Driving Factors of Trade Flows in a Small Open Economy: The Case of Italy

Abstract

The structural VEC methodology is applied to study Italy's trade balance over the last two decades. The proposed methodological framework allows discussing not only standard empirical issues, such as the response to currency shocks or the trade elasticities/growth nexus, but also assessing quantitatively the effects of trade liberalization policies and the time-varying relative weights of trade flows' determinants. The main findings are: i) in the long-run, price and non-price factors influence the trade balance; ii) permanent price factors drive its dynamics in the pre-EMU period, but not in the most recent years, when transitory foreign productivity shocks appear to dominate.