Growth Prospects and the Trade Balance in Advanced Economies*
| Published date | 01 October 2022 |
| Author | Ansgar Belke,Steffen Elstner,Svetlana Rujin |
| Date | 01 October 2022 |
| DOI | http://doi.org/10.1111/obes.12493 |
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 84, 5 (2022) 0305-9049
doi: 10.1111/obes.12493
Growth Prospects and the Trade Balance
in Advanced Economies*
ANSGAR BELKE,** STEFFEN ELSTNER† and SVETLANA RUJIN‡
†Bundesrechnungshof, Berlin, 10117, Germany (e-mail: steffen.elstner@brh.bund.de)
‡Deutsche Bundesbank, Wilhelm-Epstein-Straße 14 Frankfurt am Main, 60431, Germany
(e-mail: svetlana.rujin@bundesbank.de)
Abstract
Does an improvement in growth prospects (technological news shock) lead to a fall in
the trade balance? We introduce a novel news shock identification scheme and obtain in
a panel vector autoregression (VAR) for the G7 countries the following results. Positive
news shocks have negative effects on the trade balance in the United States and Japan.
However, in other G7 countries, the effects are positive to a great extent. The differences in
trade balance dynamics are mainly due to heterogeneous reactions of labour markets and
wealth effects. Further, the terms of trade and exchange rate movements play an important
role in explaining the results. Therefore, policy recommendations aimed at reducing the
trade imbalances through productivity-enhancing reforms in advanced economies might
not entail the targeted effects.
I. Introduction
Does an improvement in growth prospects lead to a fall in the trade balance?1This
question is highly relevant as the persistence of global trade imbalances in the last decades
has prompted a lot of research and triggered major policy debates. Prominent examples
are the high trade surpluses of China and Germany and policy reactions from the Trump
administration.2To fix these imbalances, economic officials often call for productivity-
enhancing reforms leading to an improvement in growth prospects in advanced economies
JEL Classification numbers: F41, E32, F32, D83, O40.
*We are deeply grateful to the Editor, Anindya Banerjee and two anonymous referees for their insightful comments
and suggestions. We thank Danilo Cascaldi-Garcia, Volker Clausen, Christoph Fischer, Daniel Gros, Gregor von
Schweinitz, the participants of the Deutsche Bundesbank’s In-house Research Workshop, 28th Annual Virtual
Symposium of the Society for Nonlinear Dynamics and Econometrics, the 35th Annual Virtual Congress of the
European Economic Association, and the 29th Annual Meeting of the Midwest Econometrics Group in Columbus
(Ohio) for helpful comments and suggestions. The views expressed in this paper are those of the authors and
do not necessarily coincide with the views of the Bundesrechnungshof, Deutsche Bundesbank, the ECB or the
Eurosystem. We are deeply grateful to our coauthor Ansgar Belke, who unfortunately left us too soon.
**Deceased.
1Our analysis focuses on the trade balance, rather than the current account, since we want to abstract from fluctuations
in primary income caused by factors that are not related to an improvement in growth prospects.
2According to OECD statistics, while the trade surplus in Germany was 5.6% of GDP in 2019, which is prior to the
global COVID-19 recession, the trade balance deficit in the United States amounted to 2.7% of GDP. These figures
for the current account balance were 7.4% and -2.2%, respectively.
1209
©2022 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and
reproduction in any medium, provided the original work is properly cited.
1210 Bulletin
whose economic performance is lagging behind the United States.3The key idea behind
this policy recommendation is that improved growth prospects create a positive wealth
effect for households, stimulating consumption. The increase in households’ demand
and the anticipated productivity gains raise firms’ investment. Overall, higher domestic
absorption increases imports, leading to a decline in net exports.4
We challenge this policy recommendation and ask whether an improvement in growth
prospects indeed generates negative trade balance effects in the G7 countries. Since
an improvement in a country’s growth prospects cannot be observed directly, we rely
on the concept of technological news shocks. The literature on news shocks builds
around the idea that forward-looking agents observe productivity-enhancing changes in
technology well in advance of their effect on the economy’s productive capacity (Beaudry
and Portier, 2004). These shocks diffuse slowly over time and result in predictable and
persistent changes in the productivity level.
The literature relates news shocks to changes in expectations about long-run economic
developments, proxied by stock prices (Beaudry and Portier, 2006), consumer confidence
(Barsky and Sims, 2012), forecasts (Miyamoto and Nguyen, 2014), survey expectations
of long-run output growth (Hoffmann, Krause, and Laubach, 2019), revisions from
professional forecasters (Cascaldi-Garcia, 2019), changes in the expected share of US
income (Engel and Rogers, 2006), consumption and income (Aguiar and Gopinath, 2007).
Other studies use patent data (Bluwstein, Hacioglu Hoke, and Miranda-Agrippino, 2020;
Cascaldi-Garcia and Vukoti´
c, 2020), the slope of the term structure of interest rates
(Kurmann and Otrok, 2013), or worldwide giant oil and gas discoveries (Arezki, Ramey,
and Sheng, 2017) to identify news shocks.
The empirical studies regarding the effects of technology shocks on the trade balance
focus strongly on the US economy (see, e.g. Corsetti, Dedola, and Leduc, 2008a; Enders
and M¨
uller, 2009; Enders, M¨
uller, and Scholl, 2011; Corsetti, Dedola, and Leduc, 2014).
Moreover, while these studies consider the effects of unanticipated changes in technology,
we are interested in the relationship between anticipated technology shocks (news shocks)
and the trade balance. Nonetheless, the empirical results from the bulk of the literature
show that a positive technology shock in the US economy triggers a deterioration of the
trade balance. This result is complemented by the work of Aguiar and Gopinath (2007)
and Hoffmann et al. (2019), who show that a fall in the trade balance is the optimal
response of households and firms to changing growth prospects.
The focus on the effects of news shocks rather than the unanticipated technology
shocks is motivated by the following considerations. First, we are interested in analysing
trade balance fluctuations resulting from an improvement in domestic growth prospects,
for which anticipated technological innovations play a crucial role. Second, the literature
shows that unanticipated and anticipated technology shocks induce distinct trade balance
dynamics, which can be traced back to different incentives for savings and investment
decisions in the aftermath of these shocks (Obstfeld and Rogoff, 1996). For example, Nam
3See, for example, European Commission (2019) and International Monetary Fund (2019).
4Another transmission mechanism highlighted in the literature is through international capital flows. An improvement
in domestic growth prospects relative to other countries is likely to be associated with future increasing returns on
investment. As a result, the domestic economy becomes a profitable investment destination and thus attracts more
capital. The latter induces a fall in net exports (net capital exports).
©2022 The Authors. Oxford Bulletin of Economics and Statistics published by Oxford University and John Wiley & Sons Ltd.
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