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Federal Reserve Bank of Philadelphia
Working Papers
Long-Run Trade Elasticity and the Trade-Comovement Puzzle
Lukasz A. Drozd
Sergey Kolbin
Jaromir B. Nosal
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.


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Lukasz A. Drozd & Sergey Kolbin & Jaromir B. Nosal, Long-Run Trade Elasticity and the Trade-Comovement Puzzle, Federal Reserve Bank of Philadelphia, Working Papers 17-42, 22 Nov 2017.
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Keywords: trade-comovement puzzle; elasticity puzzle; international business cycle synchronization
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