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Relative Price Movements in Dynamic General Equilibrium Models of International Trade

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  • David K. Backus
  • Patrick J. Kehoe
  • Finn E. Kydland

Abstract

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models.
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Suggested Citation

  • David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1992. "Relative Price Movements in Dynamic General Equilibrium Models of International Trade," Working Papers 92-25, New York University, Leonard N. Stern School of Business, Department of Economics.
  • Handle: RePEc:ste:nystbu:92-25
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    1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
    2. Lapham, Beverly J., 1995. "A dynamic general equilibrium analysis of deviations from the laws of one price," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1355-1389, November.
    3. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
    4. Maurice Obstfeld, 1982. "Aggregate Spending and the Terms of Trade: Is There a Laursen-Metzler Effect?," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 251-270.
    5. Stockman, Alan C & Tesar, Linda L, 1995. "Tastes and Technology in a Two-Country Model of the Business Cycle: Explaining International Comovements," American Economic Review, American Economic Association, vol. 85(1), pages 168-185, March.
    6. William Alterman, 1991. "Price Trends in U.S. Trade: New Data, New Insights," NBER Chapters,in: International Economic Transactions: Issues in Measurement and Empirical Research, pages 109-143 National Bureau of Economic Research, Inc.
    7. Robert F. Graboyes, 1991. "International trade and payments data: an introduction," Economic Review, Federal Reserve Bank of Richmond, issue Sep, pages 20-31.
    8. Backus, David K., 1993. "Interpreting comovements in the trade balance and the terms of trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 375-387, May.
    9. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
    10. Stockman, Alan C. & Svensson, Lars E. O., 1987. "Capital flows, investment, and exchange rates," Journal of Monetary Economics, Elsevier, vol. 19(2), pages 171-201, March.
    11. Enrique G. Mendoza, 1992. "The Terms of Trade and Economic Fluctuations," IMF Working Papers 92/98, International Monetary Fund.
    12. Hodrick, Robert J., 1989. "U.S. International capital flows: Perspectives from rational maximizing models," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 30(1), pages 231-288, January.
    13. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-775, August.
    14. David Backus & Patrick Kehoe & Finn Kydland, 1992. "Dynamics of the trade balance and the terms of trade: the J-curve revisited," Discussion Paper / Institute for Empirical Macroeconomics 65, Federal Reserve Bank of Minneapolis.
    15. John Whalley, 1984. "Trade Liberalization among Major World Trading Areas," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262231204, May.
    16. Don E. Schlagenhauf & Jeffry M. Wrase, 1992. "A monetary, open-economy model with capital mobility," Discussion Paper / Institute for Empirical Macroeconomics 67, Federal Reserve Bank of Minneapolis.
    17. Brunner, Karl & Meltzer, Allan H., 1986. "Real business cycles, real exchange rates, and actual policies," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 1-10, January.
    18. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    19. Baxter, Marianne, 1992. "Fiscal Policy, Specialization, and Trade in the Two-Sector Model: The Return of Ricardo?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 713-744, August.
    20. Obstfeld, Maurice, 1989. "Fiscal deficits and relative prices in a growing world economy," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 461-484, May.
    21. Svensson, Lars E O & Razin, Assaf, 1983. "The Terms of Trade and the Current Account: The Harberger-Laursen-Metzler Effect," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 97-125, February.
    22. Lucas, Robert E., 1984. "Money in a theory of finance," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 9-46, January.
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    Citations

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    Cited by:

    1. Jose De Gregorio & Holger C. Wolf, 1994. "Terms of Trade, Productivity, and the Real Exchange Rate," NBER Working Papers 4807, National Bureau of Economic Research, Inc.
    2. Paul Cashin & C. McDermott, 2002. "Terms of Trade Shocks and the Current Account: Evidence from Five Industrial Countries," Open Economies Review, Springer, vol. 13(3), pages 219-235, July.
    3. Carmen M. Reinhart, 1995. "Devaluation, Relative Prices, and International Trade: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 290-312, June.
    4. Paul Cashin & C. John McDermott, 1998. "Terms of Trade Shocks and the Current Account," IMF Working Papers 98/177, International Monetary Fund.
    5. Charles Frederick Kramer, 1996. "FEERs and Uncertainty; Confidence Intervals for the Fundamental Equilibrium Exchange Rate of the Canadian Dollar," IMF Working Papers 96/68, International Monetary Fund.
    6. Warren Young, 2008. "Negishi's contributions to the development of economic analysis: Research programs and outcomes," International Journal of Economic Theory, The International Society for Economic Theory, vol. 4(2), pages 151-165.
    7. Giovanni Lombardo, "undated". "On the trade balance response to monetary shocks: the Marshall-Lerner conditions reconsidered," Discussion Papers 98/5, Department of Economics, University of York.
    8. Lee, Inkoo, 2008. "Goods market arbitrage and real exchange rate volatility," Journal of Macroeconomics, Elsevier, vol. 30(3), pages 1029-1042, September.
    9. Abdelhak Senhadji, 1997. "Two common problems related to the use of the Armington aggregator in computable general equilibrium models," Applied Economics Letters, Taylor & Francis Journals, vol. 4(1), pages 23-25.
    10. Wei Xiao, 2001. "Can Indeterminacy Resolve the Consumption Correlation Puzzle?," Computing in Economics and Finance 2001 209, Society for Computational Economics.
    11. Bernard Dumas, 1993. "Partial- Vs. General-Equilibrium Models of the International Capital Market," NBER Working Papers 4446, National Bureau of Economic Research, Inc.

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