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Net exports, consumption volatility, and international real business cycle models

  • Andrea Raffo

Conventional two-country RBC models interpret countercyclical net exports as reflecting, in large part, the dynamics of capital. I show that, quantitatively, theoretical economies rely on counterfactual terms of trade effects: trade fluctuations, on the contrary, are driven primarily by consumption smoothing, thus generating procyclical net trade in goods. I then consider a class of preferences that embeds home production in a reduced form: consumption volatility increases so that countercyclical net exports reflect primarily a strong relation between income and imports, as in the data. The major discrepancy between theory and data concerns the variability of international prices.

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Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 06-01.

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Date of creation: 2006
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Handle: RePEc:fip:fedkrw:rwp06-01
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