Towards a New INFORUM Bilateral Trade Model: Data Issues and Modelling Equations

The recent global crisis affected output, but the decline in international trade was even sharper, almost twice as big, so that in the literature it is referred as the Great Trade Collapse. Trade flows have transmitted the crisis through the world economy where international trade runs through much more intricate networks than in the past, involving a greater number of countries, firms, and products. All these relevant economic issues require a clear understanding of the possible positive and negative effects not only on the economy as a whole and on aggregate macroeconomic variables but especially on specific industries and commodities. This type of quantitative analysis can be pursued with several analytical tools and data. Macroeconometric models have a long-standing and remarkable tradition as a tool for analyzing the international transmission mechanism of shocks and policies and for forecasting their effects. Indeed, there has been extensive development of international models linking several economies through trade flows in the past few decades. Since their first stage of development in the 1970s much progress in data quality and availability as well as in computer capabilities has occurred. However, building and maintaining international multi-country models is still a daunting task. In this chapter we present a newly developed version of INFORUM Bilateral Trade Model (BTM). After a brief survey of a selection of multi-country models to compare their main characteristics and their potential in explaining and forecasting international phenomena, we focus on describing the international system of macroeconomic multisectoral country models which has been developed at INFORUM (Interindustry Forecasting Project at the University of Maryland). The main features of BTM are (i) a detailed disaggregation of commodity classification, (ii) the econometric estimation of import shares, and (iii) the linking system between national models. To exploit the potential of this analytic framework, detailed data at the commodity and bilateral level must be compiled, therefore a dataset with bilateral trade flows has been built. The chapter is organized as follows. In Section 2, some criteria for a taxonomy of applied trade models are selected to highlight their main features and their potential in dealing with complex policy issues. Then a selection of these models in the literature is presented according to these classification criteria. The INFORUM international system of models and BTM are presented in Section 3. As this system has been developed since the 1970’s, several versions of BTM are analytically explained. The new dataset which is built for this study is described in Section 4. Finally, preliminary results are presented (Section 5) and some conclusions are drawn in Section 6.