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Trade elasticity of substitution and equilibrium dynamics

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  • Martin Bodenstein

Abstract

The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Furthermore, recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity of substitution 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 elasticity of substitution is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. While multiple steady states clearly signal equilibrium multiplicity in the dynamic setup, this is not a necessary condition. Solutions based on log-linearization around a deterministic steady state are of limited to no help in computing the true dynamics. However, the log-linear solution can hint at the presence of multiple dynamic equilibria.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 934.

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Date of creation: 2008
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Handle: RePEc:fip:fedgif:934

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Keywords: Business cycles ; Equilibrium (Economics);

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Cited by:
  1. Federico S. Mandelman & Andrei Zlate, 2010. "Immigration, remittances, and business cycles," Working Paper 2008-25, Federal Reserve Bank of Atlanta.
  2. Murat Ungor, 2011. "De-industrialization of the Riches and the Rise of China," 2011 Meeting Papers 740, Society for Economic Dynamics.
  3. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.

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