This paper introduces a new methodology for the estimation of income trade elasticities based on an import intensity-adjusted measure of aggregate demand. It provides an empirical illustration of this new approach for a panel of 18 OECD countries, paying particular attention to the 2008-09 Great Trade Collapse, which standard empirical trade models fail to account for. In this paper, we argue that the composition of demand plays a key role in the collapse of trade during crises because of a relatively bigger fall in the most import-intensive categories of expenditure (especially investment, but also private consumption), which has a large downward impact on the quantity of imports from the rest of the world. In addition, the fragmentation of production implies high import content of exports and, in turn, strongly synchronized trade ‡uctuations across countries. We provide evidence in favor of these factors based on the analysis of the new OECD input-output tables and building on a stylized theoretical model. Importantly, we show that our new intensityweighted measure of demand outperforms alternative measures, during crises but also in normal times, providing import elasticities of demand that are much less volatile across the cycle. JEL Codes: F10, F15, F17.

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This paper examines the exchange rate predictability stemming from the equilibrium model of international …nancial adjustment developed by Gourinchas and Rey (2007). Using theoreticallymotivated predictive variables that measure cyclical external imbalances for country pairs, we assess the ability of this model to forecast out-of-sample four major US dollar exchange rates using criteria of economic pro…tability. The analysis shows that the model delivers tangible economic value to a risk averse investor, who will pay high performance fees to switch from a portfolio strategy based on the random walk benchmark to one that conditions on the structural model. The results are robust to the presence of reasonable transaction costs across various forecasting performance criteria, and they are further enhanced when sensible economic restrictions are imposed on the predictive model. JEL classi…cation: F31; F37; G15.

Non-technical summary 1 Introduction 2 Review of the literature 2.1 Empirical trade modelling 2.2 Global VAR modelling 3 The GVAR approach to global macroeconomic modelling 4 The GVAR trade model 4.1 Data 4.2 Individual country models 4.3 Unit root tests 4.4 Long-run relations 4.5 Robustness tests and further results 5 Applications of the model 5.1 Simulation results 5.2 Generalised forecast error variance decomposition 5.3 The Collapse of global trade in 2008Q4 6 Conclusion Tables and fi gures References Appendix European Central Bank Working Paper Series CONTENTS 4 ECB Working Paper Series No

We study government spending multipliers of the UK economy using a time-varying parameter factor augmented vector autoregressive model (TVP-FAVAR) over the period 1966:Q1-2015:Q4. We show that government spending multipliers vary over time and that most of the variation is cyclical: multipliers for GDP are typically above one in recessions and below one in expansions. Regarding the drivers of the cyclical variation, our results are consistent with theories emphasizing the role of financial frictions and economic slack. We find no evidence that multipliers are larger at the zero lower bound. Structural factors seem to play a lesser role and multipliers do not exhibit a clear trend. We conclude that fiscal policy recommendations should take into account the position of the economy in the cycle in assessing their effectiveness and that the impact of government spending shocks is limited in the UK in non-recessionary periods. 4