International Correlations and the Composition of Trade

Abstract

Taking the composition of trade into account, this paper shows that an otherwise parsimonious international real business cycle model can account for the international comovement of macro quantities. In disaggregated US trade data the share of non-durable consumer goods in imports and exports is low and remarkably stable from 1989 to 2012. In the model as in the data, trade is mostly in consumer durables and capital goods, and cross-country correlations are consistent with the evidence. Output comoves positively across countries with a higher cross-country correlation than consumption, and the cross-country correlation of investment and employment are both positive. Standard models of international business cycles that ignore the composition of trade flows typically fail to produce these patterns in international correlations.

Keywords: International business cycles

JEL Classification: F44