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Trade patterns, trade balances and idiosyncratic shocks

Author

Listed:
  • 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.

Suggested Citation

  • Claudia Canals & Xavier Gabaix & Josep M. Vilarrubia & David Weinstein, 2007. "Trade patterns, trade balances and idiosyncratic shocks," Working Papers 0721, Banco de España;Working Papers Homepage.
  • Handle: RePEc:bde:wpaper:0721
    as

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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
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. Jonathan Eaton & Samuel Kortum & Francis Kramarz, 2004. "Dissecting Trade: Firms, Industries, and Export Destinations," American Economic Review, American Economic Association, vol. 94(2), pages 150-154, May.
    3. 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, September.
    4. Assaf Razin, 1993. "The Dynamic-Optimizing Approach to the Current Account: Theory and Evidence," NBER Working Papers 4334, National Bureau of Economic Research, Inc.
    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 745-775, August.
    6. Kraay, Aart & Ventura, Jaume, 2002. "Current Accounts in the Long and Short Run," CEPR Discussion Papers 3440, C.E.P.R. Discussion Papers.
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    9. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    10. 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.
    11. repec:rus:hseeco:122439 is not listed on IDEAS
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Andrei A. Levchenko & Julian di Giovanni, 2009. "International Trade and Aggregate Fluctuations in Granular Economies," 2009 Meeting Papers 491, Society for Economic Dynamics.
    2. 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).
    3. Yoshihiko Hogen & Ko Miura & Koji Takahashi, 2017. "Large Firm Dynamics and Secular Stagnation: Evidence from Japan and the U.S," Bank of Japan Working Paper Series 17-E-8, Bank of Japan.
    4. Aitor Erce, 2008. "A structural model of sovereign debt issuance: assessing the role of financial factors," Working Papers 0809, Banco de España;Working Papers Homepage.
    5. repec:spr:series:v:8:y:2017:i:3:d:10.1007_s13209-017-0157-x is not listed on IDEAS
    6. Julian di Giovanni & Andrei A. Levchenko & Isabelle Mejean, 2014. "Firms, Destinations, and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 82(4), pages 1303-1340, July.
    7. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, May.
    8. Nieminen, Mika & Heimonen, Kari & Tohmo, Timo, 2017. "Current accounts and coordination of wage bargaining," BOFIT Discussion Papers 20/2017, Bank of Finland, Institute for Economies in Transition.
    9. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2006. "Institutional Investors and Stock Market Volatility," The Quarterly Journal of Economics, Oxford University Press, vol. 121(2), pages 461-504.
    10. Julian di Giovanni & Andrei A. Levchenko, 2012. "Country Size, International Trade, and Aggregate Fluctuations in Granular Economies," Journal of Political Economy, University of Chicago Press, vol. 120(6), pages 1083-1132.
    11. Maravall, A. & del Rio, A., 2007. "Temporal aggregation, systematic sampling, and the Hodrick-Prescott filter," Computational Statistics & Data Analysis, Elsevier, vol. 52(2), pages 975-998, October.
    12. Jonathan Eaton & Samuel S. Kortum & Sebastian Sotelo, 2012. "International Trade: Linking Micro and Macro," NBER Working Papers 17864, National Bureau of Economic Research, Inc.
    13. Juan Lucio & Raúl Mínguez & Asier Minondo & Francisco Requena, 2017. "The granularity of Spanish exports," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 8(3), pages 225-259, August.
    14. Isabel Argimón & Pablo Hernández de Cos, 2008. "The determinants of budget balances of the regional (Autonomous) governments," Working Papers 0803, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    trade balance; trade concentration; firms; empirical;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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