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Trade elasticity and vertical specialisation

  • Ines Buono

    ()

    (Bank of Italy)

  • Filippo Vergara Caffarelli

    ()

    (Bank of Italy)

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.

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File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2013/2013-0924/en_tema_924.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 924.

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Date of creation: Jul 2013
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Handle: RePEc:bdi:wptemi:td_924_13
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Web page: http://www.bancaditalia.it

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  1. 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.
  2. 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.
  3. Eaton, Jonathan & Kortum, Sam & Neiman, Brent & Romalis, John, 2013. "Trade and the Global Recession," Working Papers 2013-21, University of Sydney, School of Economics.
  4. 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, May-June.
  5. Barbara Dluhosch & Michael Burda, 2000. "Cost Competition, Fragmentation and Globalization," CESifo Working Paper Series 393, CESifo Group Munich.
  6. Escaith, Hubert & Lindenberg, Nannette & Miroudot, Sébastien, 2010. "International Supply Chains and Trade Elasticity in Times of Global Crisis," MPRA Paper 20478, University Library of Munich, Germany.
  7. Bussière, Matthieu & Chudik, Alexander & Sestieri, Giulia, 2009. "Modelling global trade flows: results from a GVAR model," Working Paper Series 1087, European Central Bank.
  8. Logan Lewis & Linda Tesar & Andrei Levchenko, 2010. "The Collapse of International Trade During the 2008-2009 Crisis: In Search of the Smoking Gun," 2010 Meeting Papers 109, Society for Economic Dynamics.
  9. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  10. Calista Cheung & Stéphanie Guichard, 2009. "Understanding the World Trade Collapse," OECD Economics Department Working Papers 729, OECD Publishing.
  11. Kei-Mu Yi & Rudolfs Bems & Robert C. Johnson, 2010. "Demand Spillovers and the Collapse of Trade in the Global Recession," IMF Working Papers 10/142, International Monetary Fund.
  12. Hubert Escaith, 2010. "Global Supply Chains and the Great Trade Collapse: Guilty or Casualty?," Theoretical and Practical Research in Economic Fields, ASERS Publishing, vol. 0(1), pages 27-41, June.
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