Research Spotlight: Hidden Effects of Global Trade

Aubrey George

Econ Focus, 2023, issue 1Q, 35

Abstract: Economists have long studied the parallel movement of inflation and output growth. But although this correlation occurs in the data as strongly across countries as within, standard models in macroeconomics tend to focus only on inflation-output relationships within countries, perhaps because most large countries purchase roughly 80 percent of goods domestically. Nonetheless, economic disturbances are not confined within the country where they originate; they propagate throughout that country's trading network as both its immediate trading partners and trading partners of trading partners react. In a recent working paper, Richmond Fed economists Paul Ho, Pierre-Daniel Sarte, and Felipe Schwartzman demonstrated how trade networks can explain a large proportion of cross-country comovement in inflation and GDP growth even though foreign trade constitutes a small part of many economies. Inflation movements in a country are related not only to that country's own production, but also to movements in output growth, consumption, and exchange rates in every other country.

Date: 2023
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