On the connection between intra-temporal and intertemporal trade

Shang-Jin Wei, Kang Shi and Jiandong Ju

No 8838, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Sticky (or slow-adjusting) current accounts are observed for many countries. This paper explores the role of domestic factor market flexibility in understanding the phenomenon. To do so, we consider multiple tradable sectors with different factor intensities and allow substitution between intertemporal trade (current account adjustment) and intra-temporal trade (goods trade) in a dynamic general equilibrium model. 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 in support of the theory.

Keywords: Current account; Intertemporal trade; Labor market rigidity; Trade balance (search for similar items in EconPapers)
JEL-codes: F3 F4 (search for similar items in EconPapers)
Date: 2012-02
New Economics Papers: this item is included in nep-int
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Chapter: On the Connections between Intra-temporal and Intertemporal Trades (2013)
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