Seminar in International Economics: From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances (Online event) | 25.03.201

The Competence Centre for International Economics Research (FIW) kindly invites to participate in the Seminar in International Economics on the topic

From Theory to Policy with Gravitas: A Solution to the Mystery of the Excess Trade Balances

Yoto V. Yotov,
Drexel University (Philadelphia, USA)

Thursday, 25th of March 2021, 4:00 p.m. (CET)

Registration link:
This is an online event via Zoom. Please register for the dial-in link. The link will be sent shortly before the event.

This presentation is based on a paper co-authored with Gabriel Felbermayr (Kiel Institute & Kiel University).

Bilateral trade balances often play an important role in the international trade policy debate. Academic economists understand that they are misleading indicators of competitiveness and of the gains from trade. However, they also recognize their political relevance, calling for accurate statistical measurement and for more scholarly work. Disturbingly, Davis and Weinstein (2002) argue that the canonical gravity model of trade fails when confronted with bilateral trade balances data, dubbing this "The Mystery of the Excess Trade Balances''. Capitalizing on the latest developments in the theoretical and empirical gravity literature, we demonstrate that the workhorse international trade model actually performs well in explaining bilateral trade balances. Moreover, in our data, only 11 to 13% of the variance in bilateral balances is due to asymmetric bilateral trade costs, belying beliefs that bilateral imbalances are driven by 'unfair' manipulation of terms-of-trade. We also perform several general equilibrium experiments within the same structural gravity framework to show that free trade agreements tend to exacerbate bilateral imbalances and that macroeconomic rebalancing leads to adjustment with all trade partners.

The seminar series is organised by the Vienna Institute for International Economic Studies (wiiw) in co-operation with FIW, the Centre of Competence in International Economics. The seminar provides a forum for presentation and discussion of recent academic research in the field of international economics.