Obstfeld and Rogoff: The Six Major Puzzles in International Macroeconomics

OBSTFELD, M, and K ROGOFF. 2000. The Six Major Puzzles in International Macroeconomics: Is There a Common Cause? NBER Working Paper.

"Why do people seem to have such a strong preference for consumption of their home goods (the home bias in trade puzzle)? Why do observed OECD current account imbalances tend to be so small relative to saving and investment when measured over any sustained period (the Feldstein-Horioka puzzle)? Why do home investors overwhelmingly prefer to hold home equity assets (the home bias portfolio puzzle)? Why is consumption less correlated than output across major OECT countries (the consumption correlations puzzle)? How is it possible that the half-life of real exchange rate changes can be three to four years (the purchasing power parity puzzle)? Why are exchange rates so volatile and so apparently disconnected from fundamentals (the exchange rate disconnect puzzle...)?" (2).

The authors attempt to explain all of these puzzles through the lenses of costs to trade conferred by distance in transport, a key assumption of the gravity trade model.

Each of the puzzles are explored separately. I skimmed them and will not document them.

"An obvious potential criticism of our central theme is that transport technology has been steadily improving over the past half century, and tariffs have fallen dramatically, especially among the OECD countries...while transport technology has steadily improved, labor costs have risen sharply so there is actually some debate about whether net transport costs have fallen" (43).