Euro area and US external adjustment: the role of commodity prices and emerging market shocks

Summary:

The paper uses an estimated macroeconomic multi-region model with commodities to analyse the evolution of euro area and United States trade balances after the Global Financial Crisis.

The trade balances of the Euro Area (EA) and of the US have improved markedly after the Global Financial Crisis. This paper quantifies the drivers of EA and US economic fluctuations and external adjustment, using an estimated (1999-2017) three-region (US, EA, rest of world) DSGE model with trade in manufactured goods and in commodities. In the model, commodity prices reflect global demand and supply conditions. The paper highlights the key contribution of the post-crisis collapse in commodity prices for the EA and US trade balance reversal. Aggregate demand shocks originating in the rest of the world, including Emerging markets, too had a significant impact on EA and US trade balances.

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