The Cyclicality of the Income Elasticity of Trade

Borin, Alessandro and Di Nino, Virginia and Mancini, Michele and Sbracia, Massimo (2016): The Cyclicality of the Income Elasticity of Trade.

Abstract

In 2011-2015 global trade has disappointed, to a much larger extent than global GDP. We show that two key features of real trade flows - their high volatility and their procyclicality - determine a cyclicality of the income elasticity of trade. This property is such that when real GDP growth is positive but lower than its long-run trend, then the income elasticity of trade is also smaller than its own long-run trend. Therefore, when real GDP growth turns out to be weaker than expected, the forecast error on trade volumes is amplified by the fact that also the income elasticity of trade happens to be smaller than predicted. We then analyze the implications of our findings for the cross-country differences in the elasticity, the role of long-run and cyclical factors for the recent weakness of trade, and the accuracy of existing trade forecasts, which we significantly improve by exploiting real-time data on business conditions.

• Item Type: MPRA Paper
• Language: English
• Keywords: global trade; income elasticity; international business cycle
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; F - International Economics > F1 - Trade; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance

References

Alessandria G., Kaboski J.P., Midrigan V. (1995), "The Great Trade Collapse of 2008-09: An Inventory Adjustment?," IMF Economic Review, Vol. 58, pp. 254-294.

Backus D.K., Kehoe P.J., Kydland F.E. (1995), "International Business Cycles: Theory and Evidence," in: Cooley T. (ed.), Frontiers of Business Cycle Research, Princeton: Princeton University Press.

Baldwin R., ed. (2009), The Great Trade Collapse: Causes, Consequences and Prospects, Voxeu Ebook, London: CEPR.

Baldwin R., Evenett S.J., eds. (2009), The Collapse of Global Trade, Murky Protectionism, and the Crisis: Recommendations for the G20, Voxeu Ebook, London: CEPR.

Bems R., Johnson R.C., Yi K.M. (2013), "The Great Trade Collapse," Annual Review of Economics, Vol. 5, pp. 375-400.

Borin A., Mancini M. (2015), "Follow the Value-Added: Bilateral Gross Export Accounting", Temi di discussione, No. 1026, Bank of Italy.

Bussiere M., Callegari G., Ghironi F., Sestieri G., Yamano N. (2013), "Estimating Trade Elasticities: Demand Composition and the Trade Collapse of 2008--2009," American Economic Journal: Macroeconomics, Vol. 5, pp. 118-151.

Constantinescu C., Mattoo A, Ruta M. (2015), "The Global Trade Slowdown: Cyclical or Structural?," World Bank Development Research Group Working Paper, No. 7158, Washington, DC.

Eaton J., Kortum S. (2001), "Trade in Capital Goods," European Economic Review, Vol. 45, pp. 1195-1235.

Eaton J., Kortum S., Neiman B., Romalis J. (2016), "Trade and the Global Recession," American Economic Review, Vol. 106, pp. 3401-3348.

ECB (2016), Eurosystem Staff Macroeconomic Projections for the Euro Area, European Central Bank, December.

Engel C., Wang J. (2011), "International Trade in Durable Goods: Understanding Volatility, Cyclicality, and Elasticities," Journal of International Economics, Vol. 83, pp. 37.52.

Estevadeordal A., Frantz B., Taylor A.M. (2003), "The Rise and Fall of World Trade, 1870-1939," Quarterly Journal of Economics, Vol. 118, pp. 359-407.

Feenstra R.C., Inklaar R., Timmer M.P. (2015), "The Next Generation of the Penn World Table," American Economic Review, Vol. 105, pp. 3150-3182.

Freund C. (2009), "The Trade Response to Global Downturns: Historical Evidence," Policy Research Working Paper, No. 5015, World Bank.

Gaulier G., Mayer T., Steingress W., Zignago S. (2016), "Aggregation and Omitted Variable Biases in the Trade Elasticities," mimeo, Banque de France.

Heathcote J., Perri F. (2002), "Financial Autarky and International Business Cycles," Journal of Monetary Economics, Vol. 49, pp. 601--627.

Hendry D.F., Clements M.P. (2004), "Pooling of Forecasts," Econometrics Journal, Vol. 7, pp. 1-31.

Hoekman B., ed. (2015), The Global Trade Slowdown: A New Normal?, Voxeu Ebook, London: CEPR.

Hooper P., Johnson K., Marquez J. (2000), "Trade Elasticities for the G-7 Countries," Princeton Studies in International Economics, No. 87.

Houthakker H.S., Magee S.P. (1969), "Income and Price Elasticities in World Trade," Review of Economics and Statistics, Vol. 51, pp. 111-125.

IMF (2016), "Dissecting the Global Trade Slowdown", World Economic Outlook (Box 1.1), International Monetary Fund, April.

IRC Trade Task Force (2016), "Understanding the Weakness in Global Trade: What Is the New Normal?," Occasional Paper, No. 178, European Central Bank.

Levchenko A.A., Lewis L.T., Tesar L.L. (2010), "The Collapse of International Trade during the 2008-09 Crisis: In Search of the Smoking Gun," IMF Economic Review, Vol. 58, pp. 214-253.

World Bank (2016), World Development Indicators, July 2016.