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Trade elasticity of substitution and equilibrium dynamics

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  • Martin Bodenstein

Abstract

The empirical literature provides a wide range of estimates for trade elasticities at the aggregate level. Furthermore, recent contributions in international macroeconomics suggest that low (implied) values of the trade elasticity of substitution may play an important role in understanding the disconnect between international prices and real variables. However, a standard model of the international business cycle displays multiple locally isolated equilibria if the trade elasticity of substitution is sufficiently low. The main contribution of this paper is to compute and characterize some dynamic properties of these equilibria. While multiple steady states clearly signal equilibrium multiplicity in the dynamic setup, this is not a necessary condition. Solutions based on log-linearization around a deterministic steady state are of limited to no help in computing the true dynamics. However, the log-linear solution can hint at the presence of multiple dynamic equilibria.

Suggested Citation

  • Martin Bodenstein, 2008. "Trade elasticity of substitution and equilibrium dynamics," International Finance Discussion Papers 934, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:934
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    Cited by:

    1. Mykhaylova Olena & Staveley-O’Carroll James, 2014. "International transmission of productivity shocks with nonzero net foreign debt," The B.E. Journal of Macroeconomics, De Gruyter, vol. 14(1), pages 1-46, January.
    2. repec:red:issued:13-34 is not listed on IDEAS
    3. Toda, Alexis Akira, 2017. "Huggett economies with multiple stationary equilibria," Journal of Economic Dynamics and Control, Elsevier, vol. 84(C), pages 77-90.
    4. Staveley-O’Carroll, James & Staveley-O’Carroll, Olena M., 2017. "Impact of pension system structure on international financial capital allocation," European Economic Review, Elsevier, vol. 95(C), pages 1-22.
    5. Hakon Tretvoll, 2013. "Investment-Specific Technology Shocks and Recursive Preferences," 2013 Meeting Papers 1207, Society for Economic Dynamics.
    6. Philippe Bacchetta & Eric van Wincoop, 2016. "The Great Recession: A Self-Fulfilling Global Panic," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 177-198, October.
    7. A. Berthou & E. Dhyne, 2018. "Exchange Rate Movements, Firm-Level Exports and Heterogeneity," Working papers 660, Banque de France.
    8. Mandelman, Federico S. & Zlate, Andrei, 2012. "Immigration, remittances and business cycles," Journal of Monetary Economics, Elsevier, vol. 59(2), pages 196-213.
    9. Robert Dekle, 2013. "Real Exchange Rates in a Model of Structural Change: Applications to the Real Yen-Dollar and Chinese RMB-Dollar Exchange Rates," IMES Discussion Paper Series 13-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
    10. Holden, Thomas, 2016. "Existence and uniqueness of solutions to dynamic models with occasionally binding constraints," EconStor Preprints 130142, ZBW - German National Library of Economics.
    11. Bodenstein, Martin, 2011. "Closing large open economy models," Journal of International Economics, Elsevier, vol. 84(2), pages 160-177, July.
    12. James Staveley-O'Carroll & Olena Staveley-O'Carroll, 2018. "International Risk Sharing in Overlapping Generations Models," Working Papers 1806, College of the Holy Cross, Department of Economics.

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    Keywords

    Business cycles ; Equilibrium (Economics);

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