Trade Adjustment and the Composition of Trade

47 Pages Posted: 19 May 2006

See all articles by Christopher J. Erceg

Christopher J. Erceg

Board of Governors of the Federal Reserve System

Luca Guerrieri

Board of Governors of the Federal Reserve System

Christopher Gust

Board of Governors of the Federal Reserve System

Date Written: May 2006

Abstract

A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a standard framework that abstracts from such compositional differences. Overall, our analysis suggests that investment shocks, originating from either foreign or domestic sources, may serve as an important catalyst for trade adjustment, while implying a minimal depreciation of the real exchange rate.

Keywords: SDGE model, open-economy macroeconomics

JEL Classification: F41, F17

Suggested Citation

Erceg, Christopher J. and Guerrieri, Luca and Gust, Christopher, Trade Adjustment and the Composition of Trade (May 2006). Available at SSRN: https://ssrn.com/abstract=903424 or http://dx.doi.org/10.2139/ssrn.903424

Christopher J. Erceg (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
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202-452-2575 (Phone)
202-736-5638 (Fax)

Luca Guerrieri

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2550 (Phone)

Christopher Gust

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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