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Dynamics of the Trade Balance and the Terms of Trade: The S-Curve

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  • David Backus
  • Patrick J. Kehoe
  • Finn E. Kydland

Abstract

We provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document these same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that the general equilibrium perspective is essential: The relation between the trade balance and the terms of trade depends critically on the source of fluctuations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4242.

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Date of creation: Dec 1992
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Publication status: published as "Dynamics of the Trade Balance and the Terms of Trade: the J Curve?" American Economic Review, 84 (March 1994) pp 84-103.
Handle: RePEc:nbr:nberwo:4242

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  1. Pierre Danthine, Jean & Donaldson, John B., 1993. "Methodological and empirical issues in real business cycle theory," European Economic Review, Elsevier, vol. 37(1), pages 1-35, January.
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  16. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 97-125, February.
  17. Helen B. Junz & Rudolf R. Rhomberg, 1973. "Price competitiveness in export trade among industrial countries," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 22, Board of Governors of the Federal Reserve System (U.S.).
  18. Murphy, Robert G., 1986. "Productivity shocks, non-traded goods and optimal capital accumulation," European Economic Review, Elsevier, vol. 30(5), pages 1081-1095, October.
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  22. Christian Zimmermann, 1996. "International Real Business Cycles among Heterogeneous Countries," Macroeconomics, EconWPA 9607002, EconWPA.
  23. Dornbusch, Rudiger, 1983. "Real Interest Rates, Home Goods, and Optimal External Borrowing," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(1), pages 141-53, February.
  24. Matsuyama, Kiminori, 1988. "Terms-of-Trade, Factor Intensities and the Current Account in a Life-Cycle Model," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 55(2), pages 247-62, April.
  25. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
  26. Ellen E. Meade, 1988. "Exchange rates, adjustment, and the J-curve," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.), issue Oct, pages 633-644.
  27. Stephen P. Magee, 1973. "Currency Contracts, Pass-Through, and Devaluation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 4(1), pages 303-325.
  28. John Hassler & Petter Lundvik & Torsten Persson & Paul Soderlind, 1992. "The Swedish business cycle: stylized facts over 130 years," Discussion Paper / Institute for Empirical Macroeconomics 63, Federal Reserve Bank of Minneapolis.
  29. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, Econometric Society, vol. 50(6), pages 1345-70, November.
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  1. > Macroeconomics > Economic Fluctuations > Real Business Cycle Theory > International RBC
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