## Are Bilateral Trade Balances Irrelevant?

_IMF Working Papers, September 25, 2020_

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## Bibliographic details
- Authors: Margaux MacDonald, Roberto Piazza, Johannes Eugster, Florence Jaumotte
- Published: September 25, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513557793.001

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### Summary and key findings
- Based on an empirical gravity model of sectoral bilateral trade, the paper uncovers three features of bilateral trade balances:
  - The difficulty of gravity models in fitting the observed level of bilateral balances is likely due to the presence of unobservable bilateral trade costs.
  - The model fit improves drastically when focusing on changes over time of the balances.
  - Using a log linear approximation, 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.
- Conclusion: This provides new support for the view that bilateral balances are, for practical purposes, not relevant to the conduct of macroeconomic policy.

### Methodology and analytical approach
- Empirical framework: gravity model of sectoral bilateral trade.
- Analytical technique: log linear approximation to decompose drivers of changes in bilateral trade balances.
- Focus: both levels of bilateral balances and changes over time; improved explanatory power when analyzing temporal changes.

### Policy implications and interpretation
- Bilateral trade costs (including tariffs) had a negligible role in driving changes in bilateral trade balances over the past two decades relative to macro factors that determine aggregate balances.
- Practical implication: Bilateral balances are not relevant to the conduct of macroeconomic policy, supporting policy focus on aggregate determinants rather than bilateral positions.

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_Source: https://www.imf.org/en/publications/wp/issues/2020/09/25/are-bilateral-trade-balances-irrelevant-49736_