Long-Run Trade Elasticity and the Trade-Comovement Puzzle

61 Pages Posted: 26 Nov 2017

See all articles by Lukasz A. Drozd

Lukasz A. Drozd

University of Pennsylvania - The Wharton School

Sergey Kolbin

Amazon.com

Jaromir B. Nosal

Columbia Business School - Economics Department

Date Written: 2017-11-22

Abstract

We show that the trade-comovement puzzle - theory's failure to account for the positive relation between trade and business cycle synchronization - is intimately related to its counterfactual implication that short- and long-run trade elasticities are equal. Based on this insight, we show that modeling the disconnect between the low short- and the high long-run trade elasticity in consistency with the data is promising in resolving the puzzle. In a broader context, our findings are relevant for analyzing business cycle transmission in a large class of models and caution against the use of static elasticity models in cross-country studies.

Keywords: trade-comovement puzzle, elasticity puzzle, international business cycle synchronization

JEL Classification: E32, F31

Suggested Citation

Drozd, Lukasz A. and Kolbin, Sergey and Nosal, Jaromir B., Long-Run Trade Elasticity and the Trade-Comovement Puzzle (2017-11-22). FRB of Philadelphia Working Paper No. 17-42, Available at SSRN: https://ssrn.com/abstract=3077206

Lukasz A. Drozd (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Sergey Kolbin

Amazon.com

Seattle, WA 98144
United States

Jaromir B. Nosal

Columbia Business School - Economics Department ( email )

1022 IAB Economics
420 W 118th Street
New York, NY 10027
United States
2128414005 (Phone)

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