Perhaps the one question facing trade economists with the most urgency is the effect of liberalization and other trade shocks on the welfare of workers, a question which has generated a large body of research. However, a feature shared by almost all of the extant trade literature on this is a reliance on static models, in which workers are assumed to be either instantly costlessly mobile, or perfectly immobile (we will discuss important exceptions below). This prevents the trade literature from even addressing, let alone answering, some central questions: What are the costs faced by workers who wish to move to a new industry in response to import competition? How long will the labor market take to adjust, and find its new steady state? Will that steady state feature a lasting differential impact on workers in the import-affllicted sector, or will arbitrage equalize worker returns in the long run? What are the lifetime welfare effects on workers in different industries, taking into account moving costs and transitional dynamics?
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Over the past twenty years, economists have developed a rich set of tools for studying the design of monetary policy in dynamic and stochastic environments. We know how to build macro models consistent with optimizing behavior by households, firms, and the central bank. Most of these models are highly stylized, more appropriate for gaining basic insights into policy issues than they are for actually guiding the implementation of policy, but these models have also been extended in a wide variety of ways to better incorporate macroeconomic dynamics, to improve their forecasting ability, and to make them more useful in the practice of monetary policy.
