Trade adjustment and the composition of trade

• Published in: Journal of economic dynamics & control Vol. 32; no. 8; pp. 2622 - 2650
• Main Authors: Erceg, Christopher J., Guerrieri, Luca, Gust, Christopher
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01.08.2008; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Economic Dynamics and Control
• Subjects: Absorption; Adjustment; Capital goods; DSGE model; Durable goods; Economic models; Equilibrium; Equilibrium models; Exchange rates; Expenditure; Expenditures; Exports; Foreign exchange rates; General economic equilibrium; Imports; International trade; Macroeconomics; Open economies; Open economy macroeconomics; Studies; Trade flows; U.S.A; United States > US; F41; DSGE model; F17; Open economy macroeconomics
• ISSN: 0165-1889; 1879-1743
• DOI: 10.1016/j.jedc.2007.09.015

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 DSGE 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.