Imports - Exports Correlation: A New Enigma?

Abstract

This paper documents the existence of a strong and striking correlation between imports and exports. A cross-sectional and time series analysis for the largest possible international sample (159 countries in the period 1960-2006) supports the robustness of this finding, although the statistical causality between both variables is not explored in depth. After ruling out common factors that simultaneously drive imports and exports, as well as the presence of systematic government interventions, we suggest two plausible explanations. The first is the existence of external financial constraints, in the spirit of the Feldstein-Horioka literature. However, we argue that this is an incomplete explanation, and therefore we offer a classical rationale, which links imports and exports to the growth of the level of economic activity. This hypothesis is consistent with a Mundell-Fleming approach in the short term and with an export-based growth process in the long term. Our results open the way to fruitful policy implications and a reinterpretation of commonly accepted notions in the analysis of open economies. In particular, the study reveals the ineffectiveness of active policies to permanently increase the trade balance.

JEL classification: F21 ; G36 ; G15