nep-int New Economics Papers
on International Trade
Issue of 2008‒07‒20
five papers chosen by
Alessia A. Amighini
University Amedeo Avogadro

  1. Structural Estimation and Solution of International Trade Models with Heterogeneous Firms By Edward J. Balistreri; Russell H. Hillberry; Thomas F. Rutherford
  2. Do Customs Union Members Engage In More Bilateral Trade Than Free Trade Agreement Members? By Jayjit Roy
  3. Estimating the Gravity Equation when Zero Trade Flows are Frequent By Martin, Will; Pham, Cong S.
  4. Trends and Drivers of Bilateral FDI Flows in Developing Asia By Rabin Hattari; Ramkishen S. Rajan
  5. Input Substitution, Export Pricing, and Exchange Rate Policy By Kang Shi; Juanyi Xu

  1. By: Edward J. Balistreri (Division of Economics and Business, Colorado School of Mines, Golden, CO); Russell H. Hillberry (University of Melbourne); Thomas F. Rutherford (The Swiss Federal Institute of Technology (ETH-Zürich))
    Abstract: We present an empirical implementation of a general-equilibrium model of international trade with heterogeneous manufacturing firms. The theory underlying our model is consistent with Melitz (2003). A nonlinear structural estimation procedure identifies a set of core parameters and unobserved firm-level trade frictions that best fit the geographic pattern of trade. Once the parameters are identified, we utilize a decomposition technique for computing general-equilibrium counterfactuals. We illustrate this technique using trade and protection data from the Global Trade Analysis Project (GTAP). We first assess the economic effects of reductions in measured tariffs. Taking the simple-average welfare change across regions the Melitz structure indicates welfare gains from liberalization that are nearly four times larger than in a standard policy simulation model. Furthermore, when we compare the economic impact of tariffs with reductions in estimated fixed trade costs we find that policy measures affecting the fixed costs of firmentry are of greater importance than conventional tariff barriers.
    JEL: C68 F12
    Date: 2008–06
  2. By: Jayjit Roy (SMU)
    Abstract: This paper provides the first empirical analysis directly comparing the effects of customs unions (CUs) and free trade agreements (FTAs) on members' bilateral trade, while addressing the biases arising from log-linearization of the gravity model and crucial time-invariant unobservables. Since Fiorentino et al. (2007) question the popularity of CUs relative to FTAs, considering the latter to be more practical in the current trading climate, such a comparison seems especially relevant. While Baier and Bergstrand (2007) find an FTA to approximately double membersí bilateral trade after 10 years, it is actually a CU, and not an FTA, which doubles bilateral trade.
    Keywords: Free Trade Agreements, Customs Unions, Gravity Model
    JEL: F1
    Date: 2008–07
  3. By: Martin, Will; Pham, Cong S.
    Abstract: In this paper we estimate the gravity model allowing for the pervasive issues of heteroscedasticity and zero bilateral trade flows identified in an influential paper by Santos Silva and Tenreyro. We use Monte Carlo simulations with data generated using a heteroscedastic, limited-dependent-variable process to investigate the extent to which different estimators can deal with the resulting parameter biases. While the Poisson Pseudo-Maximum Likelihood estimator recommended by Santos Silva and Tenreyro solves the heteroscedasticity-bias problem when this is the only problem, it apprears to yield severely biased estimates when zero trade values are frequent. Standard threshold-Tobit estimators perform better as long as the heteroscedasticity problem is satisfactorily dealt with. The Heckman Maximum Likelihood estimators appear to perform well if true identifying restrictions are available.
    Keywords: International trade; Gravity equation; Limited dependent variable regression; Poisson pseudo-maximum likelihood; Zero trade flows
    JEL: C13 P45 C01
    Date: 2008
  4. By: Rabin Hattari (George Mason University); Ramkishen S. Rajan (George Mason University, Hong Kong Institute for Monetary Research)
    Abstract: Developing countries are rapidly emerging as new and important sources of foreign direct investment (FDI) to other developing countries. While Asian companies have become significant foreign direct investors abroad, a large share of outward investments from Asia appears to have been recycled intraregionally. However, unlike trade flows, there has been little to no detailed examination of FDI flows between Asian economies at a bilateral level. This paper uses bilateral FDI flows data to investigate trends and patterns of intra-Asian FDI flows over the period 1990 to 2005. It also employs an augmented gravity model framework to examine the main determinants of intra-Asian FDI flows. A range of drivers of FDI flows, including transactional and informational distance (proxied by distance), real sector variables, financial variables and institutional quality are examined.
    Keywords: Developing Asia, Distance, Foreign direct investment (FDI), Institutions, Intra-regional, Gravity model
    JEL: F21 F23 F36
    Date: 2008–11
  5. By: Kang Shi (The Chinese University of Hong Kong, Hong Kong Institute for Monetary Research); Juanyi Xu (Hong Kong University of Science and Technology, Simon Fraser University, Hong Kong Institute for Monetary Research)
    Abstract: This paper develops a small open economy model with sticky prices to show why a flexible exchange rate policy is not desirable in East Asian emerging market economies. We argue that weak input substitution between local labor and import intermediates in traded goods production and extensive use of foreign currency in export pricing in these economies can help to explain this puzzle. In the presence of these two trade features, the adjustment role of the exchange rate is inhibited, so even a flexible exchange rate cannot stabilize the real economy in face of external shocks. Instead, due to the high exchange rate pass-through, exchange rate changes will lead to instability in both inflation and production cost. As a result, a fixed exchange rate may dominate a monetary policy rule with high exchange rate flexibility in terms of welfare. In a sense, our finding provides a rationale for the "fear of floating" phenomenon in these economies. That is, "fear of floating" may be central banks' rational reaction when these economies are constrained by the trade features mentioned above.
    Keywords: Input Substitution, Export Pricing, Exchange Rate Flexibility, Welfare
    JEL: F3 F4
    Date: 2008–10

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