Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/263800 
Year of Publication: 
2022
Series/Report no.: 
CESifo Working Paper No. 9870
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We present a unified dynamic framework to study the interconnections between international trade and business cycle models. We prove an aggregate equivalence between a competitive, representative firm model that has aggregate production externalities and dynamic trade models that feature monopolistic competition, endogenous entry, and heterogeneous firms. The production externalities in the representative firm model have to be introduced in the intermediate and final good sectors so that the model is isomorphic to dynamic trade models that embody love-of-variety and selection effects. In a quantitative exercise with multiple shocks, we show that to improve the fit of the dynamic trade models with the data, the most important ingredient is negative capital externality in the intermediate good sector. We conclude that this presents a puzzle for the literature as standard dynamic trade models provide micro-foundations for positive capital externality.
Subjects: 
international business cycle
dynamic trade models
heterogeneous firms
production externalities
monopolistic competition
export costs
entry costs
JEL: 
F12
F41
F44
F32
Document Type: 
Working Paper
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