Abstract:

We use a two-country, stochastic, general equilibrium model of international trade and macro-
economic dynamics with monopolistic competition and heterogeneous …rms to explore the role of
entry in the domestic economy and the extensive margin of international trade in the dynamics
of U.S. trade ‡ows over the business cycle. We show that the model can reproduce the evidence
on the cyclicality of U.S. trade and important features of the evidence on the extensive margins
of domestic entry and international trade. Entry in the domestic economy and the implied
di¤erences in the timing of export and import expansions in response to favorable productivity
shocks provide the key mechanism for the model’s ability to explain this range of stylized facts.