Trade Weakness: Cycle or Trend?
In 2011–2016 global trade volumes systematically surprised on the downside, to a much larger extent than real GDP; in other words, the income elasticity of trade declined and was lower than expected. This finding has generally been interpreted as evidence of the importance of structural factors in determining the weakness of international trade. However, as income elasticity is itself a cyclical variable, the role of cyclical factors has been underestimated. Once the cyclicality of the elasticity is correctly accounted for, it turns out that cyclical forces have provided the main contribution to the unexpected weakness of trade. In addition, the accuracy of existing forecasts on trade growth can be significantly improved by using real-time information about business conditions, given that a large share of the forecast error depends on mispredicted income elasticities.
KeywordsGlobal trade Trade forecasts International business cycle
JEL ClassificationE32 F1 F4
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