Überblick
The macroeconomic costs of closing an external imbalance are revisited in the context of the classical controversy on the "transfer problem", accounting for net creation and destruction of product varieties. We set up a general-equilibrium model of current account rebalancing with firms´ entry and exit in the tradables and nontradables sectors worldwide. We show that real exchange rate movements in equilibrium are dramatically lower when trade adjustment at the extensive margin is accounted for, relative to traditional macromodels in which there is no free entry and debtor countries suffer a signifcant deterioration of their terms of trade. For reasonable parameterizations, movements in aggregate consumption and employment (hence changes in social welfare) are not sensitive to product di¤erentiation, and change little regardless of whether adjustment occurs through movements in relative prices or quantities. This result warns against interpreting the size of real depreciation associated with trade rebalancing as an index of macroeconomic distress.