In May 2008, it will be ten years since the final decision to move to the third and final stage of Economic and Monetary Union (EMU), and the decision on which countries would be the first to introduce the euro. To mark this anniversary, the Commission is undertaking a strategic review of EMU. This paper constitutes part of the research that was either conducted or financed by the Commission as source material for the review.

The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.

The purpose of the Economic History Working Papers (Quaderni di Storia economica) is to promote the circulation of preliminary versions of working papers on growth, finance, money, institutions prepared within the Bank of Italy or presented at Bank seminars by external speakers with the aim of stimulating comments and suggestions. The present series substitutes the Historical Research papers -Quaderni dell'Ufficio Ricerche Storiche. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank.

This paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB.

In 2011-2015 global trade volumes have systematically surprised on the downside, to a much larger extent than real GDP. We show that two key features of real trade ‡ows -their high volatility and their procyclicality -determine a cyclicality of the income elasticity of trade. This property is such that when real GDP growth is positive but lower than its long-run trend, then the income elasticity of trade is also smaller than its own long-run trend. As a consequence, when real GDP growth turns out to be weaker than expected, the forecast error on trade volumes is ampli…ed by the fact that also the income elasticity of trade happens to be smaller than predicted. Our analysis shows, in particular, that long-run and cyclical forces have contributed to a similar extent to the recent weakness of trade volumes. As a by-product, we also explain how the high volatility and procyclicality of real trade ‡ows, together with the size of the non-tradeable-goods sector, contribute to determine cross-country di¤erences in the income elasticity of trade.JEL classi…cation: E32, F1, F4