Trade Adjustment and the Composition of Trade

Christopher Erceg, Luca Guerrieri and Christopher Gust

No 788, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a "standard" framework that abstracts from such compositional differences. Overall, our analysis suggests that investment shocks, originating from either foreign or domestic sources, may serve as an important catalyst for trade adjustment, while implying a minimal depreciation of the real exchange rate. Moreover, while policy changes that boost investment abroad could serve to significantly improve the U.S. trade balance through an export channel, reforms oriented at stimulating foreign consumption would exert less of a corrective force on the trade balance, and primarily work by restraining real U.S. imports

Keywords: Trade; SDGE Model; Open Economy Macroeconomics (search for similar items in EconPapers)
JEL-codes: F17 F41 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-dge and nep-int
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Trade adjustment and the composition of trade (2008)
Working Paper: Trade adjustment and the composition of trade (2006)
Journal Article: Trade adjustment and the composition of trade (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:788

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