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The Trade-Comovement Puzzle

  • Lukasz A. Drozd
  • Sergey Kolbin
  • Jaromir B. Nosal
American Economic Journal: Macroeconomics
vol. 13, no. 2, April 2021
(pp. 78-120)
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Abstract

Standard international transmission mechanism of productivity shocks predicts a weak endogenous linkage between trade and business cycle synchronization: a problem known as the trade-comovement puzzle. We provide the foundational analysis of the puzzle, pointing to three natural candidate resolutions: (i) financial market frictions, (ii) Greenwood-Hercowitz-Huffman preferences, and (iii) dynamic trade elasticity that is low in the short run but high in the long run. We show the effects of each of these candidate resolutions analytically and evaluate them quantitatively. We find that while (i) and (ii) fall short of the data, (iii) goes a long way toward resolving the puzzle.

Citation

Drozd, Lukasz A., Sergey Kolbin, and Jaromir B. Nosal. 2021. "The Trade-Comovement Puzzle." American Economic Journal: Macroeconomics, 13 (2): 78-120. DOI: 10.1257/mac.20170386

Additional Materials

JEL Classification

  • E32 Business Fluctuations; Cycles
  • F14 Empirical Studies of Trade
  • F44 International Business Cycles
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