The Trade-Comovement Puzzle

Lukasz Drozd, Sergey Kolbin and Jaromir Nosal

No 20-01, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: Standard international transmission mechanism of productivity shocks predicts a weak endogenous linkage between trade and business cycle synchronization: a problem known as the trade-comovement puzzle. We provide the foundational analysis of the puzzle, pointing to three natural candidate resolutions: i) financial market frictions; ii) Greenwood–Hercowitz–Huffman preferences; and iii) dynamic trade elasticity that is low in the short run but high in the long run. We show the effects of each of these candidate resolutions analytically and evaluate them quantitatively. We find that, while i) and ii) fall short of the data, iii) goes a long way toward resolving the puzzle.

Keywords: trade-comovement puzzle; elasticity puzzle; trade elasticity; international comovement (search for similar items in EconPapers)
JEL-codes: E32 F32 F41 F44 (search for similar items in EconPapers)
Pages: 46
Date: 2020-01-02
New Economics Papers: this item is included in nep-dge, nep-mac and nep-opm
Note: Supercedes WP 17-42
References: Add references at CitEc
Citations: View citations in EconPapers (19)

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Journal Article: The Trade-Comovement Puzzle (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:86697

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DOI: 10.21799/frbp.wp.2020.01

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