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.