Trade balance volatility and consumption structures in small open economies

- Tradables consumption shares justify the difference in trade balance volatility.
- These measures are related through fluctuations in collateral prices.
- This study employs nonlinear stochastic simulations for endowment economies.
- A collateral constraint explains plausible size and diversity of the volatility.
- Researchers must select the form of collateral constraint carefully.

This paper aims to explain the difference in trade balance volatility between emerging and developed small open economies under a simple endowment economy model. The results of the nonlinear simulations with occasionally binding collateral constraints show that in a model with collateral capital, the difference can be explained by the share of tradables in consumption.