Are Bilateral Trade Balances Irrelevant?

By Margaux MacDonald, Roberto Piazza, Johannes Eugster, Florence Jaumotte

September 25, 2020

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Margaux MacDonald, Roberto Piazza, Johannes Eugster, and Florence Jaumotte. Are Bilateral Trade Balances Irrelevant?, (USA: International Monetary Fund, 2020) accessed September 27, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Econometric analysis, Exports, Gravity models, International trade, Plurilateral trade, Trade balance, Trade relations

Keywords: Aggregate trade balances, Bilateral trade, Bilateral trade balances, Exports, Global, Gravity, Gravity equation, Gravity models, Log-linearization approximation error, Plurilateral trade, Predicted trade balance, Trade balance, Trade cost, Trade imbalances, Trade relations, WP

Publication Details

Pages:

24
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/210
Stock No:

WPIEA2020210
ISBN:

9781513557793
ISSN:

1018-5941

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