Asset markets, relative price shocks and trade anomalies in international real business cycle models

Abstract

Both relative prices and the flow of goods between countries are significantly smoother in international real business cycle models than in the data. Also, in these models, increases in output cause a worsening of the terms of trade, while in the data, these variables are roughly uncorrelated. Because the imperfect substitutability of goods already limits the ability to pool country-specific risk, restricting access to asset markets has little impact on these anomalies. However, introducing exogenous terms of trade shocks allows the model to explain these trade and price anomalies while retaining the ability to replicate other aspects of the data.