Federal Reserve Bank of Philadelphia
Long-Run Trade Elasticity and the Trade-Comovement Puzzle
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.
Cite this item
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.
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- F31 - International Economics - - International Finance - - - Foreign Exchange
Keywords: trade-comovement puzzle; elasticity puzzle; international business cycle synchronization
This item with handle RePEc:fip:fedpwp:17-42
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