International trade in durable goods: understanding volatility, cyclicality, and elastics

Charles Engel and Jian Wang

No 3, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries.> ; Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short-run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models.

JEL-codes: E32 F3 F4 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2007
New Economics Papers: this item is included in nep-dge and nep-int
Note: Published as: Engel, Charles and Jian Wang (2010), "International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities," Journal of International Economics 83 (1): 37-52.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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