Properties of Fluctuations in the Trade Balance and the Terms of Trade (BKK1994)

Standard Deviations

A fair amount of heterogeneity exists across countries.

The standard deviation of the ratio of net exports to output ranges from a low of 0.45 percent for the United States to a high of 1.75 percent for Finland. (The median value is 1.06 percent.)

The standard deviation of the terms of trade varies somewhat more, from 1.63 in Austria to 5.86 in Japan; its median value is 2.92.


Autocorrelations

Both the trade balance and the terms of trade are highly persistent.

The autocorrelation of net exports extends from 0.29 in Austria to 0.90 in Switzerland, with a median of 0.71.

The autocorrelation of the terms of trade ranges from 0.50 for Austria to 0.88 in Japan and Switzerland, with a median of 0.80.


Cyclical Properties

The net-exports variable is countercyclical in every country.

The contemporaneous correlation between net exports and the terms of trade varies somewhat across countries but is negative more often than not.

In Finland, France, Italy, Japan, Switzerland, and the United Kingdom, the correlations are less than -0.4. The United States is the only country in our sample for which these two variables have a sizable positive contemporaneous correlation.

The cross-correlation function for net exports and the terms of trade has an asymmetrical S shape.

Cross-correlation function is typically negative for negative values of k (lag) but turns positive for k between 2 and 4 (quarter).


Theoretical Model

The theoretical model(*) mimics the cross-correlation function for the trade balance and the terms of trade.

(*) Two Country, Two Goods (Home and Foreign Goods), and Two Factors (Labor and Capital) Economy; Consumption, Investment, Government Purchases are Composites of Home and Foreign Goods.

Discrepancies

1. Variability in the terms of trade is much greater in the data than in the theoretical economies.

Data Sd(ToT) >> Theory Sd (ToT)

2. In the data, we generally find that the correlation of output across countries is stronger than that of consumption; in the theory, we see the reverse.

Data Corr(Y_H, Y_F) > Corr(C_H, C_F); Theory Corr(C_H, C_F) > Corr(Y_H, Y_F)


Backus, Kehoe, Kydland, 1994 "DYNAMICS OF THE TRADE BALANCE AND THE TERMS OF TRADE - THE J-CURVE"