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Trade elasticity of substitution and equilibrium dynamics

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  • Bodenstein, Martin

Abstract

The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. In simulations, the presence of multiple equilibria is shown to imply a volatile and persistent real exchange rate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 145 (2010)
Issue (Month): 3 (May)
Pages: 1033-1059

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Handle: RePEc:eee:jetheo:v:145:y:2010:i:3:p:1033-1059

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Web page: http://www.elsevier.com/locate/inca/622869

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Keywords: International business cycle Multiple equilibria Real exchange rate;

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References

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Citations

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Cited by:
  1. Philippe Bacchetta & Eric van Wincoop, 2013. "The Great Recession: A Self-Fulfilling Global Panic," Working Papers 092013, Hong Kong Institute for Monetary Research.
  2. Federico Mandelman & Andrei Zlate, 2010. "Immigration, remittances and business cycles," International Finance Discussion Papers 998, Board of Governors of the Federal Reserve System (U.S.).
  3. Murat Üngör, 2009. "De-industrialization of the Riches and the Rise of China," DEGIT Conference Papers c014_040, DEGIT, Dynamics, Economic Growth, and International Trade.
  4. Robert Dekle, 2013. "Real Exchange Rates in a Model of Structural Change: Applications to the Real Yen-Dollar and Chinese RMB-Dollar Exchange Rates," IMES Discussion Paper Series 13-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
  5. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.

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