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Working Paper

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

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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.
10.01.1992ISSN 2573-7953 WP 92-11DOI 10.26509/frbc-wp-199211

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

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. https://doi.org/10.26509/frbc-wp-199211