Working Paper: NBER ID: w17549
Authors: Jiandong Ju; Kang Shi; Shangjin Wei
Abstract: This paper develops a new theory of international economics by introducing Heckscher-Ohlin features of intra-temporal trade into an intertemporal trade approach of current account. To do so, we consider a dynamic general equilibrium model with tradable sectors of different factor intensities, which allows for substitution between intertemporal trade (current account adjustment) and intra-temporal trade (goods trade). An economy's response to a shock generally involves a combination of a change in the composition of goods trade and a change in the current account. Flexible factor markets reduce the need for the current account to adjust. On the other hand, the more rigid the factor markets, the larger the size of current account adjustment relative to the volume of goods trade, and the slower the speed of adjustment of the current account towards its long-run equilibrium. We present empirical evidence consistent with the theory.
Keywords: intertemporal trade; intratemporal trade; current account adjustment; labor market rigidity
JEL Codes: F30; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Labor market rigidity (J48) | Current account adjustments (F32) |
| Labor market rigidity increases (J48) | Size of current account adjustments relative to goods trade (F32) |
| Labor market rigidity increases (J48) | Speed of adjustment towards long-run equilibrium (D59) |
| More rigid labor markets (J48) | Greater variability in current accounts relative to total trade volume (F32) |
| Labor market rigidity (J48) | Frequency of adjustment in goods trade composition (F14) |