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Trade patterns, trade balances and idiosyncratic shocks

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Author Info

  • Claudia Canals

    ()
    (La Caixa)

  • Xavier Gabaix

    ()
    (Massachusetts Institute of Technology (MIT) - Department of Economics)

  • Josep M. Vilarrubia

    ()
    (Banco de España)

  • David Weinstein

    ()
    (Columbia University - Department of Economics)

Abstract

International Macroeconomics has long sought an explanation for current account fluctuations that matches the data. The approaches have typically focused on better models and new macroeconomic variables. We demonstrate the limitations of this approach by showing that idiosyncratic shocks are an important cause of macroeconomic volatility even for large countries. When explaining these fluctuations, standard macroeconomic models generally assume that firms are small and that their microeconomic shocks cancel out. We show that the high degree of concentration of bilateral trade flows means that idiosyncratic shocks can have a significant impact on aggregate economic fluctuations. We theoretically develop a descomposition components. Taking the model to data on bilateral trade flows from 1970 to 1997, we find that the most comprehensive macroeconomic model can only account for at most half of the observed variance in trade account volumes of each country. Thus, this paper highlights the importance of considering disaggregated data when modeling the current account.

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File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/07/Fic/dt0721e.pdf
File Function: First version, July 2007
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Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 0721.

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Length: 45 pages
Date of creation: Jul 2007
Date of revision:
Handle: RePEc:bde:wpaper:0721

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Keywords: trade balance; trade concentration; firms; empirical;

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References

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  1. Mark J. Melitz, 2002. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," NBER Working Papers 8881, National Bureau of Economic Research, Inc.
  2. Andrew B Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2000. "Plants and productivity in international trade," Working Papers 00-08, Center for Economic Studies, U.S. Census Bureau.
  3. Davis, D.R. & Weinstein, D.E., 1999. "An Account of Global Factor Trade," Working Papers 435, Research Seminar in International Economics, University of Michigan.
  4. Aart Kraay & Jaume Ventura, 2002. "Current Accounts in the Long and Short Run," NBER Working Papers 9030, National Bureau of Economic Research, Inc.
  5. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2011. "An Anatomy of International Trade: Evidence From French Firms," Econometrica, Econometric Society, vol. 79(5), pages 1453-1498, 09.
  6. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  7. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  8. repec:rus:hseeco:122439 is not listed on IDEAS
  9. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  10. Fernando Alvarez & Robert E. Lucas, 2005. "General Equilibrium Analysis of the Eaton-Kortum Model of International Trade," NBER Working Papers 11764, National Bureau of Economic Research, Inc.
  11. Youngki Lee & Luis A. N. Amaral & David Canning & Martin Meyer & H. Eugene Stanley, 1998. "Universal features in the growth dynamics of complex organizations," Papers cond-mat/9804100, arXiv.org.
  12. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
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Cited by:
  1. Agustín Maravall & Ana del Río, 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Banco de Espa�a Working Papers 0728, Banco de Espa�a.
  2. Julian di Giovanni & Andrei A. Levchenko, 2011. "Country Size, International Trade, and Aggregate Fluctuations in Granular Economies," NBER Working Papers 17335, National Bureau of Economic Research, Inc.
  3. di Giovanni, Julian & Levchenko, Andrei A. & Mejean, Isabelle, 2012. "Firms, Destinations, and Aggregate Fluctuations," CEPR Discussion Papers 9168, C.E.P.R. Discussion Papers.
  4. Aitor Erce, 2008. "A structural model of sovereign debt issuance: assessing the role of financial factors," Banco de Espa�a Working Papers 0809, Banco de Espa�a.
  5. Petr MATOUS & TODO Yasuyuki, 2014. "The Effects of Endogenous Interdependencies on Trade Network Formation across Space among Major Japanese Firms," Discussion papers 14020, Research Institute of Economy, Trade and Industry (RIETI).
  6. Jonathan Eaton & Samuel S. Kortum & Sebastian Sotelo, 2012. "International Trade: Linking Micro and Macro," NBER Working Papers 17864, National Bureau of Economic Research, Inc.
  7. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  8. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2005. "Institutional Investors and Stock Market Volatility," NBER Working Papers 11722, National Bureau of Economic Research, Inc.
  9. Isabel Argimón & Pablo Hernández de Cos, 2008. "The determinants of budget balances of the regional (Autonomous) governments," Banco de Espa�a Working Papers 0803, Banco de Espa�a.

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