TY  - JOUR
AU  - Engel,Charles
AU  - Wang,Jian
TI  - International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13814
PY  - 2008
Y2  - February 2008
UR  - http://www.nber.org/papers/w13814
L1  - http://www.nber.org/papers/w13814.pdf
N1  - Author contact info:
Charles Engel
Department of Economics
University of Wisconsin
1180 Observatory Drive
Madison, WI  53706-1393
Tel: 608/262-3697
Fax: 608/262-2033
E-Mail: cengel@ssc.wisc.edu

Jian Wang
Research Department, Federal Reserve Bank of Dalla
2200 N. Pearl St.
Dallas, TX  75201
E-Mail: Jian.Wang@dal.frb.org
AB  - Data for OECD countries document: 1. imports and exports are about three times as volatile as GDP; 2. imports and exports are pro-cyclical, and positively correlated with each other; 3. net exports are counter-cyclical. Standard models fail to replicate the behavior of imports and exports, though they can match net exports relatively well. Inspired by the fact that a large fraction of international trade is in durable goods, we propose a two-country two-sector model, in which durable goods are traded across countries. Our model can match the business cycle statistics on the volatility and comovement of the imports and exports relatively well. In addition, the model with trade in durables helps to understand the empirical regularity noted in the trade literature: home and foreign goods are highly substitutable in the long run, but the short run elasticity of substitution is low. We note that durable consumption also has implications for the appropriate measures of consumption and prices to assess risk-sharing opportunities, as in the empirical work on the Backus-Smith puzzle. The fact that our model can match data better in multiple dimensions suggests that trade in durable goods may be an important element in open-economy macro models.
ER  -