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Are Bilateral Trade Balances Irrelevant?
Author:
Ms. Margaux MacDonald
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,
Mr. Roberto Piazza
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Johannes Eugster
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Ms. Florence Jaumottenull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 210
Language:
English
Publication Date:
25 Sep 2020
DOI:
https://doi.org/10.5089/9781513557793.001
ISBN:
9781513557793
ISSN:
1018-5941
Pages:
24
Keywords:
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
Legal-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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2020: Issue 210