Discussion Paper Details

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Title: On the connection between intra-temporal and intertemporal trade

Author(s): Jiandong Ju, Kang Shi and Shang-Jin Wei

Publication Date: February 2012

Keyword(s): current account, intertemporal trade, labor market rigidity and trade balance

Programme Area(s): International Trade and Regional Economics

Abstract: Sticky (or slow-adjusting) current accounts are observed for many countries. This paper explores the role of domestic factor market flexibility in understanding the phenomenon. To do so, we consider multiple tradable sectors with different factor intensities and allow substitution between intertemporal trade (current account adjustment) and intra-temporal trade (goods trade) in a dynamic general equilibrium model. An economy?s response to a shock generally involves a combination of a change in the composition of goods trade and a change in the current account. Flexible factor markets reduce the need for the current account to adjust. On the other hand, the more rigid the factor markets, the larger the size of current account adjustment relative to the volume of goods trade, and the slower the speed of adjustment of the current account towards its long-run equilibrium. We present empirical evidence in support of the theory.

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Bibliographic Reference

Ju, J, Shi, K and Wei, S. 2012. 'On the connection between intra-temporal and intertemporal trade'. London, Centre for Economic Policy Research.