Working Paper: NBER ID: w20498
Authors: Fernando Leibovici; Michael E. Waugh
Abstract: This paper studies the dynamics of international trade flows at business cycle frequencies. We show that introducing dynamic considerations into an otherwise standard model of trade can account for several puzzling features of trade flows at business cycle frequencies. Our insight is that because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in output and prices. We formalize this idea and calibrate our model to match key features of U.S. data. We find that, in contrast to standard static models of international trade, our model is quantitatively consistent with salient features of U.S. cyclical import fluctuations. We also find that our model accounts for two-thirds of the peak-to-trough decline in imports during the 2008-2009 recession.
Keywords: International Trade; Intertemporal Substitution; Cyclical Trade Fluctuations
JEL Codes: E0; F0; F1; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dynamic considerations in trade model (F12) | high income elasticity of imports (F40) |
| dynamic considerations in trade model (F12) | low price elasticity of imports (F14) |
| time-to-ship friction (C69) | dynamic import decision framework (C69) |
| dynamic import decision framework (C69) | willingness to substitute consumption across time periods (D15) |
| variation in intertemporal marginal rate of substitution (D15) | breaks unitary income elasticity (H31) |
| variation in intertemporal marginal rate of substitution (D15) | pronounced response of imports to income changes (F40) |
| shipping times (L87) | greater volatility of imports (F14) |
| dynamic considerations in trade model (F12) | account for cyclical fluctuations in imports (F44) |
| dynamic considerations in trade model (F12) | account for peak-to-trough decline in imports during recession (F44) |