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Net Exports, Consumption Volatility and International Real Business Cycle Models

  • Andrea Raffo

    ()

    (Economic Research Federal Reserve Bank, Kansas City)

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 import of goods and income, as in the data. The major discrepancy between theory and data concerns the variability of international prices.

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File URL: http://repec.org/sed2006/up.27628.1138662762.pdf
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Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 128.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:128
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