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The Trade-Comovement Puzzle

Author

Listed:
  • Lukasz A. Drozd
  • Sergey Kolbin
  • Jaromir B. Nosal

Abstract

Standard international transmission mechanism of productivity shocks predicts a weak endogenous linkage between trade and business cycle synchronization: a problem known as the trade-comovement puzzle. We provide the foundational analysis of the puzzle, pointing to three natural candidate resolutions: i) financial market frictions; ii) Greenwood–Hercowitz–Huffman preferences; and iii) dynamic trade elasticity that is low in the short run but high in the long run. We show the effects of each of these candidate resolutions analytically and evaluate them quantitatively. We find that, while i) and ii) fall short of the data, iii) goes a long way toward resolving the puzzle.

Suggested Citation

  • Lukasz A. Drozd & Sergey Kolbin & Jaromir B. Nosal, 2020. "The Trade-Comovement Puzzle," Working Papers 20-01, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:86697
    DOI: 10.21799/frbp.wp.2020.01
    Note: Supercedes WP 17-42
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    Citations

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    Cited by:

    1. Karabarbounis, Loukas, 2010. "Labor wedges and open economy puzzles," MPRA Paper 31370, University Library of Munich, Germany.
    2. Liao, Wei & Santacreu, Ana Maria, 2015. "The trade comovement puzzle and the margins of international trade," Journal of International Economics, Elsevier, vol. 96(2), pages 266-288.
    3. Oscar Avila-Montealegre & Carter Mix, 2020. "Common Trade Exposure and Business Cycle Comovement," International Finance Discussion Papers 1306, Board of Governors of the Federal Reserve System (U.S.).
    4. Alok Johri & Terry Yip, 2015. "Financial Shocks, Customer Capital and the Trade Collapse of 2008-2009," Department of Economics Working Papers 2015-13, McMaster University, revised Sep 2015.
    5. Burstein, Ariel & Kurz, Christopher & Tesar, Linda, 2008. "Trade, production sharing, and the international transmission of business cycles," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 775-795, May.
    6. Costas Arkolakis & Ananth Ramanarayanan, 2009. "Vertical Specialization and International Business Cycle Synchronization," Scandinavian Journal of Economics, Wiley Blackwell, vol. 111(4), pages 655-680, December.
    7. Antoine Berthou & Emannuel Dhyne, 2018. "Exchange rate movements,firm-level exports and heterogeneity," Working Paper Research 334, National Bank of Belgium.
    8. Nikhil Patel, 2016. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," BIS Working Papers 539, Bank for International Settlements.
    9. Miyamoto, Wataru & Nguyen, Thuy Lan, 2019. "International Linkages and the Changing Nature of International Business Cycles," CEI Working Paper Series 2018-16, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    10. Dudley Cooke, 2019. "Technology Choice and the Long- and Short-Run Armington Elasticity," Globalization Institute Working Papers 373, Federal Reserve Bank of Dallas.
    11. Gunnella, Vanessa & Al-Haschimi, Alexander & Benkovskis, Konstantins & Chiacchio, Francesco & de Soyres, François & Di Lupidio, Benedetta & Fidora, Michael & Franco-Bedoya, Sebastian & Frohm, Erik & G, 2019. "The impact of global value chains on the euro area economy," Occasional Paper Series 221, European Central Bank.
    12. François de Soyres, 2016. "Value Added and Productivity Linkages Across Countries," Working Papers 209, Oesterreichische Nationalbank (Austrian Central Bank).
    13. Pundit,Madhavi, 2013. "Comovement in business cycles and trade in intermediate goods," Working Papers 13/116, National Institute of Public Finance and Policy.
    14. Alok Johri & Terry Yip, 2017. "Financial Shocks,Supply-chain Relationships and the Great Trade Collapse," Department of Economics Working Papers 2017-11, McMaster University.

    More about this item

    Keywords

    trade-comovement puzzle; elasticity puzzle; trade elasticity; international comovement;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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