The recent collapse in the trade of durable goods

One important feature of the recent crisis has been a significant drop in international trade. There is nothing surprising in this, as it is a regular feature of recessions that imports decrease more than GDP, as they are mostly composed of intermediate and investment goods. And it is well known that investment is very volatile through the business cycle. This are all well-known facts, that are easy to replicate with standard international business cycle models.

Dimitra Petropoulou and Kwok Tong Soo look at this trade drop from the perspective of trade theorists. They use a small open economy model (hence prices are exogenous) with two-period overlapping generations (hence we are talking about long-term movements, not business cycles) with tradable durable goods and a non-tradable non-durable good. There is a fix endowment of labor and capital that can freely be allocated between sectors (hence there is no investment, or savings). Agents can freely borrow and lend within a generation, but not between generations or with abroad.

Why do I mention this? Because Petropoulou and Soo try to reinvent the wheel and make it square. There is a large international business cycle literature that has gone through all this with much more realistic assumption and delivered quantitative results. And this not the first time I see that trade theorists could learn a lot by reading a little bit outside their bubble.