nep-int New Economics Papers
on International Trade
Issue of 2007‒01‒13
28 papers chosen by
Martin Berka
Massey University

  1. How Important is the New Goods Margin in International Trade? By Timothy J. Kehoe; Kim J. Ruhl
  2. Road infrastructure in Europe and Central Asia : does network quality affect trade ? By Shepherd, Ben; Wilson, John S.
  3. Trade Adjustment and the Composition of Trade By Christopher Erceg; Luca Guerrieri; Christopher Gust
  4. Free trade agreements and the environment with pre-existing subsidies By Claustre Bajona; David Kelly
  5. Openness, Volatility and the Risk Content of Exports By Julian di Giovanni; Andrei A. Levchenko
  6. What Goods Do Countries Trade? New Ricardian Predictions By Arnaud Costinot; Ivana Komunjer
  7. Subnational Trade Flows and State-Level Energy Intensity By Chintrakarn, Pandej; Millimet, Daniel
  8. Trade liberalization, employment flows, and wage inequality in Brazil By Ferreira, Francisco H. G.; Leite, Phillippe G.; Wai-Poi, Matthew
  9. What Good Do Countries Trade? New Ricardian Predictions By Arnaud Costinot; Ivana Komunjer
  10. International trade, security, and transnational terrorism : theory and empirics By Mirza, Daniel; Verdier, Thierry
  11. Net Exports, Consumption Volatility and International Real Business Cycle Models By Andrea Raffo
  12. Trade Agreements as Endogenously Incomplete Contracts By Horn, Henrik; Maggi, Giovanni; Staiger, Rikard W.
  13. Jobs, Jobs, Jobs: A New Perspective on Protectionism By Arnaud Costenot
  14. Are lives a substitute for livelihoods ? Terrorism, security, and U.S. bilateral imports By Mirza, Daniel; Verdier, Thierry
  15. Road network upgrading and overland trade expansion in Sub-Saharan Africa By Buys, Piet; Deichmann, Uwe; Wheeler, David
  16. Do Terms of Trade Shocks Drive Business Cycles? Some Evidence from Structural Estimation By Thomas Lubik; Wing Leong Teo
  17. Euro Effects on the Intensive and Extensive Margins of Trade By Flam, Harry; Nordström, Håkan
  18. Inefficient Policies, Inefficient Institutions and Trade By Ruben Segura-Cayuela
  19. Trade Integration, Competiton, and the Decline in Exchange-rate Pass-through By Christopher Gust; Sylvain Leduc; Robert Vigfusson
  20. Market Size, Trade, and the Resistance to the Adoption of Better Technology By Klaus Desmet; Stephen L. Parente
  21. The Coherence of Trade Flows and Trade Policies with Aid and Investment Flows By Akiko Suwa-Eisenmann
  22. Trade Costs, Limited Enforcement and Risk Sharing: A Joint Test By Doireann Fitzgerald
  23. Demographic Trends, Fiscal Policy and Trade Deficits By Andrea Ferrero
  24. We Can Work It Out - The Globalisation of ICT-enabled Services By Desiree van Welsum; Xavier Reif
  25. "Trade and the structure of cities" By Jean Cavailhes; Carl Gaigne; Takatoshi Tabuchi; Jacques-Francois Thisse
  26. Subsidies for FDI: Implications from a Model with Heterogenous Firms By Davin Chor
  27. Currency Unions and Irish External Trade By Christine Dwane; Philip R. Lane; Tara McIndoe
  28. Imports and Productivity By Laszlo Halpern; Miklos Koren; Adam Szeidl

  1. By: Timothy J. Kehoe (University of Minnesota); Kim J. Ruhl
    Abstract: We examine the bilateral trade patterns of countries involved in significant trade liberalizations using detailed data on the value of trade flows by commodity. We find a striking relationship between a good's pre-liberalization share in trade and its growth subsequent to liberalization. The goods that were traded the least before the liberalization account for a disproportionate share in trade following the reduction of trade barriers. The set of goods that accounted for only 10 percent of trade before the liberalization may account for as much as 40 percent of trade following the liberalization. This new finding cannot be accounted for by the standard models of trade, which rely on increases in previously traded goods to produce trade growth. We modify the standard Dornbusch-Fischer-Samuelson model of Ricardian trade to provide a model capable of delivering these new facts. Our specification improves on previous Ricardian models by providing a technology process that can be calibrated using data on intra-industry trade
    Keywords: extensive margin, trade liberalization, Ricardian model
    JEL: F12 F15 F17
    Date: 2006–12–03
  2. By: Shepherd, Ben; Wilson, John S.
    Abstract: The authors present a new database of minimum distance road routes connecting 138 cities in 27 countries across Europe and Central Asia. They use it to show that improved road network quality is robustly associated with higher intraregional trade flows. Gravity model simulations suggest that an ambitious but feasible road upgrade could increase trade by 50 percent over baseline, exceeding the expected gains from tariff reductions or trade facilitation programs of comparable scope. Cross-country spillovers due to overland transit are important: total intraregional trade could be increased by 30 percent by upgrading roads in just three countries-Albania, Hungary, and Romania.
    Keywords: Transport Economics Policy & Planning,Free Trade,Common Carriers Industry,Transport and Trade Logistics,Trade Law
    Date: 2006–12–01
  3. By: Christopher Erceg; Luca Guerrieri (International Finance Division Federal Reserve Board); Christopher Gust
    Abstract: A striking feature of U.S. trade is that both imports and exports are heavily concentrated in capital goods and consumer durables. However, most open economy general equilibrium models ignore the marked divergence between the composition of trade flows and the sectoral composition of U.S. expenditure, and simply posit import and exports as depending on an aggregate measure of real activity (such as domestic absorption). In this paper, we use a SDGE model (SIGMA) to show that taking account of the expenditure composition of U.S. trade in an empirically-realistic way yields implications for the responses of trade to shocks that are markedly different from those of a "standard" framework that abstracts from such compositional differences. Overall, our analysis suggests that investment shocks, originating from either foreign or domestic sources, may serve as an important catalyst for trade adjustment, while implying a minimal depreciation of the real exchange rate. Moreover, while policy changes that boost investment abroad could serve to significantly improve the U.S. trade balance through an export channel, reforms oriented at stimulating foreign consumption would exert less of a corrective force on the trade balance, and primarily work by restraining real U.S. imports
    Keywords: Trade, SDGE Model, Open Economy Macroeconomics
    JEL: F17 F41
    Date: 2006–12–03
  4. By: Claustre Bajona (Economics University of Miami); David Kelly
    Abstract: Countries that wish to erect trade barriers have a variety of instruments at their disposal. In addition to tariffs and quotas, countries can offer tax relief, low interest financing, reduced regulation ,and other subsidies to domestic industries facing foreign competition. In a trade agreement, countries typically agree to reduce not only tariffs, but also subsidies. We consider the effect of a trade agreement on pollution emissions. We show that while reducing tariffs may indeed increase pollution intensive production in a country, reductions in some subsidies required by the trade agreement reduce pollution in general equilibrium for reasonable parameter values. The reduction results from two effects. First, a reduction in subsidies to firms reduces pollution-causing capital accumulation. Second, if subsidized firms, industries, and/or state owned enterprises are sufficiently more pollution intensive, then reducing subsidies moves capital and labor from more to less pollution intensive firms. We calibrate the model to the case of China and show that pollution emissions after China's accession to the WTO are up to 22.9 percent lower than a baseline in which China does not enter the WTO, without any pollution abatement policy changes or environmental side agreements.
    Keywords: trade agreements, domestic subsidies, pollution emissions, dynamic general equilibrium
    JEL: F18 F41 Q56
    Date: 2006–12–03
  5. By: Julian di Giovanni (Middle East and Central Asia International Monetary Fund); Andrei A. Levchenko
    Abstract: It has been observed that more open countries experience higher output growth volatility. This paper uses an industry-level panel dataset of manufacturing production and trade to analyze the mechanisms through which trade can affect the volatility of production. We find that sectors with higher trade are more volatile and that trade leads to increased specialization. These two forces act to increase overall volatility. We also find that sectors which are more open to trade are less correlated with the rest of the economy, an effect that acts to reduce aggregate volatility. The point estimates indicate that each of the three effects has an appreciable impact on aggregate volatility. Added together they imply that a one standard deviation change in trade openness is associated with an increase in aggregate volatility of about 15% of the mean volatility observed in the data. The results are also used to provide estimates of the welfare cost of increased volatility under several sets of assumptions. We then propose a summary measure of the riskiness of a country's pattern of export specialization, and analyze its features across countries and over time. There is a great deal of variation in countries' risk content of exports, but it does not have a simple relationship to the level of income or other country characteristics
    Keywords: Trade, Output Volatility, Risk Content of Exports
    JEL: F14 F40
    Date: 2006–12–03
  6. By: Arnaud Costinot (University of California, San Diego); Ivana Komunjer (University of California, San Diego)
    Abstract: Though one of the pillars of the theory of international trade, the extreme predictions of the Ricardian model have made it unsuitable for empirical purposes. A seminal contribution of Eaton and Kortum (2002) is to demonstrate the stochastic productivity differences at the firm-level are sufficient to make the Ricardian model empirically relevant. While successful at explaining trade volumes, their model remains silent with regards to one important question: What goods do countries trade? Our main contribution is to generalize their approach and provide an empirically meaningful answer to this question.
    Keywords: Random Productivity Shocks, Ricardian Comparative Advantage, Predictions of Trade Patterns,
    Date: 2006–10–01
  7. By: Chintrakarn, Pandej (SMU); Millimet, Daniel (SMU)
    Abstract: In one strand of research, analysts examine trends in and the determinants of energy usage and intensity. In a second strand, researchers analyze the impact of trade flows on environmental outcomes. Recently, Cole (2006) bridges this gap, analyzing the impact of trade intensity on energy usage utilizing panel data at the country level. Here, we analyze the impact of subnational trade flows across U.S. states on state-level energy usage and intensity, controlling for the endogeneity of trade flows. Our findings indicate that an expansion of subnational trade at worst has no impact on state-level energy usage, and may actually reduce energy usage (contrary to Cole's country-level findings), although the impacts are not uniform across sectors.
    Keywords: Bilateral Trade, Energy Intensity, Pollution Haven Hypothesis
    JEL: F18 Q4
    Date: 2006–12
  8. By: Ferreira, Francisco H. G.; Leite, Phillippe G.; Wai-Poi, Matthew
    Abstract: Using nationally representative, economywide data, this paper investigates the relative importance of trade-mandated effects on industry wage premia; industry and economywide skill premia; and employment flows in accounting for changes in the wage distribution in Brazil during the 1988-95 trade liberalization. Unlike in other Latin American countries, trade liberalization appears to have made a significant contribution toward a reduction in wage inequality. These effects have not occurred through changes in industry-specific (wage or skill) premia. Instead, they appear to have been channeled through substantial employment flows across sectors and formality categories. Changes in the economywide skill premium are also important.
    Keywords: Economic Theory & Research,Free Trade,Labor Markets,Trade Policy,Trade Law
    Date: 2007–01–01
  9. By: Arnaud Costinot (University of California, San Diego); Ivana Komunjer (Department of Economics, University of California, San Diego)
    Abstract: Though one of the pillars of the theory of international trade, the extreme predictions of the Ricardian model have made it unsuitable for empirical purposes. A seminal contribution of Eaton and Kortum (2002) is to demonstrate that random productivity shocks are sufficient to make the Ricardian model empirically relevant. While successful at explaining trade volumes, their model remains silent with regards to one important questions: What goods to countries trade? Our main contribution is to generalize their approach and provide and empirically meaningful answer to this question.
    Keywords: Random Productivity Shocks, Ricardian Comparative Advantage, Predictions of Trade Patterns,
    Date: 2006–10–01
  10. By: Mirza, Daniel; Verdier, Thierry
    Abstract: The authors offer a general analytical framework illustrating the complex two-way interactions between trade and transnational terrorism. Then they survey the recent economic literature in light of this framework by pointing to the importance in empirical studies of (1) controlling appropriately for theses interactions, (2) distinguishing between " source " countries and " target " countries of terrorism, and (3) taking into account the intertemporal persistence of terrorism between specific pairs of countries.
    Keywords: Transport Security,International Terrorism & Counterterrorism,Economic Theory & Research,Free Trade,Trade Law
    Date: 2006–12–01
  11. By: Andrea Raffo (Economic Research Federal Reserve Bank, Kansas City)
    Abstract: Conventional two-country RBC models interpret countercyclical net exports as reflecting, in large part, the dynamics of capital. I show that, quantitatively, theoretical economies rely on counterfactual terms of trade effects: trade fluctuations, on the contrary, are driven primarily by consumption smoothing, thus generating procyclical net trade in goods. I then consider a class of preferences that embeds home production in a reduced form: consumption volatility increases so that countercyclical net exports reflect primarily a strong relation between import of goods and income, as in the data. The major discrepancy between theory and data concerns the variability of international prices.
    Keywords: Net exports; Home production; Consumption volatility.
    JEL: E32 F32 F41
    Date: 2006–12–03
  12. By: Horn, Henrik (Research Institute of Industrial Economics); Maggi, Giovanni (Princeton University); Staiger, Rikard W. (Stanford University)
    Abstract: We propose a model of trade agreements in which contracting is costly, and as a consequence the optimal agreement may be incomplete. Inspite of its simplicity, the model yields rich predictions on the structure of the optimal trade agreement and how this depends on the fundamentals of the contracting environment. We argue that taking contracting costs explicitly into account can help explain a number of key features of real trade agreements.
    Keywords: Trade Agreement; WTO; GATT; Endogenously Incomplete Contracts
    JEL: D86 F13 K33
    Date: 2007–01–03
  13. By: Arnaud Costenot (University of California, San Diego)
    Abstract: This paper analyzes the determinants of protectionism in a small open economy with search frictions a la PISSARIDES (2000). In equilibrium, jobs generate rents in each sector. Like in the Ricardo-Viner model, the magnitude of those rents may depend on the level of trade protection. The distinct feature of our model is that trade protection may also affect the access to those rents. By raising the domestic price of a given good, a government may attract more firms in a given industry. This raises the probability that a worker will find a job in this sector, and in turn, will benefit from the associated rents. Though simple, our model may help explain a variety of stylized facts regarding the structure of trade protection and individual trade-policy preferences.
    Keywords: search frictions, trade protection, trade-policy preferences,
    Date: 2006–07–01
  14. By: Mirza, Daniel; Verdier, Thierry
    Abstract: What is the impact of terrorism on trade through higher security at the borders? The authors set up a theory which shows that the impact goes not only from terrorism to trade. Higher trade with a partner might, in turn, increase the probability of terrorism acts and make security measures more costly for total welfare. To identify the true impact of terrorism, their theory allows for a strategy to condition out the latter mechanism. The authors show in particular how past incidents perpetrated in third countries (anywhere in the world except the origin or targeted country) constitute good exogenous factors for current security measures at the borders. Their tests suggest that terrorist incidents have a small effect on U.S. imports on average, but a much higher effect for those origin countries at the top of the distribution of incidents. In addition, the level of the impact is up to three times higher when the acts result in a relatively high number of victims, the products are sensitive to shipping time, and the size of the partner is small. The authors further show how terrorism affects the number of business visas given by the United States, thereby affecting significantly U.S. imports in differentiated products. These results suggest that security to prevent terrorism does matter for trade.
    Keywords: International Terrorism & Counterterrorism,Transport Security,Economic Theory & Research,Country Strategy & Performance,Free Trade
    Date: 2006–12–01
  15. By: Buys, Piet; Deichmann, Uwe; Wheeler, David
    Abstract: Recent research suggests that isolation from regional and international markets has contributed significantly to poverty in many Sub-Saharan African countries. Numerous empirical studies identify poor transport infrastructure and border restrictions as significant deterrents to trade expansion. In response, the African Development Bank has proposed an integrated network of functional roads for the subcontinent. Drawing on new econometric results, the authors quantify the trade-expansion potential and costs of such a network. They use spatial network analysis techniques to identify a network of primary roads connecting all Sub-Saharan capitals and other cities with populations over 500,000. The authors estimate current overland trade flows in the network using econometrically-estimated gravity model parameters, road transport quality indicators, actual road distances, and estimates of economic scale for cities in the network. Then they simulate the effect of feasible continental upgrading by setting network transport quality at a level that is functional, but less highly developed than existing roads in countries like South Africa and Botswana. The authors assess the costs of upgrading with econometric evidence from a large World Bank database of road project costs in Africa. Using a standard approach to forecast error estimation, they derive a range of potential benefits and costs. Their baseline results indicate that continental network upgrading would expand overland trade by about $250 billion over 15 years, with major direct and indirect benefits for the rural poor. Financing the program would require about $20 billion for initial upgrading and $1 billion annually for maintenance. The authors conclude with a discussion of supporting institutional arrangements and the potential cost of implementing them.
    Keywords: Transport Economics Policy & Planning,Common Carriers Industry,Rural Roads & Transport,Transport and Trade Logistics,Economic Theory & Research
    Date: 2006–12–01
  16. By: Thomas Lubik; Wing Leong Teo
    Abstract: Existing studies differ significantly on how much terms of trade shocks contribute to output fluctuations. Empirical studies based on VAR analysis find that terms of trade shocks explain less than 10% of output fluctuations while results from calibrated DSGE models suggest a figure of more than 50%. In this paper, we set out to bridge the gap between the two approaches by estimating a small scale DSGE model using a loss function based structural Bayesian inference approach. Our approach allows us to exploit cross-equation restrictions implied by the micro-founded structural model to estimate the contribution of terms of trade shocks to output fluctuations. We find that terms of trade shocks explain less than 5% of output fluctuations in our estimated model.
    Keywords: Terms of Trade; Business Cycles; Small Open Economies; Structural Estimation; Bayesian Analysis
    JEL: F41 C32
    Date: 2005–11–11
  17. By: Flam, Harry (Institute for International Economic Studies, Stockholm University); Nordström, Håkan (Swedish Board of Trade)
    Abstract: We estimate that the euro has increased trade within the eurozone by about 26 per cent and trade between the eurozone and outsiders by about 12 per cent on average for the years 2002-2005 compared to 1995-1998. The percentage increases were maller for products that were exported every year during the sample period than for products that were not, indicating significant and substantial effects on the extensive margin of trade. The euro effects were concentrated to semi-finished and finished products, in particular to industries with highly processed products such as pharmaceuticals and machinery.
    Keywords: -
    JEL: F10
    Date: 2006–12–01
  18. By: Ruben Segura-Cayuela
    Abstract: Despite the general belief among economists on the growth-enhancing role of international trade and significant trade opening over the past 25 years, the growth performance of many developing economies, especially of those in Latin America and Africa, has been disappointing. While this poor growth performance has many potential causes, in this paper I argue that part of the reason may be related to the interaction between weak institutions and trade. In particular, I construct a model in which trade opening in societies with weak institutions (in particular autocratic and elite-controlled political systems) may lead to worse economic policies. The reason is that general equilibrium price effects of taxation and expropriation in closed economies also hurt the elites, and this puts a natural barrier against inefficient policies. Trade openness removes this barrier and enables groups with political power to exercise this power in more inefficient ways
    Keywords: Trade, Institutions, Expropriation
    JEL: F10 O10
    Date: 2006–12–03
  19. By: Christopher Gust; Sylvain Leduc; Robert Vigfusson
    Abstract: Over the past twenty years, U.S. import prices have become less responsive to the exchange rate. We propose that this decline is a result of increased trade integration. To illustrate this effect, we develop an open economy DGE model in which there is strategic complementarity in price setting so that a firm's pricing decision depends on the prices set by its competitors. Because of the complementarity in price setting, a foreign exporter finds it optimal to vary its markup over cost in response to shocks that change the exchange rate, which insulates import prices from exchange rate movements. With increased trade integration, exporters have become more responsive to the prices of their competitors and this change in pricing behavior accounts for a significant portion of the observed decline in the sensitivity of U.S import prices to the exchange rate. Our environment of low pass-through also has important implications for the welfare benefits of trade integration: we find that the benefits are substantially reduced compared to an environment with complete pass-through.
    Keywords: Pass-through, Trade Integration, Strategic Complementarities
    JEL: F15 F41
    Date: 2006–12–03
  20. By: Klaus Desmet (Department of Economics Universidad Carlos III); Stephen L. Parente
    Abstract: Why is the adoption of more productive technologies more fiercely resisted in some societies than in others? This paper examines the role of market size and free trade in determining whether firms or workers resist the adoption of more advanced technologies. It puts forth a model whereby the price elasticity of demand for each industry's product is an increasing function of the economy's population size. A more elastic demand lowers the resistance to technology adoption because the drop in the price of the industry's output that follows the adoption of a cost-saving technology is associated with a larger increase in industry's revenue. We demonstrate this mechanism numerically and provide empirical support for this theory.
    Keywords: Technology Adoption, Resistance, Trade, Ideal Varieties
    JEL: O14 F16
    Date: 2006–12–03
  21. By: Akiko Suwa-Eisenmann
    Abstract: This paper provides a theoretical and empirical overview of the relationships among trade, aid and FDI, both in terms of policy interactions and interactions among resource flows. Aid flows from one country to another can have positive or negative effects on trade flows between those countries. These effects, in turn, may act at two different levels. There are macro-level links between aid and trade: aid enhances saving, permitting more imports, or aid raises the real exchange rate, depressing exports. There are also micro-level mechanisms: tied aid may increase exports if it is spent on enhancing trade capacity, but other forms of tied aid merely lead to allocative inefficiency. Aid flows can affect trade policy in the developing country that... <BR>Cet article fournit une vue d’ensemble à la fois théorique et pratique des relations existant entre les échanges, l’aide et les IDE, à la fois en termes d’interactions politiques et d’interactions entre les flux de ressources. Les flux d’aides d’un pays à un autre peuvent avoir des effets positifs ou négatifs sur les flux commerciaux des pays concernés. Ces effets peuvent agir à deux différents niveaux. Il existe ainsi des liens macroéconomiques entre l’aide et le commerce : l’aide fait augmenter l’épargne, ce qui permet plus d’importations, ou alors l’aide fait monter le taux de change réel, ce qui diminue les exportations. Il existe également des mécanismes microéconomiques : une aide liée peut augmenter les exportations si elle est utilisée pour le...
    Date: 2006–08
  22. By: Doireann Fitzgerald (Economics University of California, Santa Cruz)
    Abstract: This paper addresses the question of whether goods or asset market frictions are necessary to explain the failure of consumption risk sharing across countries. I present a multi-country DSGE model with Armington specialization. There are iceberg costs of shipping goods across countries. In asset markets, contracts are imperfectly enforceable. Both frictions separately limit the extent to which countries can pool risk. The model suggests a test for the presence of each of the two types of friction that can be implemented using data on bilateral imports. I implement this test using a sample of developed and developing countries. I find that both trade costs and asset market imperfections are necessary in order to explain the failure of perfect consumption risk sharing. However the null hypothesis of financial autarky is rejected
    Keywords: risk sharing, trade costs, asset market frictions
    JEL: F15 F36
    Date: 2006–12–03
  23. By: Andrea Ferrero (Economics New York University)
    Abstract: In this paper, I argue that demographic factors play a central role in accounting for the trade deficit experienced by the U.S. during the last three decades. The main idea is that cross-country demographic differentials lead to adjustments in savings and investments which are associated with international capital flows towards relatively young and rapidly growing economies. I develop a tractable two-country framework with life-cycle structure that formalizes this intuition. The model permits to illustrate analytically and quantitatively the contribution of demographic variables in determining the equilibrium trade balance. I show that persistent differences in population aging can explain a significant fraction of the negative trend in the U.S. trade balance. Notably, the explicit consideration of the demographic transition also helps to reconcile the dynamics of the trade balance with the evolution of the U.S. fiscal deficits and generates a declining pattern for the real interest rate broadly consistent with the data
    Keywords: External Imbalances, Aging, Fiscal Deficits
    JEL: J11 H87 F32
    Date: 2006–12–03
  24. By: Desiree van Welsum; Xavier Reif
    Abstract: This paper examines the relationship between the share of employment potentially affected by offshoring and economic and structural factors, including trade in business services and foreign direct investment (FDI), using simple descriptive regressions for a panel of OECD economies between 1996 and 2003. It tests whether there are differences in the factors driving the shares of potentially offshorable "non-clerical" and clerical occupations in total employment. The results show a positive statistical association between the share of both "non-clerical" and clerical occupations potentially affected by offshoring and exports of business services, and a negative association with imports of business services. However, the results also show important differences between different types of occupations as they behave differently over time, and are affected differently by variables included in the model. In particular, net outward manufacturing FDI, ICT investment, and the relative size of the services sector all have a positive association with the share of potentially offshorable "non-clerical" occupations, but are negative with clerical occupations. Union density has a positive statistical association with clerical occupations but negative with "non-clerical" occupations. These results have important implications for policy, as they clearly suggest that different factors are driving the performance of different occupational groups.
    JEL: F1 F16 F2 J24 J62
    Date: 2006–12
  25. By: Jean Cavailhes (IRNA-CESAER); Carl Gaigne (IRNA); Takatoshi Tabuchi (Faculty of Economics, University of Tokyo); Jacques-Francois Thisse (CORE, Universite catholique de Louvain)
    Abstract: Our purpose is to investigate how the interplay between trade, commuting and communication costs shapes the economy at both the interregional and intra-urban levels. Specifically, we study how economic integration affects the internal structure of cities and show how decentralizing the production and consumption of goods in secondary employment centers allows firms located in a large city to maintain their predominance. Several new results in both economic geography and urban economics are established, which all agree with empirical evidence.
    Date: 2006–12
  26. By: Davin Chor (Harvard University public)
    Abstract: This paper develops a two-country version of the Helpman, Melitz and Yeaple (2004) model with heterogenous firms to analyze the welfare effects of subsidy schemes to attract multinationals. Considering policies financed by a tax on labor income, I show formally that the use of a small cost subsidy by the host country to multinational firms raises welfare in that country. This welfare improvement stems from a selection effect: The subsidy attracts the most productive home country exporters to switch to servicing the foreign market via FDI, allowing foreign consumers to access these firms' products at a lower price by saving on cross-border transport costs. This consumption gain to the foreign country outweighs the direct costs of funding the subsidy precisely because it is the most productive home country exporters that respond to the FDI subsidy. Some benchmark calibrations show that the magnitude of the welfare gains from a subsidy to variable costs is substantially larger than from a subsidy to the fixed cost of conducting FDI. Intuitively, a variable cost subsidy also helps to raise the inefficiently low output levels of each firm stemming from their mark-up pricing power
    Keywords: FDI subsidies, heterogenous firms
    JEL: F12 F13 F23
    Date: 2006–12–03
  27. By: Christine Dwane; Philip R. Lane; Tara McIndoe
    Abstract: Ireland has participated in two currency unions - a bilateral union with the United Kingdom that lasted until 1979 and as a founder member of European Monetary Union that began in 1999. This paper investigates whether currency unions have influenced Irish trade patterns.
    Date: 2007–01–05
  28. By: Laszlo Halpern (Macroeconomics Institute of Economics of Hungarian Academy of Sciences); Miklos Koren; Adam Szeidl
    Abstract: What is the effect of imports on productivity? To answer this question, we estimate a structural model of producers using product-level import data for a panel of Hungarian manufacturing firms from 1992 to 2001. In our model with heterogenous firms, producers choose to import or purchase domestically varieties of intermediate inputs. Imports affect firm productivity through expanding variety as well as improved input quality. The model leads to a production function where the total factor productivity of a firm depends on the share of inputs imported. To estimate this import-augmented production function, we extend the Olley and Pakes (1996) procedure for a setting with an additional state variable, the number of input varieties imported. Our results suggest that the role of imports is both statistically and economically significant. Imports are responsible for 30% of the growth in aggregate total factor productivity in Hungary during the 1990s. About 50% of this effect is through imports advancing firm level productivity, while the remaining 50% comes from the reallocation of capital and labor to importers.
    Keywords: imports, intermediate inputs, productivity
    JEL: F12 F14 L25
    Date: 2006–12–03

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