Abstract
This paper studies the trade balance dynamics in the G-7 countries plus Spain. We estimate a SVAR model to identify three different shocks: real supply shocks, real demand disturbances and nominal shocks. A microfounded stochastic open-economy model is built to derive the long-term identification restrictions. Estimates show that real demand shocks explain most of the variability of trade imbalances, whereas, contrary to previous findings, nominal shocks play a very limited role. These results are consistent with the predictions of a widely set of open-economy models and illustrate that demand policies are the main responsible of trade imbalances.
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Notes
This weight is related negatively to the aversion to inflation variability.
Some recent papers adopt an alternative assumption, considering that the number of firms changing prices in any given period is determined endogenously (state dependent pricing models). See, for instance, Burstein (2003) and Goloslov and Lucas (2003). As emphasized by Eichenbaum and Fisher (2004), empirically plausible versions of state dependent pricing models produce similar results to those in the line of Calvo (1983) for many experiments that are relevant in countries with moderate rates of inflation.
When the probability of adjusting prices is one, which means that all firms change their prices at each moment (the case of full price flexibility), the aggregate supply is a line completely vertical (see, for instance, Woodford 2003, chapter 2).
See, for instance, Fraga et al. (2003).
These results are available from the authors upon request.
The fact that the trade balance does not improve in the short run, despite the depreciation in the real exchange rate could also be rationalised with J −curve effects in each country. Many empirical studies show, in fact, that real exchange rate depreciations worsen the trade balance during several quarters.
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We thank J. L. Carrión-i-Silvestre and participants in the Workshop on Dynamic Macroeconomics, Seville, October 2006, III Jornadas de Integración Económica, Valencia, November 2006, and X Jornadas de Economía Internacional, Madrid, June 2007, for their helpful comments and suggestions. We would also like to thank two anonymous referees for hepful comments on a previous version of the paper. J. Rodríguez and José L. Torres acknowledge financial support from Fundación Centro de Estudios Andaluces (projects ECOD1.05/025 and ECOD 1.07/085) and Proyecto de Excelencia, Junta de Andalucía P07-SEJ-02479. José García-Solanes acknowledges financial support from the Spanish Ministry of Education and Science through Project SEJ 2006-15172.
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García-Solanes, J., Rodríguez-López, J. & Torres, J.L. Demand Shocks and Trade Balance Dynamics. Open Econ Rev 22, 739–766 (2011). https://doi.org/10.1007/s11079-010-9171-3
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DOI: https://doi.org/10.1007/s11079-010-9171-3