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Federal Reserve Bank of St. Louis
Working Papers
International Trade and Intertemporal Substitution
Fernando Leibovici
Michael E. Waugh
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.


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Fernando Leibovici & Michael E. Waugh, International Trade and Intertemporal Substitution, Federal Reserve Bank of St. Louis, Working Papers 2017-4, 01 Jun 2016, revised 31 Oct 2018.
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Keywords: International trade; trade elasticity; dynamics; international; business cycles
DOI: 10.20955/wp.2017.004
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