Skip to:
  1. Main navigation
  2. Main content
  3. Footer
Working Paper

Dynamics Of The Trade Balance And The Terms Of Trade: The S-Curve

We provide a theoretical interpretation of two features of international data: the counter cyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in the terms of trade, but positively correlated with past movements. We document these same properties in a two-country stochastic growth model in which trade fluctuations reflect, in large part, the dynamics of capital formation. We find that the general equilibrium perspective is essential: The relation between the trade balance and the terms of trade depends critically on the source of fluctuations.

Suggested Citation

Backus, David, Patrick J. Kehoe, and Finn Kydland. 1992. “Dynamics Of The Trade Balance And The Terms Of Trade: The S-Curve.” Federal Reserve Bank of Cleveland, Working Paper No. 92-11.