Relative Price Movements in Dynamic General Equilibrium Models of International Trade

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net ...

Relative Price Movements in Dynamic General Equilibrium Models of International Trade

We examine the behavior of international relative prices from the perspective of dynamic general equilibrium theory, with particular emphasis on the variability of the terms of trade and the relation between the terms of trade and net exports. We highlight aspects of the theory that are critical in determining these properties, contrast our perspective with those associated with the Marshall-Lerner condition and the Harberger-Laursen-Metzler effect, and point out features of the data that have proved difficult to explain within existing dynamic general equilibrium models.

International Business Cycles

We review recent work comparing properties of international business cycles with those of dynamic general equilibrium models, emphasizing two discrepancies between theory and data that we refer to as anomalies.

International Business Cycles

We review recent work comparing properties of international business cycles with those of dynamic general equilibrium models, emphasizing two discrepancies between theory and data that we refer to as anomalies. The first is the consumption/output/productivity anomaly: in the data we generally find that the correlation across countries of output fluctuations is larger than the analogous consumption and productivity correlations. In theoretical economies we find, for a wide range of parameter values, that the consumption correlation exceeds the productivity and output correlations. The second anomaly concerns relative price movements: the standard deviation of the terms of trade is considerably larger in the data than it is in theoretical economies. We speculate on changes in theoretical structure that might bring theory and data closer together.

The Volatility of Consumption in a Simple General Equilibrium Model

This paper studies the volatility of consumption relative to output in the context of a simple general equilibrium model of a small open economy subject to exogenous shocks in productivity.

The Volatility of Consumption in a Simple General Equilibrium Model

This paper studies the volatility of consumption relative to output in the context of a simple general equilibrium model of a small open economy subject to exogenous shocks in productivity. With infinite horizons and exogenous relative prices, the model generates variance estimates that are well above what can be observed in empirical data. While finite horizons and endogenous terms of trade reduce the volatility of consumption, the model fails to generate sufficient serial correlation with respect to the consumption growth rate. If the household’s decision problem is modified to take into account durability and adjustment costs, the model does well on both dimensions.

Product Development and International Trade

We develop a multi-country, dynamic general equilibrium model of product innovation and international trade to study the creation of comparative advantage through research and development and the evolution of world trade over tune.

Product Development and International Trade

We develop a multi-country, dynamic general equilibrium model of product innovation and international trade to study the creation of comparative advantage through research and development and the evolution of world trade over tune. In our model, firms must incur resource costs to introduce new products and forward-looking potential producers conduct R & D and enter the product market whenever profit opportunities exist Trade has both intra- industry and inter-industry components, and the different incentives that face agents in different countries for investment and savings decisions give rise to Intertemporal trade. We derive results on the dynamics of trade patterns and trade volume, and on the temporal emergence of multinational corporations.

Working Paper Series

Introduction Relative price movements remain the central issue in international macroeconomics , with their source a ... relative both to real output and to the predictions of existing dynamic general equilibrium models of trade ...

Working Paper Series


Trade Costs Market Integration and Macroeconomic Volatility

This paper examines the effects of trade costs on macroeconomic volatility.

Trade Costs  Market Integration  and Macroeconomic Volatility

This paper examines the effects of trade costs on macroeconomic volatility. We first construct a dynamic, two-country general equilibrium model, where the degree of market integration depends directly on trade costs (transport costs, tariffs, etc.). The model is a extension of Obstfeld and Rogoff (1995). Naturally, a reduction in trade costs leads to more market integration, as the relative price of foreign goods falls and households increase their consumption of imported goods. In addition, with more market integration, the model predicts that the variability of the real exchange rate should fall, while the variability of the trade balance should increase. Trade costs have ambiguous effects on the volatility of other macro variables, such as income and consumption. Finally, we present some empirical findings that provide mixed support for the model's predictions.

Relating International Trade to the Housing Market

Furthermore, this model is able to match the empirical findings that (1) the price of housing relative to the (non-durable) consumption goods increases over time, (2) the price of non-tradeables relative to the tradeables increases over ...

Relating International Trade to the Housing Market


International Macroeconomic Dynamics

Relative Price Movements in Dynamic General Equilibrium Models of International Trade , ” in Handbook of International Macroeconomics , F. van der Ploeg , ed . Oxford : Blackwell . Bailey , M. J. 1956.

International Macroeconomic Dynamics

International Macroeconomic Dynamics provides extensive applications of important macroeconomic dynamic models to the international economy. For a long time, the study of macroeconomics has focused almost exclusively on a closed economy and downplayed the role of international transactions. Today, however, researchers recognize that one cannot fully understand domestic macroeconomic relationships without considering the global economy within which each country operates. Increasingly, economists are treating international transactions as an integral part of the macroeconomic system, and international macroeconomics has become an area of intensive research activity. International Macroeconomic Dynamics provides extensive applications of important macroeconomic dynamic models to the international economy. It adopts the main contemporary macroeconomic framework, the representative agent model, and develops a series of models of increasing complexity. The author considers both small and large economies and analyzes them in both deterministic and stochastic contexts. The emphasis is very much on the development of the analytical models; a novel feature is the extensive use of continuous-time stochastic methods. While the author applies the models to a range of important policy issues, particularly issues of fiscal policy, the reader is invited to view the analyses as blueprints for other applications.

Understanding the Implications of Trade and Financial Market Integration for Business Cycles

This volume is a collection of the author's scholarly work spanning a quarter century of inquiry into the causes of international business cycles.

Understanding the Implications of Trade and Financial Market Integration for Business Cycles

This volume is a collection of the author's scholarly work spanning a quarter century of inquiry into the causes of international business cycles. It starts with an introduction to international business cycle research. Part I reviews salient business cycle facts relating to quantities, prices and the driving forces of business cycles. Part II focuses on the role of risk-sharing and asset market structure in shaping business cycles and welfare. Part III deals with relative prices and the terms of trade stressing retail distribution, information frictions, and the need to tie commodity-specific shocks to particular nations or world regions. Part IV is a collection of work focusing on the inefficiencies brought about by the Hawley-Smoot tariffs and foreign retaliation. Further, because the tariffs were often specific (nominal amounts per physical quantity imported), they interacted with monetary policy in a way that exacerbated the Great Depression.The book provides the reader with an overview of key developments in international business cycle research that build upon the pioneering work of Nobel Laureates Finn Kydland and Edward Prescott, who built the first dynamic stochastic general equilibrium model of the closed economy, patterned along the lines of the US economy. As globalization has extended the span of international economic relationships, these modeling approaches have become essential for understanding business cycles today. These models and empirical methods are particularly relevant to our understanding of how domestic innovation, productivity change or policy action (fiscal, monetary and trade-related) feeds back across economies.

FEERs and Uncertainty

Backus , David , Patrick Kehoe , and Finn Kydland , " Relative Price Movements in Dynamic General Equilibrium Models of International Trade , " mimeo , New York University , 1992 . Bayouni , Tamim , Peter Clark , Steve Symansky ...

FEERs and Uncertainty

Models of Fundamental Equilibrium Exchange Rates (FEERs) impose internal and external balance, and so appeal to fundamental notions of equilibrium from a macroeconomic perspective. However, the need to estimate internal and external imbalances creates uncertainty in the approach. Parameters must be estimated, and equilibrium balances must be gauged using judgement. Hence it makes sense to consider the FEER as a statistical estimate rather than a fixed number, and to calculate confidence intervals for the FEER. This paper calculates such confidence intervals with data for Canada, under a variety of assumptions. The estimated confidence intervals are quite wide, principally because of uncertainty about price elasticities in the underlying trade equations.

Trade Liberalization in General Equilibrium

This paper uses a dynamic computable general equilibrium model to simulate the effects of unilateral reductions by the U.S. in tariffs and "voluntary" export restraints (VER's).

Trade Liberalization in General Equilibrium

This paper uses a dynamic computable general equilibrium model to simulate the effects of unilateral reductions by the U.S. in tariffs and "voluntary" export restraints (VER's). We consider 50 percent cuts in tariffs and in ad valorem VER equivalents, separately and in combination. The model features intertemporal optimization by households and firms, explicit adjustment dynamics, an integrated treatment of the current and capital accounts of the balance of payments, and industry disaggregation. Central findings include: (1) VER's are considerably more significant than tariffs in terms of the magnitude of the macroeconomic effects induced by their reduction; (2) while VER reductions enhance domestic welfare, unilateral tariff cuts reduce domestic welfare (as a consequence of U.S. monopsony power and associated adverse terms of trade effects); (3) international capital movements critically regulate the responses of the U.S. and foreign economies to these trade initiatives and produce significant differences between short and long-run effects; and (4) effects differ substantially across industries. Together, these findings indicate that simulation analyses that disregard international capital movements, adjustment dynamics, and industry differences may generate seriously misleading results

Terms of Trade Shocks and the Current Account

References Ahmed , Shagil , and Jae Ha Park , 1994 , “ Sources of Macroeconomic Fluctuations in Small Open Economies ... 1992 , “ Relative Price Movements in Dynamic General Equilibrium Models of International Trade , ” Working Paper ...

Terms of Trade Shocks and the Current Account

This paper examines the relationship between terms of trade shocks, private saving, and the current account position. The relationship between these variables is theoretically ambiguous: an adverse transitory terms of trade shock can either induce a deterioration or an improvement in the current account, depending on whether the resulting income effects are greater or less than the resulting substitution effects. The substitution effects involve both intertemporally substituting consumption and intratemporally substituting consumption between importables and nontradables. The relative strength of these substitution effects is estimated using data for five OECD countries during 1970/95; both are found to exert large and significant effects on the current account balance.

Capital Mobility

REFERENCES Backus , D.K. , P.J. Kehoe F.E. Kydland ( 1992 ) Relative Price Movements in Dynamic General Equilibrium Models of International Trade ' , Working Paper , EC - 92-25 , Department of Economics , New York University .

Capital Mobility

Essays from a CEPR conference with the Bank of Isreal and the Pinhas Sapir Center for Development discuss such topics as the erosion of capital taxation as a source of government revenue, the role of mobile capital in reducing unemployment, and the convergence of national growth rates.

IMF Staff papers

Backus , David K. , Patrick J. Kehoe , and Finn E. Kydland , “ Relative Price Movements in Dynamic General Equilibrium Models of International Trade , ” NBER Working Paper No. 4243 ( Cambridge , Massachusetts : National Bureau of ...

IMF Staff papers

This paper develops an endogenous growth model of the influence of public investment, public transfers, and distortionary taxation on the rate of economic growth. The growth–enhancing effects of investment in public capital and transfer payments are modeled, as is the growth–inhibiting influence of the levying of distortionary taxes that are used to fund such expenditure. The theoretical implications of the model are then tested with data from 23 developed countries between 1971 and 1988, and time series cross sectional results are obtained that support the proposed influence of the public finance variables on economic growth.

Trade Costs Market Integration and Macroeconomic Volatility

This paper examines the effects of trade costs on macroeconomic volatility.

Trade Costs  Market Integration  and Macroeconomic Volatility

This paper examines the effects of trade costs on macroeconomic volatility. We first construct a dynamic, two-country general equilibrium model, where the degree of market integration depends directly on trade costs (transport costs, tariffs, etc.). The model is a extension of Obstfeld and Rogoff (1995). Naturally, a reduction in trade costs leads to more market integration, as the relative price of foreign goods falls and households increase their consumption of imported goods. In addition, with more market integration, the model predicts that the variability of the real exchange rate should fall, while the variability of the trade balance should increase. Trade costs have ambiguous effects on the volatility of other macro variables, such as income and consumption. Finally, we present some empirical findings that provide mixed support for the model''s predictions.

Trade Liberalization Macroeconomic Adjustment and Welfare

Trade liberalization leads to long-run gains, but it can also involve costly short-run macroeconomic adjustment.

Trade Liberalization  Macroeconomic Adjustment  and Welfare

Trade liberalization leads to long-run gains, but it can also involve costly short-run macroeconomic adjustment. The paper explores the relative importance of these effects within a dynamic general equilibrium model that captures key elements of both international trade and macroeconomic models. The welfare effect of trade liberalization is decomposed into a steady-state efficiency gain and a transitional loss associated with wage-price stickiness. Our estimates show that the transitional loss is small relative to the steady-state gain, and tends to be lower under flexible as compared to fixed exchange rates. We also show that the loss can be reduced further by a flexible price-level targeting policy rule.

An Inframarginal Approach to Trade Theory

Pt. 1. Introduction. 1. Divison of labor and corner solutions in positive trade theory / Christis G. Tombazos -- pt. 2. Origins of inframarginal applications to trade theory. 2.

An Inframarginal Approach to Trade Theory

Pt. 1. Introduction. 1. Divison of labor and corner solutions in positive trade theory / Christis G. Tombazos -- pt. 2. Origins of inframarginal applications to trade theory. 2. Economics and biology : specialization and speciation / Hendrik S. Houthakker. 3. Substitution and division of labour / Sherwin Rosen. 4. Trade and insurance with moral hazard / Avinash Dixit. 5. Trade and insurance with imperfectly observed outcomes / Avinash Dixit -- pt. 3. Exogenous comparative advantage : corner solutions in the Heckscher-Ohlin and Ricardian models of trade. 6. An inframarginal analysis of the Ricardian model / Wen Li Cheng, Jeffrey Sachs and Xiaokai Yang. 7. A Ricardian model with endogenous comparative advantage and endogenous trade policy regimes / Wen Li Cheng, Meng-Chun Liu and Xiaokai Yang. 8. A general-equilibrium re-appraisal of the Stolper-Samuelson theorem / Wen Li Cheng, Jeffrey Sachs and Xiaokai Yang -- pt. 4. Division of labor in models of trade with economies of scale. 9. A Ricardo model with economies of scale / Ralph E. Gomory. 10. Pattern of trade and economic development in a model of monopolistic competition / Jeffrey Sachs, Xiaokai Yang and Dingsheng Zhang. 11. Market led industrialization and globalization / Jeffrey Sachs and Xiaokai Yang -- pt. 5. Economies of specialization and endogenous comparative advantage. 12. Specialization and product diversity / Xiaokai Yang and He-Ling Shi. 13. Endogenous vs. exogenous comparative advantage and economies of specialization vs. economies of scale / Xiaokai Yang. 14. A new theory of demand and supply and emergence of international trade from domestic trade / Xiaokai Yang. 15. Walrasian equilibrium computation, network formation, and the Wen theorem / Shuntian Yao -- pt. 6. Inframarginal analysis of trade policy, dual structures, and globalization. 16. Globalization, dual economy, and economic development / Jeffrey Sachs, Xiaokai Yang and Dingsheng Zhang. 17. Endogenous structure of the division of labor, endogenous trade policy regime, and a dual structure in economic development / Xiaokai Yang and Dingsheng Zhang -- pt. 7. Dynamic inframarginal analysis of trade models with endogenous comparative advantage. 18. A microeconomic mechanism for economic growth / Xiaokai Yang and Jeff Borland. 19. Specialization and a new approach to economic organization and growth / Jeff Borland and Xiaokai Yang. 20. Specialization, information, and growth : a sequential equilibrium analysis / Yew-Kwang Ng and Xiaokai Yang. 21. Evolution in division of labor and macroeconomic policies / Junxi Zhang. 22. Division of labor, money and economic progress / Wen Li Cheng

Economics The Definitive Encyclopedia from Theory to Practice 4 volumes

3: Microeconomics: Business Cycle; Labor Economics; Nash, John Further Reading Backus, David, Patrick J. Kehoe, and Finn E. Kydland. 1992. Relative price movements in dynamic general equilibrium models of international trade.

Economics  The Definitive Encyclopedia from Theory to Practice  4 volumes

A comprehensive four-volume resource that explains more than 800 topics within the foundations of economics, macroeconomics, microeconomics, and global economics, all presented in an easy-to-read format. • Provides readers with a comprehensive one-stop reference source on the subject of economics that serves as an easy-to-read "textbook" • Presents more than 800 entries in four books that address economics foundations, macroeconomics, microeconomics, and global economics as well as a glossary and a documents section • Spotlights the concepts, movements, events, people, organizations, places, and objects relevant to the study of economics at the macro, micro, and global levels • Includes excerpts from key court and legislative documents that influenced the U.S. economy

Economic Thinkers A Biographical Encyclopedia

Relative Price Movements in Dynamic General Equilibrium Models of International Trade. Issue 4243. Washington, DC: National Bureau of Economic Research, 1992. Kydland, Finn E., and Edward C. Prescott. “Business Cycles: Real Facts and a ...

Economic Thinkers  A Biographical Encyclopedia

Who are the individuals whose novel ideas, writings, and philosophies have influenced economics throughout history—and in doing so, have helped change the world? This encyclopedia provides a readable study of economics by examining the great economists themselves.

Financial Liberalization Structural Change and Real Exchange Rate Appreciations

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across ...

Financial Liberalization  Structural Change  and Real Exchange Rate Appreciations

We account for the appreciation of the real exchange rate in Mexico between 1988 and 2002 using a two sector dynamic general equilibrium model of a small open economy with two driving forces: (i) differential productivity growth across sectors and (ii) a decline in the cost of borrowing in foreign markets. These two mechanisms account for 60 percent of the decline in the relative price of tradable goods and explain a large fraction of the reallocation of labor across sectors. We do not find a significant role for migration remittances, foreign reserves accumulation, government spending, terms of trade, or import tariffs.