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International trade in durable goods: understanding volatility, cyclicality, and elastics

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  • Engel, Charles
  • Wang, Jian

Abstract

Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries.> ; Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short-run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models.

Suggested Citation

  • Engel, Charles & Wang, Jian, 2007. "International trade in durable goods: understanding volatility, cyclicality, and elastics," Globalization and Monetary Policy Institute Working Paper 03, Federal Reserve Bank of Dallas.
  • Handle: RePEc:fip:feddgw:03 Note: Published as: Engel, Charles and Jian Wang (2010), "International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities," Journal of International Economics 83 (1): 37-52.
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    Cited by:

    1. Andrea Raffo, 2008. "Technology Shocks: Novel Implications for International Business Cycles," 2008 Meeting Papers 511, Society for Economic Dynamics.
    2. Jonathan Eaton & Samuel Kortum & Brent Neiman & John Romalis, 2016. "Trade and the Global Recession," American Economic Review, American Economic Association, pages 3401-3438.
    3. Christopher F. Baum & Mustafa Caglayan, 2008. "The Volatility of International Trade Flows and Exchange Rate Uncertainty," Boston College Working Papers in Economics 695, Boston College Department of Economics.
    4. George Alessandria & Joseph P. Kaboski & Virgiliu Midrigan, 2010. "The Great Trade Collapse of 2008-09: An Inventory Adjustment?," NBER Working Papers 16059, National Bureau of Economic Research, Inc.
    5. Baum, Christopher F. & Caglayan, Mustafa, 2010. "On the sensitivity of the volume and volatility of bilateral trade flows to exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 29(1), pages 79-93, February.
    6. Bellone, Flora & Kiyota, Kozo & Matsuura, Toshiyuki & Musso, Patrick & Nesta, Lionel, 2014. "International productivity gaps and the export status of firms: Evidence from France and Japan," European Economic Review, Elsevier, pages 56-74.

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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