Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock

Authors

Andres Rodrıguez-Clare

Jose P. Vasquez

Download PDF
(678 KB)

2020-32 | March 1, 2022

We present a dynamic quantitative trade and migration model that incorporates downward nominal wage rigidities and show how this framework can generate changes in unemployment and labor participation that match those uncovered by the empirical literature studying the “China shock.” We find that the China shock leads to average welfare increases in most U.S. states, including many that experience unemployment during the transition. However, nominal rigidities reduce the overall U.S. gains by around one fourth. In addition, there are seven states that experience welfare losses in the presence of downward nominal wage rigidity that would have experienced gains without it.

Article Citation

Rodrıguez-Clare, Andres, Jose P. Vasquez, and Mauricio Ulate. 2020. “Trade with Nominal Rigidities: Understanding the Unemployment and Welfare Effects of the China Shock,” Federal Reserve Bank of San Francisco Working Paper 2020-32. Available at https://doi.org/10.24148/wp2020-32

About the Author
Abstract image representing a seat vacancy.
Mauricio Ulate is a senior economist in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Mauricio Ulate