International Trade and Intertemporal Substitution

42 Pages Posted: 22 Sep 2014

See all articles by Fernando Leibovici

Fernando Leibovici

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: September 2014

Abstract

This paper studies the dynamics of international trade flows at business cycle frequencies. We show that introducing dynamic considerations into an otherwise standard model of trade can account for several puzzling features of trade flows at business cycle frequencies. 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 formalize this idea and calibrate our model to match key features of U.S. data. We find that, in contrast to standard static models of international trade, our model is quantitatively consistent with salient features of U.S. cyclical import fluctuations. We also find that our model accounts for two-thirds of the peak-to-trough decline in imports during the 2008-2009 recession.

Suggested Citation

Leibovici, Fernando and Waugh, Michael E., International Trade and Intertemporal Substitution (September 2014). NBER Working Paper No. w20498. Available at SSRN: https://ssrn.com/abstract=2499340

Fernando Leibovici (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Michael E. Waugh

New York University (NYU), Leonard N. Stern School of Business, Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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