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Trade patterns, trade balances and idiosyncratic shocks

  • 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)

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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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 0721.

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Length: 45 pages
Date of creation: Jul 2007
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Handle: RePEc:bde:wpaper:0721
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  1. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting trade: firms, industries, and export destinations," Staff Report 332, Federal Reserve Bank of Minneapolis.
  2. Razin, A., 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," Papers 2-93, Tel Aviv - the Sackler Institute of Economic Studies.
  3. Donald R. Davis & David E. Weinstein, 1998. "An Account of Global Factor Trade," Harvard Institute of Economic Research Working Papers 1849, Harvard - Institute of Economic Research.
  4. Francis Kramarz & Jonathan Eaton & Samuel Kortum, 2005. "An Anatomy of International Trade: Evidence from French Firms," 2005 Meeting Papers 197, Society for Economic Dynamics.
  5. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August.
  6. 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,
  7. 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.
  8. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  9. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
  10. Aart Kraay & Jaume Ventura, 2002. "Current Accounts in the Long and Short Run," NBER Working Papers 9030, National Bureau of Economic Research, Inc.
  11. Alvarez, Fernando & Lucas, Robert Jr., 2007. "General equilibrium analysis of the Eaton-Kortum model of international trade," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1726-1768, September.
  12. repec:rus:hseeco:122439 is not listed on IDEAS
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