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Trade elasticity and vertical specialisation

Author

Listed:
  • Ines Buono

    (Bank of Italy)

  • Filippo Vergara Caffarelli

    (Bank of Italy)

Abstract

This paper shows that vertical specialisation can increase the elasticity of trade to income, hence explaining dramatic events such as the great trade collapse. We argue that a change in the extent of vertical specialisation affects the elasticity of trade to income, while a mere change in global production levels for a given extent of vertical specialisation does not. In the model we show that only large demand shocks induce firms to vary the extent of vertical specialisation. Using panel data starting from the late 1990s that include the 2008-09 global crisis, we consistently find that the correlation between trade elasticity and vertical specialisation increases precisely in years of large demand shocks, such as the ICT euphoria and the great trade collapse.

Suggested Citation

  • Ines Buono & Filippo Vergara Caffarelli, 2013. "Trade elasticity and vertical specialisation," Temi di discussione (Economic working papers) 924, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_924_13
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0924/en_tema_924.pdf
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    References listed on IDEAS

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    1. Andrei A. Levchenko & Logan Lewis & Linda L. Tesar, 2009. "The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun," Working Papers 592, Research Seminar in International Economics, University of Michigan.
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    4. Andrei A Levchenko & Logan T Lewis & Linda L Tesar, 2010. "The Collapse of International Trade during the 2008–09 Crisis: In Search of the Smoking Gun," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(2), pages 214-253, December.
    5. Bussière, Matthieu & Chudik, Alexander & Sestieri, Giulia, 2009. "Modelling global trade flows: results from a GVAR model," Working Paper Series 1087, European Central Bank.
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    7. Calista Cheung & Stéphanie Guichard, 2009. "Understanding the World Trade Collapse," OECD Economics Department Working Papers 729, OECD Publishing.
    8. Kei-Mu Yi, 2003. "Can Vertical Specialization Explain the Growth of World Trade?," Journal of Political Economy, University of Chicago Press, vol. 111(1), pages 52-102, February.
    9. Jonathan Eaton & Samuel Kortum & Brent Neiman & John Romalis, 2016. "Trade and the Global Recession," American Economic Review, American Economic Association, vol. 106(11), pages 3401-3438, November.
    10. Menzie D. Chinn, 2005. "Supply Capacity, Vertical Specialization and Tariff Rates: The Implications for Aggregate U.S. Trade Flow Equations," NBER Working Papers 11719, National Bureau of Economic Research, Inc.
    11. Rudolfs Bems & Robert C Johnson & Kei-Mu Yi, 2010. "Demand Spillovers and the Collapse of Trade in the Global Recession," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 58(2), pages 295-326, December.
    12. Paolo Guerrieri & Filippo Vergara Caffarelli, 2012. "Trade Openness and International Fragmentation of Production in the European Union: The New Divide?," Review of International Economics, Wiley Blackwell, vol. 20(3), pages 535-551, August.
    13. Emanuele Breda & Rita Cappariello & Roberta Zizza, 2007. "Vertical Specialisation in Europe: Evidence from the Import Content of Exports," Rivista di Politica Economica, SIPI Spa, vol. 97(3), pages 189-189, May-June.
    14. repec:bla:reviec:v:10:y:2002:i:3:p:424-41 is not listed on IDEAS
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    Cited by:

    1. Cristina Constantinescu & Aaditya Mattoo & Michele Ruta, 2020. "The Global Trade Slowdown: Cyclical or Structural?," The World Bank Economic Review, World Bank, vol. 34(1), pages 121-142.
    2. Jaime Martínez-Martín, 2016. "Breaking down world trade elasticities: a panel ECM approach," Working Papers 1614, Banco de España.
    3. Sanjay Kalra, 2016. "6½ Decades of Global Trade and Income: “New Normal” or “Back to Normal” after GTC and GFC?," IMF Working Papers 2016/139, International Monetary Fund.
    4. Takaaki Kizu & Stefan Kühn & Christian Viegelahn, 2016. "Jobs in global supply chains: a macroeconomic assessment," FIW Working Paper series 170, FIW.

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    More about this item

    Keywords

    vertical specialisation; trade elasticity; global crisis; trade collapse;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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