International Trade and Intertemporal Substitution
This paper studies the dynamics of international trade flows at business cycle frequencies. We show that introducing dynamic considerations into an otherwise standard model of trade can account for several puzzling features of trade flows at business cycle frequencies. 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 formalize this idea and calibrate our model to match key features of U.S. data. We find that, in contrast to standard static models of international trade, our model is quantitatively consistent with salient features of U.S. cyclical import fluctuations. We also find that our model accounts for two-thirds of the peak-to-trough decline in imports during the 2008-2009 recession.
Fernando Leibovici gratefully acknowledges the financial assistance provided by the Social Sciences and Humanities Research Council of Canada (SSHRC). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Fernando Leibovici & Michael E. Waugh, 2017. "International Trade and Intertemporal Substitution," Federal Reserve Bank of St. Louis, Working Papers, vol 2017(004).
Leibovici, Fernando & Waugh, Michael E., 2019. "International trade and intertemporal substitution," Journal of International Economics, Elsevier, vol. 117(C), pages 158-174. citation courtesy of
Fernando Leibovici & Michael E. Waugh, 2019. "International trade and intertemporal substitution," Journal of International Economics, vol 117, pages 158-174.