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Abstract:
A striking feature of U.S. trade is that both imports and
exports are heavily concentrated in capital goods and consumer
durables. However, most open economy general equilibrium models
ignore the marked divergence between the composition of trade flows
and the sectoral composition of U.S. expenditure, and simply posit
import and exports as depending on an aggregate measure of real
activity (such as domestic absorption). In this paper, we use a SDGE
model (SIGMA) to show that taking account of the expenditure
composition of U.S. trade in an empirically-realistic way yields
implications for the responses of trade to shocks that are markedly
different from those of a "standard" framework that abstracts from
such compositional differences. Overall, our analysis suggests that
investment shocks, originating from either foreign or domestic
sources, may serve as an important catalyst for trade adjustment,
while implying a minimal depreciation of the real exchange rate.
Full paper (296 KB PDF)
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