Are Bilateral Trade Balances Irrelevant?

Are Bilateral Trade Balances Irrelevant?
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Volume/Issue: Volume 2020 Issue 210
Publication date: September 2020
ISBN: 9781513557793
$18.00
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Topics covered in this book

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Exports and Imports , WP , bilateral trade balances , trade cost , predicted trade balance , aggregate trade balances , log-linearization approximation error , Bilateral trade , gravity , trade imbalances , gravity equation , Trade balance , Plurilateral trade , Exports , Gravity models , Trade relations , Global

Summary

Based on an empirical gravity model of sectoral bilateral trade, we uncover three features of bilateral trade balances. First, the difficulty of gravity models in fitting the observed level of bilateral balances is likely due to the presence of unobservable bilateral trade costs. Second, the model fit improves drastically when we focus on changes over time of the balances. Third, using a log linear approximation we show that changes in bilateral trade balances over the past two decades were driven almost entirely by changes in the same macro factors that determine countries’ aggregate balances – changes in bilateral trade costs, including tariffs, played therefore only a negligible role. This conclusion provides new support for the view that bilateral balances are, for practical purposes, not relevant to the conduct of macroeconomic policy.