International trade fluctuations: global versus regional factors

Abstract

This paper examines the relative importance of global, regional, country and idiosyncratic factors, as well as the determinants that underpin fluctuations in international trade flows across different regions of the world. Our analysis uses a two-step process, starting with a Bayesian dynamic latent factor model (BDFM) to simultaneously estimate the four dynamic factors, followed by the application of Bayesian model averaging to identify the variables that explain the shares of volatility. Our key findings are: (i) international factors are the most important in explaining fluctuations in international trade, suggesting that the interconnections between economies, and policies/shocks at the regional and global level, tend to be more important than country-level factors (ii) regional integration, particularly when the agreement goes beyond trade in goods, is positively related to the share of the regional factor, and inversely related to the importance of the global factor. Furthermore, the regional factor is more important in the case of economically large trade blocks. Overall, our analysis illustrates the usefulness of applying a BDFM model to study the co-movements of international trade series.

Keywords: Bayesian dynamic latent factor model, Bayesian model averaging, regional trade agreements

JEL Classification: C11, F14, F15