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Trade Adjustment and the Composition of Trade

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  • Christopher Erceg
  • Luca Guerrieri

    ()
    (International Finance Division Federal Reserve Board)

  • Christopher Gust

Abstract

A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a "standard" framework that abstracts from such compositional differences. Overall, our analysis suggests that investment shocks, originating from either foreign or domestic sources, may serve as an important catalyst for trade adjustment, while implying a minimal depreciation of the real exchange rate. Moreover, while policy changes that boost investment abroad could serve to significantly improve the U.S. trade balance through an export channel, reforms oriented at stimulating foreign consumption would exert less of a corrective force on the trade balance, and primarily work by restraining real U.S. imports

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 788.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:788

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Keywords: Trade; SDGE Model; Open Economy Macroeconomics;

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