VOLATILITY IN THE TERMS OF TRADE WITH NONIDENTICAL PREFERENCES

This paper studies the terms of trade volatility in a two-country two- commodity general equilibrium pure exchange model with state-dependent endowments, allowing non-identical preferences across countries. We f ind that the introduction of a forward market may result in a higher t erms of trade volatility with non-identical preferences, while it is i ndependent of market completeness with identical preferences. We also find that, when markets are complete, non-identical preferences lead t o more volatile terms of trade, compared with the identical preference case, if and only if the product of the coefficients of relative risk aversion and the elasticities of substitution is greater than one.