Trade Patterns, Trade Balances and Idiosyncratic Shocks

Banco de España Research Paper No. WP-0721

"la Caixa" Working Paper No. 02/2007

45 Pages Posted: 3 Jul 2007 Last revised: 30 Apr 2008

See all articles by Claudia Canals

Claudia Canals

La Caixa

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Josep M. Vilarrubia

Banco de España

David E. Weinstein

Columbia University - Graduate School of Arts and Sciences - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 2007

Abstract

International Macroeconomics has long sought an explanation for current account fluctuations that matches the data. The approaches have typically focused on better models and new macroeconomic variables. We demonstrate the limitations of this approach by showing that idiosyncratic shocks are an important cause of macroeconomic volatility even for large countries. When explaining these fluctuations, standard macroeconomic models generally assume that firms are small and that their microeconomic shocks cancel out. We show that the high degree of concentration of bilateral trade flows means that idiosyncratic shocks can have a significant impact on aggregate economic fluctuations. We theoretically develop a descomposition components. Taking the model to data on bilateral trade flows from 1970 to 1997, we find that the most comprehensive macroeconomic model can only account for at most half of the observed variance in trade account volumes of each country. Thus, this paper highlights the importance of considering disaggregated data when modeling the current account.

Keywords: trade balance, trade concentration, firms, empirical

JEL Classification: F41, F32

Suggested Citation

Canals, Claudia and Gabaix, Xavier and Vilarrubia, Josep M. and Weinstein, David E., Trade Patterns, Trade Balances and Idiosyncratic Shocks (July 2007). Banco de España Research Paper No. WP-0721; "la Caixa" Working Paper No. 02/2007. Available at SSRN: https://ssrn.com/abstract=997993 or http://dx.doi.org/10.2139/ssrn.997993

Claudia Canals

La Caixa ( email )

Av Diagonal 629
Barcelona, 08028
Spain

Xavier Gabaix

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Josep M. Vilarrubia (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

David E. Weinstein

Columbia University - Graduate School of Arts and Sciences - Department of Economics ( email )

420 W. 118th Street
MC 3308
New York, NY 10027
United States
212-854-6880 (Phone)
212-854-8059 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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