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Relative Price Movements in Dynamic General Equilibrium Models of International Trade

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

Abstract

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models.

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Bibliographic Info

Paper provided by New York University, Leonard N. Stern School of Business, Department of Economics in its series Working Papers with number 92-25.

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Date of creation: Aug 1992
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Handle: RePEc:ste:nystbu:92-25

Contact details of provider:
Postal: New York University, Leonard N. Stern School of Business, Department of Economics, 44 West 4th Street, New York, NY 10012-1126
Phone: (212) 998-0860
Fax: (212) 995-4218
Web page: http://w4.stern.nyu.edu/economics/
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References

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  1. Obstfeld, Maurice, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 251-70, May.
  2. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  3. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  4. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
  5. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204.
  6. 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.
  7. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
  8. Alan C. Stockman & Lars E.O. Svensson, 1987. "Capital Flows, Investment, and Exchange Rates," NBER Working Papers 1598, National Bureau of Economic Research, Inc.
  9. Don E. Schlagenhauf & Jeffry M. Wrase, 1992. "A monetary, open-economy model with capital mobility," Discussion Paper / Institute for Empirical Macroeconomics 67, Federal Reserve Bank of Minneapolis.
  10. 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, vol. 91(1), pages 97-125, February.
  11. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  12. Enrique G. Mendoza, 1992. "The Terms of Trade and Economic Fluctuations," IMF Working Papers 92/98, International Monetary Fund.
  13. Brunner, Karl & Meltzer, Allan H., 1986. "Real business cycles, real exchange rates, and actual policies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 1-10, January.
  14. Beverly J. Lapham, 1990. "A Dynamic General Equilibrium Analysis of Deviations from the Laws of One Price," Working Papers 793, Queen's University, Department of Economics.
  15. Blackburn, K. & Ravn, M.O., 1991. "Contemporary Macroeconomics Fluctuations : An International Perspective," Economics Working Papers 1991-132, School of Economics and Management, University of Aarhus.
  16. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-80.
  17. Marianne Baxter, 1991. "Fiscal policy, specialization, and trade in the two-sector model: the return of Ricardo?," Discussion Paper / Institute for Empirical Macroeconomics 56, Federal Reserve Bank of Minneapolis.
  18. Hodrick, Robert J., 1989. "U.S. International capital flows: Perspectives from rational maximizing models," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 30(1), pages 231-288, January.
  19. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
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Citations

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Cited by:
  1. Lee, Inkoo, 2008. "Goods market arbitrage and real exchange rate volatility," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1029-1042, September.
  2. Carmen M. Reinhart, 1995. "Devaluation, Relative Prices, and International Trade: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 290-312, June.
  3. Luis Opazo, 2006. "The Backus-Smith Puzzle: The Role of Expectations," Working Papers Central Bank of Chile 395, Central Bank of Chile.
  4. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," Working Papers 94-19, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Giovanni Lombardo, . "On the trade balance response to monetary shocks: the Marshall-Lerner conditions reconsidered," Discussion Papers 98/5, Department of Economics, University of York.
  6. Bernard Dumas, 1993. "Partial- Vs. General-Equilibrium Models of the International Capital Market," NBER Working Papers 4446, National Bureau of Economic Research, Inc.
  7. Paul Cashin & C. McDermott, 2002. "Terms of Trade Shocks and the Current Account: Evidence from Five Industrial Countries," Open Economies Review, Springer, vol. 13(3), pages 219-235, July.
  8. Lombardo, Giovanni, 2006. "Inflation targeting rules and welfare in an asymmetric currency area," Journal of International Economics, Elsevier, vol. 68(2), pages 424-442, March.
  9. Reinhart, Carmen, 1994. "Devaluation, Relative Prices, and International Trade," MPRA Paper 13708, University Library of Munich, Germany.
  10. Wei Xiao, 2001. "Can Indeterminacy Resolve the Consumption Correlation Puzzle?," Computing in Economics and Finance 2001 209, Society for Computational Economics.

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