Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?

David Backus, Patrick Kehoe and Finn Kydland

American Economic Review, 1994, vol. 84, issue 1, 84-103

Abstract: The authors provide a theoretical interpretation of two features of international data: the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements. They document the same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. The authors find that their general-equilibrium perspective is essential: the relation between the trade balance and the terms of trade depends critically on the source of fluctuations. Copyright 1994 by American Economic Association.

Date: 1994
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