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The cost of adjustment: On comovement between the trade balance and the terms of trade

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  • Dmitriev, Alexandre
  • Roberts, Ivan

Abstract

The S-shaped cross-correlation function between the trade balance and the terms of trade has been documented for several countries and time frames. The ability of two-country, two-good business cycle models to reproduce this regularity hinges on the dynamics of capital formation. We consider the consequences of modeling the adjustment costs for comovement in the trade balance and the terms of trade. Both complete and incomplete market models with capital adjustment costs à la Hayashi (1982) deliver the S-curve seen in the data while the model with investment adjustment costs à la Christiano et al. (2005) does not.

Suggested Citation

  • Dmitriev, Alexandre & Roberts, Ivan, 2013. "The cost of adjustment: On comovement between the trade balance and the terms of trade," Economic Modelling, Elsevier, vol. 35(C), pages 689-700.
  • Handle: RePEc:eee:ecmode:v:35:y:2013:i:c:p:689-700
    DOI: 10.1016/j.econmod.2013.08.027
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    Keywords

    Capital adjustment costs; Investment adjustment costs; S-curve; International business cycles;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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