Borrowing constraints and the trade balance¬タモoutput comovement ¬リニ

a r t i c l e i n f o The countercyclical trade balance ratio is among the key stylized facts about open economies. The magnitude of the correlation between the trade balance and output, however, differs from country to country. In particular , the trade balance ratio is more negatively correlated with output in emerging economies than in developed economies, suggesting that the trade balance is more sensitive to output changes in the former than in the latter. This paper explores whether this difference is caused by international borrowing constraints imposed on emerging economies. By modeling borrowing constraints as conditional on macroeconomic performance, this paper shows that when there is a positive shock takes place in an emerging economy, GDP increases and the borrowing constraint becomes less binding, resulting in a decreased incentive to accumulate foreign assets. When there is a negative shock, by contrast, GDP falls, and the representative household must increase the trade balance to avoid possible binding borrowing constraints. The dynamics of the trade balance is one of the most important research topics in international economics. As the net of exports and imports, the trade balance reflects the terms of trade of a country in a given period. The trade balance has a direct effect on the exchange rate and on the level of the national debt. As world economies become increasingly integrated, the trade balance also has a substantial impact on almost all macroeconomic variables, including economic growth, the level of output, economic fluctuations and the unemployment rate. For this reason, it draws wide public attention and research on it has never waned. Most studies of the trade balance focused on its cyclical behavior, which is a product of two main forces. The first is the insurance effect, which implies a procyclical trade balance: a country should increase its net foreign asset holdings in booms as precautionary savings and decrease its net foreign assets in recessions to smooth consumption. The second is the productivity effect. A country that experiences a positive shock should take advantage of enhanced productivity by importing more capital from abroad. This suggests a countercyclical trade balance. Assuming standard preferences, the insurance effect dominates such that the overall trade balance should be procyclical. This is, however, at odds with the data for most open economies. For this reason, generating a realistic trade balance–output comovement has been one of the major goals …