International Trade and Intertemporal Substitution

Abstract

This paper shows how variation in the intertemporal marginal rate of substitution can account for several puzzling features of cyclical fluctuations in international trade volumes. Our insight is that because international trade is time-intensive, variation in the rate at which agents are willing to substitute across time affects how trade volumes respond to changes in output and prices. We calibrate our model to match key features of U.S. data and discipline the variation in the intertemporal marginal rate of substitution using asset price data. We find that our model is quantitatively consistent with U.S. cyclical import fluctuations.