International Trade and Intertemporal Substitution

46 Pages Posted: 1 Mar 2017 Last revised: 21 Feb 2019

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: 2016-06-01

Abstract

This paper quantitatively investigates the extent to which variation in the intertemporal marginal rate of substitution can help account for puzzling features of cyclical fluctuations of 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 use a standard small open economy model with time-intensive international trade, calibrated to match key features of U.S. data and disciplining the variation in the intertemporal marginal rate of substitution using asset price data. We find that variation in the intertemporal marginal rate of substitution helps rationalize puzzling features of import fluctuations and that this mechanism is quantitatively important during both normal and crisis times.

Keywords: International trade, trade elasticity, dynamics, international, business cycles

JEL Classification: E3, F1, F41

Suggested Citation

Leibovici, Fernando and Waugh, Michael E., International Trade and Intertemporal Substitution (2016-06-01). FRB St. Louis Working Paper No. 2017-4. Available at SSRN: https://ssrn.com/abstract=2925734 or http://dx.doi.org/10.20955/wp.2017.004

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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