I study a model of regime change in which the government can communicate with different levels of precision as a function of the underlying fundamentals. In the model, higher precision of communication corresponds to a lower dispersion of private information among market participants. I compare a policy of an uncommitted government, which chooses the precision of communication after it learns the realization of fundamentals, to a policy of a committed government, which commits to a state-dependent policy before it learns the realization of fundamentals. I find that an uncommitted government communicates imprecisely for weak fundamentals and precisely for strong fundamentals. In contrast, a committed government communicates precisely for weak fundamentals and imprecisely for strong fundamentals. Consequently, a committed government saves its regime more often than an uncommitted one. An uncommitted government can benefit from a rule that enforces constant precision of communication.
In this paper we argue that modeling dynamic properties of trade elasticity in a
unified framework is essential for understanding one of the fundamental questions that
lies at the intersection of business cycle and trade theory: What role do international
trade linkages play in transmitting shocks across borders? Analytically, we show that
in a broad class of open economy macroeconomic models shock transmission crucially
depends on dynamic properties of trade elasticity. We demonstrate how modeling
the dynamics of trade elasticity is thus of critical importance for applications aiming
to relate economic models to cross-sectional variation of business cycle moments in
the data. In the context of such applications, our paper cautions against drawing
conclusions from models relaying on a single (static) trade elasticity and advocate the
use of models consistent with Online Appendix
Sergey Kolbin
Ph.D. Candidate
Department of Economics
1022 International Affairs Building
420 West 118th Street
New York City, NY 10027
Phone: (929) 343-8130
sk3404@columbia.edu