trade volumes, summarized by the dynamics of the trade elasticity. We use U.S. imports and trade policy from 1974-2017 on China and Vietnam - the countries with the largest growth in U.S. imports and the largest cuts in US import tariffs over the last fifty years - and a multi-industry heterogeneous firm dynamic trade model to recover the dynamic path of the trade elasticity from an unanticipated once-and-for-all permanent tariff change. We estimate a short-run trade elasticity that is about three and a long-run trade elasticity that is about 15, and find that it takes about five years to close half of the gap between the short-run and long-run. We argue that the dynamics of trade policy uncertainty in these reforms biases down the estimates of the long-run trade elasticity and biases up the short-run trade elasticity recovered from reduced form empirical approaches. We argue that the dynamics of trade policy in other trade reforms such as within NTR regimes or Preferential Trading Agreement biases estimates of long-run elasticities downward and short-run elasticities upward.

This paper develops a quantitative general-equilibrium model to analyze the macroeconomic implications of a global minimum corporate income tax for the U.S. economy. This policy has been widely adopted by some of the United States' most important trade partners, including the European Union and Japan, under a landmark international agreement spearheaded by the OECD and the G20, but the United States itself has not yet implemented it. This inaction poses questions about the policy's potential macroeconomic impact given the United States's status as the domicile of the world's largest multinational enterprises (MNEs) and its position as the global economic leader. Our model features heterogeneous firms that make endogenous decisions about exporting, multinational production, and profit shifting, as well as a detailed representation of MNE-related provisions of the U.S. tax code, including the GILTI provision of the 2017 Tax Cuts and Jobs Act (TCJA). Through a series of counterfactual analyses, we quantify the macroeconomic consequences of TCJA's MNE-related provisions, the unilateral implementation of a global minimum corporate income tax by the U.S.'s main trading partners, and the interaction between these effects. Additionally, we evaluate the potential effects of the U.S. adopting such a policy. Our findings shed light on the complex dynamics at play and offer critical insights into the potential paths forward for U.S. policy in the context of global tax reform.

We model trade policy as a Markov process. Using a dynamic exporting model, we estimate how expectations about U.S. tariffs on China have changed around the U.S.-China trade war. We find (i) no increase in the likelihood of a trade war before 2018; (ii) the trade war was initially expected to end quickly but its expected duration grew substantially after 2020; and (iii) the trade war reduced the likelihood that China would face Non-Normal Trade Relations tariffs in the future. Our findings imply the expected mean future U.S. tariff on China rose more under President Biden than under President Trump.

@techreport{NBERw32150,
title = {{Trade War and Peace: U.S.-China Trade and Tariff Risk from 2015–2050}},
author = "Alessandria, George A and Khan, Shafaat Y and Khederlarian, Armen and Ruhl, Kim J and Steinberg, Joseph B",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "32150",
year = "2024",
month = "February",
doi = {10.3386/w32150},
URL = "http://www.nber.org/papers/w32150",
}

Misallocation of resources can cause large reductions in total factor productivity (TFP). The literature emphasizes financial frictions driven by limited contract enforcement that restrict productive firms’ access to credit. Evidence suggests that information frictions also reduce access to credit, particularly in countries with weak contract enforcement. I study how the interaction between information frictions and limited enforcement affects resource allocation and TFP. I build a model in which lenders have imperfect information about borrowers’ default risk and enforcing repayment is costly. I use the model to illustrate i) how imperfect information of this type causes misallocation, and ii) how limited enforcement exacerbates this effect. I calibrate the model and find that imperfect information causes TFP to fall by up to 23% when I take contract enforcement parameter values from U.S. data, and by up to 32% when I set them to values common in low-income countries.

This paper studies the hypothesis that real exchange rate undervaluation can alleviate the economic symptoms of financial underdevelopment, acting as a temporary substitute for institutional reform. This hypothesis is motivated by recent empirical studies that document a link between real exchange rate undervaluation and increased growth in GDP per capita in developing countries. As further motivation I present new evidence that this effect is driven by an interaction between undervaluation and financial frictions. Using panel data on value added in manufacturing sectors at the 3-digit ISIC level for 103 countries, I find that for countries with low levels of financial development, real exchange rate undervaluation is associated with stronger growth in sectors that depend more heavily on external financing. To establish a causal relationship between undervaluation, financial development and growth and evaluate its quantitative implications I build a multi-sector semi-small open economy model with limited enforcement of financial contracts. Qualitative partial equilibrium results indicate that a government policy of subsidizing the purchase of tradeable goods undervalues the real exchange rate and loosens enforcement constraints, leading to temporary increased growth on the transition to a new steady state with higher output. The magnitude of this effect is increasing in the severity of the enforcement problem. For economies with severe enforcement problems this policy increases consumption although the quantitative effect is quite small.

We develop a general-equilibrium model to study the macroeconomic consequences of international profit shifting by multinational enterprises (MNEs). In our model, MNEs shift profits by exploiting intangible capital transfer pricing rules, which makes intangible investment more attractive and leads to higher output at home and abroad. We use the model to quantify the effects of two reforms proposed by the OECD: (i) reallocating MNEs’ profit tax bases to the countries where they sell their products; and (ii) a minimum global corporate income tax. Both reforms would reduce profit shifting substantially, but (i) would reduce global output whereas (ii) would have little macroeconomic impact. The reforms’ distributional implications would also be important. In high-tax countries, tax revenues would increase more than output declines, raising gross national income and enabling redistribution that could offset lower wages. In contrast, output and tax revenues would both drop in low-tax countries, significantly reducing national income.

@article{DYRDA2024104022, title = {A macroeconomic perspective on taxing multinational enterprises},
journal = {Journal of International Economics},
volume = {152},
pages = {104022},
year = {2024},
doi = {https://doi.org/10.1016/j.jinteco.2024.104022},
url = {https://www.sciencedirect.com/science/article/pii/S0022199624001491},
author = {Sebastian Dyrda and Guangbin Hong and Joseph B. Steinberg}
}

We study China’s export growth to the United States from 1950--2008, using a structural model to disentangle the effects of past tariff changes from the effects of changes in expectations of future tariffs. We find the effects of China’s 1980 Normal Trade Relations (NTR) grant lasted past its 2001 accession to the World Trade Organization (WTO), and the likelihood of losing NTR status decreased significantly during 1986--1992 but changed little thereafter. U.S. manufacturing employment trends support our findings: industries more exposed to the 1980 reform have shed workers steadily since then without acceleration around China's WTO accession.

@techreport{NBERw29122,
title = {{Trade-Policy Dynamics: Evidence from 60 Years of U.S.-China Trade}},
author = "Alessandria, George A and Khan, Shafaat Y and Khederlarian, Armen and Ruhl, Kim J and Steinberg, Joseph B",
institution = "National Bureau of Economic Research",
type = "Working Paper",
series = "Working Paper Series",
number = "29122",
year = "2021",
month = "August",
doi = {10.3386/w29122},
URL = "http://www.nber.org/papers/w29122",
}

Wealth inequality has prompted calls for higher taxes on capital income and wealth, but also concerns that rich households would respond by concealing their assets offshore. We use a general equilibrium model to study how taxing capital more heavily would affect offshore tax evasion and how this would affect the broader economy. Without evasion, tax revenue could be increased dramatically, inequality could be reduced, and widespread welfare gains could be achieved. After accounting for evasion, however, tax revenue would rise marginally or even fall, inequality would increase, and widespread welfare losses would result.

@article{doi:10.1086/729066,
author = {Rotberg, Shahar and Steinberg, Joseph},
title = {Tax Evasion and Capital Taxation},
journal = {Journal of Political Economy},
volume={132},
number={7},
pages={2179-2530},
year={2024},
doi = {10.1086/729066},
URL = {https://doi.org/10.1086/729066}
}

Mortgage interest deductions and other homeownership subsidies are widely believed to be harmful because they redistribute resources from lower-income renters to higher-income homeowners. We argue that renters actually benefit from these policies in general equilibrium for two reasons. First, the rental supply curve is relatively inelastic, which means that rents fall when these policies reduce rental demand. Second, many renters spend most of their income on housing, and these renters gain substantially from rent decreases. We calibrate a quantitative model to match empirical evidence on these factors and show they are strong enough that subsidizing homeownership actually increases welfare.`

@article{ROTBERG2024103551,
title = {Mortgage interest deductions? Not a bad idea after all},
journal = {Journal of Monetary Economics},
year = {2024},
volume=144,
pages={103551},
doi = {https://doi.org/10.1016/j.jmoneco.2024.01.004},
url = {https://www.sciencedirect.com/science/article/pii/S0304393224000047},
author = {Shahar Rotberg and Joseph B. Steinberg}
}

What is the optimal design of the international corporate tax system? We revisit this classic question in a multi-country general equilibrium model that incorporates three key features of the modern globalized economy: multinational production; intangible capital; and international profit shifting. Our model’s competitive equilibrium is inefficient due to an externality that arises from international spillovers in intangible investment. In the absence of profit shifting, there is little, if anything, a Ramsey planner can do with corporate income taxes to improve the allocation of intangible investment across countries. However, profit shifting allows the planner to use corporate income taxes to internalize the externality and achieve an efficient allocation of intangible investment. To quantitatively investigate the properties of the Ramsey planner’s optimal policy in a more realistic setting, we extend our model to an environment with firm heterogeneity and selection into multinational production. Without spillovers, it would be optimal to shut down profit shifting as much as possible. With spillovers, it would be optimal to allow MNEs to continue to shift profits, and if the planner is restricted to Pareto-improving policies, it would be optimal to allow even more profit shifting than under the status quo.

@article{DYRDA202474,
title = {Optimal taxation of multinational enterprises: A Ramsey approach},
journal = {Journal of Monetary Economics},
volume = {141},
pages = {74-97},
year = {2024},
note = {CARNEGIE-ROCHESTER-NYU APRIL 2023 CONFERENCE},
issn = {0304-3932},
doi = {https://doi.org/10.1016/j.jmoneco.2023.10.003},
url = {https://www.sciencedirect.com/science/article/pii/S0304393223001186},
author = {Sebastian Dyrda and Guangbin Hong and Joseph B. Steinberg}
}

I develop a dynamic theory of exporting that synthesizes two approaches: static models, in which exporting costs depend on the number of foreign customers a firm serves in the present; and dynamic models, in which these costs depend on whether a firm exported in the past. The theory simultaneously accounts for two sets of established empirical findings: (i) larger markets attract exports from more firms and these exports are more concentrated; and (ii) new exporters are generally smaller and more likely to exit than incumbents. It also accounts for a new set of findings from Brazilian microdata showing that differences between new exporters and incumbents are more pronounced in larger markets. When calibrated to match all of these findings, the theory predicts that trade reforms cause greater but also slower trade growth in smaller markets.

@article{STEINBERG2023103807,
title = {Export market penetration dynamics},
journal = {Journal of International Economics},
volume = {145},
pages = {103807},
year = {2023},
issn = {0022-1996},
doi = {https://doi.org/10.1016/j.jinteco.2023.103807},
url = {https://www.sciencedirect.com/science/article/pii/S0022199623000934},
author = {Joseph B. Steinberg}
}

US President Trump has threatened to leave the North American Free Trade Agreement. How much would each member country gain or lose if this threat were carried out? Would trade imbalances within the region diminish? What would the transition to new production and consumption patterns look like? I provide quantitative answers to these questions using a dynamic general equilibrium model with a multi-sector input–output production structure, heterogeneous firms that make forward-looking export participation decisions, and adjustment frictions in trade and factor markets. Regional trade flows would fall dramatically, and while the US trade deficit with Canada would decline, the deficit with Mexico would grow. Welfare would fall by 0.04%, 0.12%, and 0.2% in the United States, Canada, and Mexico, respectively, and transition dynamics would significantly affect welfare in both the short run and the long run.

@article{https://doi.org/10.1111/caje.12445,
author = {Steinberg, Joseph B.},
title = {The macroeconomic impact of NAFTA termination},
journal = {Canadian Journal of Economics/Revue canadienne d'économique},
volume = {53},
number = {2},
pages = {821-865},
doi = {https://doi.org/10.1111/caje.12445},
url = {https://onlinelibrary.wiley.com/doi/abs/10.1111/caje.12445},
year = {2020}
}

The paper by Caldara et al. develops new measures of trade policy uncertainty (TPU) that are associated with reduced economic activity at the micro and macro levels, and uses a DSGE model with sticky prices and sunk exporting costs to illustrate the economic forces driving these results. This discussion provides two forms of additional context for the authors’ findings. First, I shed light on the reasons that firms care about TPU by linking the authors’ dataset to the U.S. input-output accounts. Second, I use a simple model of price-setting under nominal rigidities to explore the sensitivity of the authors’ quantitative results to some of their modeling assumptions.

@Article{RePEc:eee:moneco:v:109:y:2020:i:c:p:60-64,
author={Steinberg, Joseph B.},
title={{Comment on: “The economic effects of Trade Policy Uncertainty” by Dario Caldara, Matteo Iacoviello, Patrick Molligo, Andrea Prestipino, and Andrea Raffo}},
journal={Journal of Monetary Economics},
year=2020,
volume={109},
number={C},
pages={60-64},
doi={10.1016/j.jmoneco.2019.08},
url={https://ideas.repec.org/a/eee/moneco/v109y2020icp60-64.html}
}

On June 23, 2016, the United Kingdom voted to leave the European Union. The trade policies that will replace E.U. membership are uncertain, however, and speculation abounds that this uncertainty will cause immediate harm to the U.K. economy. In this paper, I use a dynamic general equilibrium model with heterogeneous firms, endogenous export participation, and stochastic trade costs to quantify the impact of uncertainty about post-Brexit trade policies. I find that the total consumption-equivalent welfare cost of Brexit for U.K. households is between 0.4 and 1.2%, but less than a quarter of a percent of this cost is due to uncertainty.

@article{STEINBERG2019175,
title = {Brexit and the macroeconomic impact of trade policy uncertainty},
journal = {Journal of International Economics},
volume = {117},
pages = {175-195},
year = {2019},
issn = {0022-1996},
doi = {https://doi.org/10.1016/j.jinteco.2019.01.009},
url = {https://www.sciencedirect.com/science/article/pii/S0022199619300121},
author = {Joseph B. Steinberg}
}

Are U.S. trade deficits caused by high foreign saving—a global saving glut—or low domestic saving—a domestic saving drought? To answer this question, I conduct a wedge accounting analysis of U.S. trade balance dynamics during 1995–2011 using a dynamic general equilibrium model. I find that a global saving glut explains 96 percent of U.S. trade deficits in excess of those that would have occurred naturally as a result of productivity growth and demographic change. Contrary to widespread belief, however, investment distortions, not a global saving glut, account for much of the decline in real interest rates that has accompanied U.S. trade deficits.

@article{STEINBERG2019200,
title = {On the source of U.S. trade deficits: Global saving glut or domestic saving drought?},
journal = {Review of Economic Dynamics},
volume = {31},
pages = {200-223},
year = {2019},
issn = {1094-2025},
doi = {https://doi.org/10.1016/j.red.2018.07.002},
url = {https://www.sciencedirect.com/science/article/pii/S1094202518303843},
author = {Joseph B. Steinberg}
}

In recent decades, country portfolio home bias has fallen in advanced economies but not in emerging economies. I use a dynamic general equilibrium model to show that changes in the distribution of global production and absorption explain this pattern. For advanced economies, whose share of world output fell as their trade openness rose, the model predicts an unambiguous drop in home bias. By contrast, emerging economies' growth in both size and trade openness have opposing implications for portfolios. To quantify these forces I calibrate the model to real and counterfactual input–output tables. Jointly, changes in the global production structure account for much of the decline in home bias in advanced economies and lack thereof in emerging economies. Country size and trade openness account for most of this effect. Consistent with theory, the increase in the intermediate share of trade had little impact.

@article{STEINBERG2018195,
title = {International portfolio diversification and the structure of global production},
journal = {Review of Economic Dynamics},
volume = {29},
pages = {195-215},
year = {2018},
issn = {1094-2025},
doi = {https://doi.org/10.1016/j.red.2018.01.001},
url = {https://www.sciencedirect.com/science/article/pii/S1094202518300048},
author = {Joseph B. Steinberg}
}

Since the early 1990s, as the United States borrowed heavily from the rest of the world, employment in the US goods-producing sector has fallen. We construct a dynamic general equilibrium model with several mechanisms that could generate declining goods-sector employment: foreign borrowing, nonhomothetic preferences, and differential productivity growth across sectors. We find that only 15.1 percent of the decline in goods-sector employment from 1992 to 2012 stems from US trade deficits; most of the decline is due to differential productivity growth. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall.

@article{doi:10.1086/696279,
author = {Kehoe, Timothy J. and Ruhl, Kim J. and Steinberg, Joseph B.},
title = {Global Imbalances and Structural Change in the United States},
journal = {Journal of Political Economy},
volume = {126},
number = {2},
pages = {761-796},
year = {2018},
doi = {10.1086/696279},
URL = {https://doi.org/10.1086/696279},
}

Mean-variance analysis is widely used for portfolio allocation decisions. The use of historical data for the inputs may be inferior to using informed estimates that reflect one's beliefs about the current financial environment. In this article we show that portfolios based on expert opinion can outperform portfolios based on historical data, and that even better performance can be achieved by taking into account regression to the mean.

@article{SmithSteinbergWertheimerJWM2006,
author = {Smith, Gary and Steinberg, Joseph and Wertheimer, Robert},
year = {2006},
month = {10},
title = {The Next Best Thing to Knowing Someone Who is Usually Right},
volume = {9},
journal = {The Journal of Wealth Management},
doi = {10.3905/jwm.2006.661432}
}

Since the early 1990s, the United States has borrowed heavily from its trading partners. This paper presents an analysis of the impact of an end to this borrowing, an end that could occur suddenly or gradually.

Modeling U.S. borrowing as the result of what Bernanke (2005) calls a global saving glut—where foreigners sell goods and services to the United States but prefer purchasing U.S. assets to purchasing U.S. goods and services—we capture four key features of the United States and its position in the world economy over 1992–2012. In the model, as in the data: (1) the U.S. trade deficit first increases, then decreases; (2) the U.S. real exchange rate first appreciates, then depreciates; (3) the U.S. trade deficit is driven by a deficit in goods trade, with a steady U.S. surplus in service trade; and (4) the fraction of U.S labor dedicated to producing goods—agriculture, mining and manufacturing—falls throughout the period.

Using this model, we analyze two possible ends to the saving glut: an orderly, gradual rebalancing and a disorderly, sudden stop in foreign lending as occurred in Mexico in 1995–96. We find that a sudden stop would be very disruptive for the U.S. economy in the short term, particularly for the construction industry. In the long term, however, a sudden stop would have a surprisingly small impact. As the U.S. trade deficit becomes a surplus, gradually or suddenly, employment in goods production will not return to its level in the early 1990s because much of this surplus will be trade in services and because much of the decline in employment in goods production has been, and will be, due to faster productivity growth in goods than in services.

@TechReport{RePEc:fip:fedmep:13-4,
author={Timothy J. Kehoe and Kim J. Ruhl and Joe Steinberg},
title={{What will happen when foreigners stop lending to the United States?}},
year=2013,
month=,
institution={Federal Reserve Bank of Minneapolis},
type={Economic Policy Paper},
url={https://ideas.repec.org/p/fip/fedmep/13-4.html},
number={13-4},
abstract={Since the early 1990s, the United States has borrowed heavily from its trading partners. This paper presents an analysis of the impact of an end to this borrowing, an end that could occur suddenly or gradually.},
keywords={},
doi={},
}

In this paper, we explore the impact of the Great Recession on economic inequality and redistribution in the United States. We analyze many sorts of inequality (in earnings, disposable income, consumption expenditures and wealth) for different sections of the economic distribution. Here we highlight three central findings.
• In 2010, the bottom 20 percent of the U.S. earnings distribution was doing much worse, relative to the median, than in the entire postwar period. This is because their earnings (including wages, salaries, and business and farm income) fell by about 30 percent relative to the median over the course of the recession. This lowest quintile also did poorly in terms of wealth, which declined about 40 percent.
• Redistribution through taxes and transfer programs reached historically high levels in 2010. As a result, spending power, captured by disposable income and consumption expenditures on nondurables, of this same lowest 20 percent did not significantly change relative to other economic groups during the recession.
• Although government redistribution protected households from fully bearing the impact of an earnings decline, households that experienced such a decrease nonetheless endured sizable drops in disposable income and drops in consumption expenditures.

@TechReport{RePEc:fip:fedmep:12-1,
author={Fabrizio Perri and Joe Steinberg},
title={{Inequality and redistribution during the Great Recession}},
year=2012,
month=,
institution={Federal Reserve Bank of Minneapolis},
type={Economic Policy Paper},
url={https://ideas.repec.org/p/fip/fedmep/12-1.html},
number={12-1},
abstract={In this paper, we explore the impact of the Great Recession on economic inequality and redistribution in the United States. We analyze many sorts of inequality (in earnings, disposable income, consumption expenditures and wealth) for different sections of the economic distribution.},
keywords={},
doi={},
}