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2018 | OriginalPaper | Buchkapitel

Trade Weakness: Cycle or Trend?

verfasst von : Alessandro Borin, Virginia Di Nino, Michele Mancini, Massimo Sbracia

Erschienen in: International Macroeconomics in the Wake of the Global Financial Crisis

Verlag: Springer International Publishing

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Abstract

In 2011–2016 global trade volumes systematically surprised on the downside, to a much larger extent than real GDP; in other words, the income elasticity of trade declined and was lower than expected. This finding has generally been interpreted as evidence of the importance of structural factors in determining the weakness of international trade. However, as income elasticity is itself a cyclical variable, the role of cyclical factors has been underestimated. Once the cyclicality of the elasticity is correctly accounted for, it turns out that cyclical forces have provided the main contribution to the unexpected weakness of trade. In addition, the accuracy of existing forecasts on trade growth can be significantly improved by using real-time information about business conditions, given that a large share of the forecast error depends on mispredicted income elasticities.

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Vorheriges Kapitel The Unintended Consequences of Globalization and Technological Progress

Nächstes Kapitel The Role of Debt Dynamics in US Household Consumption

Real GDP growth fell short of IMF projections by an annual average of 0.5% points in 2011–2016. By using the elasticity of 1.3 implicit in the IMF forecasts, lower GDP growth then accounted for 0.7% points of the forecast error. Hence, the remaining 1.2% points are accounted for by the decline of the income elasticity of trade.

See Hoekman (2015) for several explanations for the post-crisis weakness of trade; other views are found in Borin and Mancini (2015), Constantinescu et al. (2015), Del Prete and Federico (2014), IMF (2016), IRC Trade Task Force (2016) and the literature surveyed therein.

Engel and Wang (2011) first put the spotlight on the high volatility and the procyclicality of imports and exports (and on their positive correlation), and analyzed their implications for the price elasticity of trade. Borin et al. (2017) followed a similar approach in order to analyze the implications of these two features of trade flows for the income elasticity of trade.

The exact value is \(\bar{\varepsilon }_{t}=-\left[ g_{m}+\omega _{n,t}(S)(g_{s}-g_{m})\right] /\left[ \beta -\omega _{n,t}(S)\cdot \left( \beta -1\right) \right] \).

It is worth recalling that the average of a ratio is not the same as the ratio of the averages: for this reason, the income elasticity over long time spans is not equal to the average of the income elasticities at each shorter horizon. In this example, in fact, the income elasticity would always be larger than 1 at the quarterly or yearly frequency, but would be equal to 1 when calculated over long periods, because \(g_{m,t}=g_{s,t}\).

The noise component cleans the data for the measurement error that typically affects imports and exports, which is such that these two variables, which should always coincide at the world level, often display significant differences (even though these differences cancel out over time).

As suggested by Borin et al. (2017), income elasticity is not filtered directly because the theory implies that its long-run trend and cyclicality are not ‘genuine’, but are just the by-product of the long-run trend and cyclicality of imports and GDP.

For the key role of technological progress in the transport sector for the dynamics of international trade, see Estevadeordal et al. (2003).

Focusing on global trade has another important advantage: because world import growth has generally been positive in the post-war period, observations will be distributed only on the right branch of the hyperbola (see Fig. 2), where the relationship between income elasticity and the cyclical shock is monotonic. We can therefore avoid using more complex non-linear estimations.

Borin et al. (2017) also analyze the IMF forecasts for each calendar year t published in the spring and the fall of year \(t-1\).

Backus DK, Kehoe PJ, Kydland FE (1995) International business cycles: theory and evidence. In: Cooley T (ed) Frontiers of business cycle research. Princeton, Princeton University Press

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Borin A, Mancini M (2015) Follow the value-added: bilateral gross export accounting. Temi di discussione (Working Papers), no 1026, Bank of Italy

Borin A, Di Nino V, Mancini M, Sbracia M (2017) The cyclicality of the income elasticity of trade. Temi di discussione (Working Papers), no 1126, Bank of Italy

Constantinescu C, Mattoo A, Ruta M (2015) The global trade slowdown: cyclical or structural? World Bank Development Research Group working paper, no 7158, Washington, DCCrossRef

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Estevadeordal A, Frantz B, Taylor AM (2003) The rise and fall of world trade, 1870–1939. Q J Econ 118:359–407CrossRef

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IMF (2016) Global trade: what’s behind the slowdown? World economic outlook (Chapter 2), International Monetary Fund, October

IRC Trade Task Force (2016) Understanding the weakness in global trade: what is the new normal? Occasional paper, no 178, European Central Bank

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Titel: Trade Weakness: Cycle or Trend?
verfasst von: Alessandro Borin
Virginia Di Nino
Michele Mancini
Massimo Sbracia
Verlag: Springer International Publishing
Buch: International Macroeconomics in the Wake of the Global Financial Crisis
Print ISBN: 978-3-319-79074-9

Electronic ISBN: 978-3-319-79075-6

Copyright-Jahr: 2018
DOI: https://doi.org/10.1007/978-3-319-79075-6_6