Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models?

Cardani, Roberta and Hohberger, Stefan and Pfeiffer, Philipp and Vogel, Lukas (2020): Domestic versus foreign drivers of trade (im)balances: How robust is evidence from estimated DSGE models?

Abstract

Estimated DSGE models tend to ascribe a significant and often predominant part of a country's trade balance (TB) dynamics to domestic drivers ("shocks"), suggesting foreign factors to be only of secondary importance. This paper revisits the result based on more agnostic approaches to shock transmission and using "agnostic structural disturbances". We estimate multi-region models for Germany and Spain as countries with very distinct TB patterns since 1999. Results suggest that domestic drivers remain dominant when theory-based restrictions on shock transmission are relaxed, although the transmission of foreign shocks is strengthened.

• Item Type: MPRA Paper
• Language: English
• Keywords: Agnostic structural disturbances, open economy DSGE model, trade balance, Germany, Spain
• Subjects: F - International Economics > F3 - International Finance > F30 - General; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F45 - Macroeconomic Issues of Monetary Unions

References

Adjemian, S., H. Bastani, M. Juillard, F. Karamé, F. Mihoubi, G. Perendia, J. Pfeifer, M. Ratto, S. Villemot (2011): Dynare: Reference Manual, Version 4, Dynare Working Papers 1, CEPREMAP.

Albonico, A., L. Calès, R. Cardani, O. Croitorov, F. Di Dio, F. Ferroni, M. Giovannini, S. Hohberger, B. Pataracchia, F. Pericoli, P. Pfeiffer, R. Raciborski, M. Ratto, W. Roeger, L. Vogel (2019): The Global Multi-Country Model (GM): an Estimated DSGE Model for the Euro Area Countries, ECFIN Discussion Paper No. 102 , European Commission.

Bacchetta, P., E. van Wincoop (2013): Sudden Spikes in Global Risk, Journal of International Economics 89, 511-521.

Benigno, P. (2009): Price Stability with Imperfect Financial Integration, Journal of Money, Credit and Banking 41, 121–149.

Blanchard, O. and J. Galí (2007): Real Wage Rigidities and the New Keynesian Model, Journal of Money, Credit and Banking 39, 35–65.

Bocola, L. (2016): The Pass-Through of Sovereign Risk, Journal of Political Economy 124, 879-926.

Born, A., Z. Enders (2019): Global Banking, Trade, and the International Transmission of the Great Recession, The Economic Journal 129, 2691-2721.

Burnside, C. and M. Eichenbaum (1996): Factor-Hoarding and the Propagation of Business-Cycle Shocks, American Economic Review 86, 1154–1174.

Darracq Paries, M., N.Papadopoulou (2019): On the Credit and Exchange Rate Channels of Central Bank Asset Purchases in a Monetary Union, ECB Working Paper Series 2259.

Dedola, L., G. Lombardo (2012): Financial Frictions, Financial Integration and the International Propagation of Shocks, Economic Policy 27, 319-359.

Den Haan, W., T. Drechsel (2020): Agnostic Structural Disturbances (ASDs): Detecting and Reducing Misspecification in Empirical Macroeconomic Models, Journal of Monetary Economics, in press

Devereux, M., A. Sutherland (2011): Evaluating International Financial Integration under Leverage Constraints, European Economic Review 55, 427-442.

Dolls, M., C. Fuest, A. Peichl (2012): Automatic Stabilizer and Economic Crisis: US vs. Europe, Journal of Public Economics 96, 279-294.

Dornbusch, R., Y. Park, S. Claessens (2000): Contagion: Understanding How It Spreads, The World Bank Research Observer 15, 177-197.

European Commission (2013): Report on Public Finances in EMU 2013, European Economy 4/2013.

Fisher, J. (2015): On the Structural Interpretation of the Smets–Wouters "Risk Premium" Shock, Journal of Money, Credit and Banking 47, 511-516.

Giovannini, M., S. Hohberger, R. Kollmann, M. Ratto, W. Roeger, L. Vogel (2019): Euro Area and U.S. External Adjustment: The Role of Commodity Prices and Emerging Market Shocks, Journal of International Money and Finance 94, 183-205.

in 't Veld, J., R. Kollmann, B. Pataracchia, M. Ratto, W. Roeger (2014): International Capital Flows and the Boom-bust Cycle in Spain, Journal of International Money and Finance 48, 314-335.

in ’t Veld, J., A. Pagano, R. Raciborski, M. Ratto, and W. Roeger (2015): Imbalances and Rebalancing in an Estimated Structural Model for Spain, International Journal of Central Banking 11, 1-41.

Justiniano, A., and B. Preston (2010): Can Structural Small Open-Economy Models Account for the Influence of Foreign Disturbances? Journal of International Economics 81, 61-74.

Kalemli-Ozcan, S., E. Papaioannou, F. Perri (2013): Global Banks and Crisis Transmission, Journal of International Economics 89, 495-510.

Kass, R., and A. Raftery (1995): Bayes Factors, Journal of the American Statistical Association 90, 773-795.

Kollmann, R. (2013): Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model, Journal of Money, Credit and Banking 45, 159-195.

Kollmann, R., Z. Enders, G. Müller (2011): Global Banking and International Business Cycles, European Economic Review 55, 407-426.

Kollmann, R., M. Ratto, W. Roeger, J. in 't Veld, L. Vogel (2015): What Drives the German Current Account? And How Does it Affect Other EU Member States? Economic Policy 30, 47-93.

Kollmann, R, B. Pataracchia, R. Raciborski, M. Ratto, W. Roeger, L. Vogel (2016): The Post-Crisis Slump in the Euro Area and the US: Evidence from an Estimated Three-region DSGE Model, European Economic Review 88, 21-41.

Krishnamurthy, A., A. Vissing-Jorgensen (2012): The Aggregate Demand for Treasury Debt, Journal of Political Economy 120, 233-267.

Neal, R. (2003): Slice Sampling, The Annals of Statistics 31, 705-767.

Obstfeld, M., K. Rogoff (1996): Foundations of International Macroeconomics. Cambridge, Mass.: MIT Press.

Perri, F., V. Quadrini (2018): International Recessions, American Economic Review 108, 935-984.

Planas, Ch., M. Ratto, A. Rossi (2015): Slice Sampling in Bayesian Estimation of DSGE models, Conference paper presented at 11th DYNARE conference 2015.

Ratto, M., W. Roeger, J. in ’t Veld (2009): QUEST III: An Estimated Open-Economy DSGE Model of the Euro Area with Fiscal and Monetary Policy, Economic Modelling 26, 222-233.

Rotemberg, J. (1982): Monopolistic Price Adjustment and Aggregate Output, Review of Economic Studies 49, 517–531.

Schmitt-Grohe, S., M. Uribe (2003): Closing Small Open Economy Models, Journal of International Economics 61, 163–185.

Sidrauski, M. (1967): Rational Choice and Patterns of Growth in a Monetary Economy, American Economic Review 57, 534–544.

Smets F., R. Wouters (2007): Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach, American Economic Review 97, 586-606.

Vitek, F. (2017): Policy, Risk and Spillover Analysis in the World Economy. A Panel Dynamic Stochastic General Equilibrium Approach, IMF Working Papers 17/89, International Monetary Fund.