nep-int New Economics Papers
on International Trade
Issue of 2014‒02‒15
forty-six papers chosen by
Luca Salvatici
Universita' di Roma 3

  1. Intra‐national Trade Costs: Measurement and Aggregation By Agnosteva, Delina E.; Anderson, James E.; Yotov, Yoto
  2. The Political Economy of FDI flows into Developing Countries: Does the depth of International Trade Agreements Matter? By Rana, Arslan Tariq; Kebewar, Mazen
  3. Estimating Illicit Flows of Capital via Trade Mispricing: A Forensic Analysis of Data on Switzerland-Working Paper 350 By Alex Cobham, Petr Janský, and Alex Prats
  4. Relatedness and Diversification in the EU-27 and ENP countries By Ron Boschma; Gianluca Capone
  6. Exporting and labor demand: Micro-level evidence from Germany By Lichter, Andreas; Peichl, Andreas; Siegloch, Sebastian
  7. Is Agricultural Productivity Growth Good for Industrialization? Infrastructures and the Welfare Maximizing Tax Rate By Kamei, Keita; Sasaki, Hiroaki
  8. Heaven’s Swing Door: Endogenous skills, migration networks and the effectiveness of quality-selective immigration policies By Bertoli, Simone; Rapoport, Hillel
  9. Philippine Export Efficiency and Potential: An Application of Stochastic Frontier Gravity Model By Deluna, Roperto Jr; Cruz, Edgardo
  10. Changing patterns of export of goods versus macroeconomic competitiveness. A comparative analysis for East-Central European countries in the period 2000-2011. By Lechman, Ewa
  11. Does Anti-dumping Enforcement Generate Threat? By Bagchi, Sagnik; Bhattacharyya, Surajit; Narayanan, Krishnan
  12. Openness and competitiveness of manufacturing sector: a comparative study of China and India By Santra, Swarup; Bagaria, Nidhi
  13. Global Value Chains and Trade Elasticities By Byron S. Gangnes; Alyson C. Ma; Ari Van Assche
  14. Macroeconomic Consequences of Terms of Trade Episodes, Past and Present By Tim Atkin; Mark Caputo; Tim Robinson; Hao Wang
  15. Structural Change, the Real Exchange Rate, and the Balance of Payments in Mexico, 1960-2012 By Robert M. Feinberg
  16. The Missing Food Problem By Trevor Tombe
  17. Modeling and Estimation of Gravity Equation in the Presence of Zero Trade: A Validation of Hypotheses Using Africa's Trade Data By Kareem, Fatima O.
  18. The India–Sri Lanka Free Trade Agreement and the Proposed Comprehensive Economic Partnership Agreement: A Closer Look By Kelegama, Saman
  19. Carbon Tariffs Revisited By Christoph Böhringer; Andre Müller; Jan Schneider
  20. The geographical restructuring of the European automobile industry in the 2000s By Frigant, Vincent; Miollan, Stéphane
  21. Regional integration, international liberalisation and the dynamics of industrial agglomeration By Pasquale Commendatore; Ingrid Kubin; Carmelo Petraglia; Iryna Sushko
  22. The Foreign Investment Effects of Tax Treaties By Arjan Lejour
  23. Vertical integration and supplier finance By Kersting, Erasmus K.; Gorg, Holger
  24. Heterogeneity and Uncertainty in the Dynamics of Firm Selection into Foreign Markets By Mehmet Fatih Ulu
  25. Welfare and Trade Without Pareto By Keith Head; Thierry Mayer; Mathias Thoenig
  26. European Integration: Partisan Motives or Economic Benefits? By Patricia Esteve-González; Bernd Theilen
  27. A practitioners' guide to gravity models of international migration By Michel Beinea; Simone Bertolib; Jesús Fernández-Huertas Moraga
  28. Determinants of risk sharing through remittances: cross-country evidence By Faruk Balli; Faisal Rana
  29. Emerging Economies' Supply Shocks and Japan's Price Deflation: International Transmissions in a Three-Country DSGE Model By Hirakata, Naohisa; Iwasaki, Yuto; Kawai, Masahiro
  30. Foreign Reserve Accumulation and the Mercantilist Motive Hypothesis By Patrick Carvalho; Renee A. Fry-McKibbin
  31. Technical Change, Non-Tariff Trade Barriers and the Developmente of the Italian Locomotives Industry, 1850-1913 By Carlo Ciccarelli; Alessandro Nuvolari
  32. Regional Settlement Infrastructure and Currency Internationalization: The Case of Asia and the Renminbi By Rhee, Changyong; Sumulong, Lea
  33. U.S. High-Skilled Immigration, Innovation, and Entrepreneurship: Empirical Approaches and Evidence By William R. Kerr
  34. A multi-country DSGE model with incomplete Exchange Rate Pass-through: application for the Euro area By Tovonony Razafindrabe
  35. Emigration and democracy By Docquier, Frédéric; Lodigiani, Elisabetta; Rapoport, Hillel; Schiff, Maurice
  36. Migration, remittances and household welfare in Ethiopia By Andersson L.
  37. Outsourcing and the shift from manufacturing to services By Giuseppe Berlingieri
  38. The World Input-Output Database: Content, Concepts and Applications By Robert Stehrer; Los, Bart; Dietzenbacher, H.W.A.; Timmer, Marcel; Gaaitzen J. de Vries
  39. Reassessing international investment patterns: a revisitation of Lane and Milesi-Ferretti's evidence. By Pierucci, Eleonora; Pericoli, Filippo; Ventura, Luigi
  40. Foreign direct investment in retail market in India: some issues and challenges By Santra, Swarup; Bagaria, Nidhi
  41. Did NAFTA Help Mexico? An Assessment After 20 Years By Mark Weisbrot; Stephan Lefebvre; Joseph Sammut
  42. Natural-Resource Booms, Fiscal Rules and Welfare in a Small Open Economy By Jair N. OJeda; Julián A. Parra Polanía; Carmiña O. Vargas
  43. Agri-investments and public spending in selected vulnerable countries – will they contribute to reduce food insecurity? By Wieck, Christine; Rudloff, Bettina; Heucher, Angela
  44. Using Twitter to Model the EUR/USD Exchange Rate By Dietmar Janetzko
  45. Influence of Foreign Institutional Investments (FIIs) on the Indian stock market By Vardhan, Harsh; Sinha, Pankaj
  46. International Capital Markets Structure, Preferences and Puzzles: The US-China Case By Guglielmo Maria Caporale; Michael Donadelli; Alessia Varani

  1. By: Agnosteva, Delina E. (School of Economics LeBow College of Business Drexel University); Anderson, James E. (Department of Economics Boston College); Yotov, Yoto (School of Economics LeBow College of Business Drexel University)
    Abstract: We develop and apply a procedure to flexibly estimate intra-national border barriers and intra-regional trade costs. Bilateral border barriers very significantly depress Canadian inter-provincial trade for some pairs, though the overall effect is rather small. Bilateral distance imposes much larger inter-provincial trade costs. Contiguity between provinces accounts for little. Intra-regional trade cost variation affects relative bilateral costs and trade flows, and alters comparative statics except in a neutral case rejected by the data. Consistent trade cost aggregation procedures are developed and applied for groups of regions and/or sectors.
    Keywords: Intra- and Inter-regional Trade Costs; Border Effects; Aggregation; Canada
    JEL: F13 F14 F16
    Date: 2014–01–24
  2. By: Rana, Arslan Tariq; Kebewar, Mazen
    Abstract: There is considerable debate whether the domestic political institutions (specifically, the country’s level of democracy) of the host developing country toward foreign investors are effective in establishing the credibility of commitments are still underway, researchers have also analyzed the effect of international institutions such as (GATT-WTO) membership and Bilateral Investment treaties (BIT) in their role of establishing the credibility of commitment to attract foreign investments. In addition, most recent studies have examined the effect of International Trade Agreements (TAs) on FDI flows as they contain separate investment chapters and dispute settlement mechanism, thus providing confidence to investor regarding the security of their investments. We argue that there are qualitative differences among various types of trade agreements and full-fledged trade agreements (FTA-CU) provide credibility to foreign investors and democracy level in the host country conditions this effect whereas the partial scope agreements (PSA) are not sufficient in providing credibility of commitments and not moderated by democracy. This paper analyses the impact of heterogeneous TAs, and their interaction with domestic institutions, on FDI inflows. Statistical analyses for 122 developing countries from 1970 to 2005 support this argument. The method adopted relies on fixed effects estimator which is robust to control endogeneity on a large panel dataset. The strict erogeneity of results by using a method suggested by Baier and Bergstrand (2007) and no feedback effect found in sample. The results state that (1) More the FTA-CU concluded, larger the amount of FDI inflows are attracted into the developing countries and PSA are insignificant in determining the FDI inflow; (2) FTA CU are complementary to democratic regime whereas the conditional effect of PSA with democracy on levels of FDI inflows is insignificant --
    Keywords: foreign direct investment,free trade agreements,partial scope agreements,domestic institutions
    JEL: F21 F55 F59
    Date: 2014–02–03
  3. By: Alex Cobham, Petr Janský, and Alex Prats
    Abstract: This paper assesses the role of Switzerland as the leading hub for global commodities trading, in terms of the patterns of prices received by original exporting countries and subsequently by Switzerland and other jurisdictions. We find support for the hypotheses that (i) the average prices for commodity exports from developing countries to Switzerland are lower than those to other jurisdictions; and that (ii) Switzerland declares higher (re-)export prices for those commodities than do other jurisdictions. This pattern implies a potential capital loss for commodity exporting developing countries and we provide a range of estimates of that loss – each of which suggests the scale is substantial (the most conservative is around $8 billion a year) and that the issue merits greater research and policy attention. An important first step would be a Swiss commitment to meet international norms of trade transparency.
    Keywords: illicit financial flows, trade mispricing, transparency, commodities
    JEL: F14 F23 F39 O24
    Date: 2014–01
  4. By: Ron Boschma; Gianluca Capone
    Abstract: This paper analyzes the process of industrial diversification in the EU-27 and ENP countries in the period 1995-2010 by means of world trade data derived from the BACI database (elaborated UN Comtrade data). Our results show that in both the EU-27 and the ENP countries, the evolution of the export mix is strongly path-dependent: countries tend to keep a comparative advantage in products that are strongly related to their current productive structure, and they also diversify in nearby products. However, this effect is much stronger for ENP countries, signalling their lower capabilities to diversify in products that are not very near to their productive structure. We also show that the future export structures of countries are affected by their imports: both the EU-27 and ENP countries keep a comparative advantage in products that are strongly related to their imports, but only EU countries show a strong capability to diversify in new products from related import sectors. Our results also hold when controlling for geographical and institutional proximity.
    Keywords: diversification, relatedness, European Neighborhood Policy, trade
    JEL: F19 O14 O33
    Date: 2014–02
  5. By: Marco Fugazza; Alain McLaren
    Abstract: This paper explores the effect of market access on firms’ export performance and their survival on foreign markets. The data used cover all Peruvian exporting firms between 2002 and 2008, a period during which Peru was active in joining the global economy. This is done using two indices: one that summarizes the tariffs faced by exports; the other that measures the preferential margin at the bilateral level. Results show that more than market access conditions per se, it is market access conditions relative to those faced by competitors that significantly influence export performance and survival. About a fifth of the increase of exports directed to MERCOSUR countries is due to improvement in preference margins.
    Date: 2013
  6. By: Lichter, Andreas; Peichl, Andreas; Siegloch, Sebastian
    Abstract: It is widely believed that globalization affects the extent of employment and wage responses to economic shocks. To provide evidence for this, we analyze the effect of firms' exporting behavior on the elasticity of labor demand. Using rich, German administrative linked employer-employee panel data from 1996 to 2008, we explicitly control for self-selection into exporting and endogeneity concerns. In line with our theoretical model, we find that exporting at both the intensive and extensive margins significantly increases the (absolute value of the) unconditional own-wage labor demand elasticity. This is not only true for the average worker, but also for different skill groups. For the median firm, the elasticity is three-quarters higher when comparing exporting to nonexporting firms. --
    Keywords: trade,export,labor demand,wage elasticity,administrative microdata
    JEL: F16 J23
    Date: 2014
  7. By: Kamei, Keita; Sasaki, Hiroaki
    Abstract: This paper develops a dynamic Ricardian trade model that incorporates productive infrastructures into the manufacturing sector financed by tax. We investigate the relationship between the timing of opening trade and total welfare. We also compare the two kinds of total welfare: the total welfare that a country obtains by closing international trade until it has a comparative advantage in manufacturing and then engaging in free trade and the total welfare that the country obtains by specializing in agriculture according to the law of comparative advantage from the beginning. The main results are as follows: (1) there is the optimal tax rate maximizing the total welfare; (2) an increase in agricultural productivity can accelerate the timing of opening trade, which, however, does not necessarily improve the total welfare; and (3) the total welfare under specialization in manufacturing can be higher than that under specialization in agriculture depending on conditions.
    Keywords: productive infrastructure; industrialization; timing of opening trade; agricultural productivity
    JEL: F10 F43 O14
    Date: 2014–02–11
  8. By: Bertoli, Simone; Rapoport, Hillel
    Abstract: A growing number of OECD countries are leaning toward adopting quality-selective immigration policies. The underlying assumption behind such policies is that more skill-selection should raise immigrants’ average quality (or education level). This view tends to neglect two important dynamic effects: the role of migration networks, which could reduce immigrants’ quality, and the responsiveness of education decisions to the prospects of migration. Our model shows that migration networks and immigrants’ quality can be positively associated under a set of sufficient conditions regarding the degree of selectivity of immigration policies, the initial pattern of migrants’ self-selection on education, and the way time-equivalent migration costs by education level relate to networks. The results imply that the relationship between networks and immigrants’ quality should vary with the degree of selectivity of immigration policies at destination. Empirical evidence presented as background motivation for this paper suggests that this is indeed the case.
    Keywords: migration; self-selection; brain drain; immigration policy; discrete choice models
    JEL: F22 O15 J61
    Date: 2014–02
  9. By: Deluna, Roperto Jr; Cruz, Edgardo
    Abstract: This study was conducted to investigate the issue of what Philippine merchandise trade flows would be if countries operated at the frontier using gravity model. The study sought to estimate the coefficients of the gravity equation. The estimated coefficients were used to estimate merchandise export potentials and technical efficiency of each country in the sample and these were also aggregated to measure impact of country groups. Result of the estimated coefficients of the gravity equation shows that merchandise export flows of the Philippines to trading partners is significantly positively affected by income and market size of the importing partner. The income elasticity of merchandise exports is 0.69%. A 1% increase in market size increases export flow by 0.24%. Distance was estimated to reduce export flow by 1.22% in every 1% increase in distance. The technical efficiency for all sample countries is not so high; it ranged from 38 to 42% with standard deviation of 30. The most efficient countries in the sample which recorded more than 80% efficiency were Singapore (100%), New Zealand (97%), HongKong (97%), USA (96%), Australia (96%), Canada (96%), UK (93%), Denmark (93%), Japan (87%), Malaysia (85%) and S. Korea (81%). Countries with larger markets emerge as high export potentials such as USA, China and Japan with potential ranging from 10 to 30 Trillion US dollars. These potential has been changing within the period. Result of technical inefficiency model reveals that these potential is increased by membership of the Philippines to ASEAN, APEC and WTO. Reduction of corruption and freer labor market in the importing country enhances export potential of Philippine merchandise exports. Commonality of language also enhances these potential.
    Keywords: Merchandise exports, Gravity, Stochastic frontier, Philippine export potential
    JEL: C1 C13 F00 F1 F13 F14 F15
    Date: 2014–02
  10. By: Lechman, Ewa
    Abstract: The paper discusses existing links between changing patterns of export of goods broken down by technology-intensity versus macroeconomic competitiveness. The study covers nine East-Central European economies: Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Slovak Republic, in the time span 2000-2011. We hypothesize on discovering strong, positive and statistically significant relationship between flows of export of high-tech and ICTs manufactures goods, and level of macroeconomic competitiveness (approximated by Global Competitiveness Index – GCI, see: World Economic Forum). Our methodological approach relies on elaboration of country`s individual export patterns with regard to industries of different technology-intensity, and statistical analysis between macroeconomic GCI variable and variables identifying shares in total export of certain industries. Reversely to what was initially expected, our empirical results do not seem to support the hypothesis on statistically positive links between growing shares of high-tech and ICT manufactures industries in total value of export versus Global Competitiveness Index, in analyzed countries.
    Keywords: competitiveness, export, technology-intensity, comparative analysis
    JEL: F1 F14
    Date: 2014–02
  11. By: Bagchi, Sagnik; Bhattacharyya, Surajit; Narayanan, Krishnan
    Abstract: The last two decades have witnessed that countries across the world are guided by the rules and regulations of multilateral trading institutions (for example, World Trade organization [WTO], International Monetary Fund [IMF]) in order to promote free and fair trade through gradual reduction in trade barriers. The World economy has noticed significant reduction in tariffs, yet we find a rise in non-tariff barriers (NTBs). However, we still find dumping and few other trade strategies of the exporting countries as a major hindrance to free and fair trade. Such behaviour has led to “contingent protection” as a tool of new-protectionism. Among the contingent protection measures, anti-dumping (AD) has evolved as the most popular choice of strategy for the trading nations. The AD policy invokes a threat to the exporter and thereby can change its strategic behaviour. We describe the phenomenon of dumping through a price-leadership model and thereby compute the optimal level of anti-dumping duty that can offset dumping. Using a sequential game, we conclude that the credible threat of an AD duty restricts dumping and thereby leads to a win-win situation for both the foreign and domestic firms.
    Keywords: Price-leadership, Dumping, Anti-dumping duty, Sequential game
    JEL: C02 C72 D43 F13 L40
    Date: 2014–02–12
  12. By: Santra, Swarup; Bagaria, Nidhi
    Abstract: FDI may affect the supply of productive resources including (financial capital, equipment and machinery, technology, management and etc.). FDI creates employment where unemployment and underemployment rate is high and thus increases the income of the workers. As a result an additional savings to the host country is created. FDI also has the backward effect. Through buying locally made materials and intermediate goods it creates a good environment for the locally produced goods. For China, the competitiveness of manufacturing sector and Trade Openness are increasing over the year since 1991. However, the Financial Openness of China is showing mixed result, it increased until mid-1990s and it is showing the declining trend. In case of India, the picture is so complex. The Competitiveness of manufacturing sector and Financial Openness are showing the fluctuating path over the year. No as such trend can be found for these two series for India. Only the Trade Openness is showing increasing trend for India.
    Keywords: China, India, Financial Openness, Foreign Direct Investment (FDI), Manufacturing Sector, Revealed Comparative Advantage (RCA), Trade Openness
    JEL: F10 F14
    Date: 2014–01–20
  13. By: Byron S. Gangnes (UHERO, University of Hawaii at Manoa); Alyson C. Ma (University of San Diego); Ari Van Assche (HEC Montréal, Department of International Business)
    Abstract: Previous studies have argued that global value chains (GVCs) have increased the sensitivity of trade to external business cycle shocks. This may occur either because GVC trade is concentrated in durable goods industries, which are known to have high income elasticities (a composition effect), or because, within industries, GVC trade has a higher income elasticity than regular trade (a supply chain effect). Using Chinese trade data across customs regimes and industries during the period 1995-2009, we find evidence for the former, but not the latter.
    Keywords: global value chains, trade elasticities, supply chain effect, composition effect
    JEL: F1 F4
    Date: 2014–02
  14. By: Tim Atkin; Mark Caputo; Tim Robinson; Hao Wang
    Abstract: The early 21st century saw Australia experience its largest and longest terms of trade boom. This paper places this recent boom in a long-run historical context by comparing the current episode with earlier cycles. While similarities exist across most episodes, current macroeconomic policy frameworks and settings are quite different to those of the past. This mitigated the broader macroeconomic consequences of the upswing and as the terms of trade decline may do likewise.
    Keywords: Commodity prices, terms of trade, macroeconomic policy
    JEL: E30 E60 N17
    Date: 2014–01
  15. By: Robert M. Feinberg
    Abstract: This paper estimates a structural model of the balance of payments, with disaggregated exports (manufactured and non-manufactured) and imports (final and intermediate goods), and a reduced form model of the trade balance for the Mexican economy. The analysis identifies several structural breaks, implying a division of the entire sample period into five phases. The results indicate that a tightening of the balance-of-payments constraint may account for the slowdown in Mexico’s growth only during certain subperiods of the post-liberalization era, and that the impact of real exchange rate changes on the trade balance has diminished as a result of the increasing integration of export industries into global supply chains. The results also suggest an important asymmetry, whereby a country can grow below the rate consistent with balance-of-payments equilibrium when other constraints are more binding, but cannot sustain growth above that rate. JEL classification: F43, F14, E12, O24
    Date: 2014
  16. By: Trevor Tombe (University of Calgary)
    Abstract: Poor countries have low agricultural productivity relative to other sectors, yet predominantly consume domestically produced food. The literature on agriculture's low productivity typically abstracts from trade to focus on domestic distortions. This leaves open important questions: Why do poor countries import so little food? Does trade contribute to cross-country aggregate and agricultural productivity differences? I answer these questions with a rich, quantitative model applied to many countries. I show trade amplifies the costs of domestic distortions. I also measure trade costs; they are large in poor countries and help account for productivity differences across countries.
    Keywords: Food Problem; Productivity; Dual Economy Models; Trade; Agriculture
    JEL: F1 F41 O11
    Date: 2014–02–05
  17. By: Kareem, Fatima O.
    Abstract: Gravity model of trade has emerged as an important and popular model in explaining and predicting bilateral trade flows. While the theoretical justification is no longer in doubt, nonetheless, its empirical application has however generated several unresolved controversies in the literature. These specifically concerns estimation challenges which revolve around the validity of the log linear transformation of the gravity equation in the presence of heteroscedasticity and zero trade observations. These two issues generate several challenges concerning the appropriate choice of the estimation techniques. This paper evaluates the performance of alternative estimation techniques in the presence of zero trade observations, checks for the validation of their assumptions and their behaviour in cases of departure from their assumptions, particularly the departure from the heteroscedasticity assumption. Analysis was based on a dataset of Africa's fish exports to the European Union, which contains about 70% zero observations. Given our dataset and the gravity equation specified, our results show that there is no one general best performing model, although most of the linear estimators outperform the GLM estimators in many of the robust checks performed. In essence, we find that choosing the best model depends on the dataset, and a lot of robust tests and advocate an encompassing toolkit approach of the methods so as to establish robustness. We concur with Head and Mayer (2013) that the gravity equation is indeed just a toolkit and cookbook in the estimation of bilateral trade flows.
    Keywords: Gravity Equation, Heteroscedasticity, Zero trade flows, Estimation techniques, Agribusiness, C13 C33 F10 F13,
    Date: 2014
  18. By: Kelegama, Saman (Asian Development Bank Institute)
    Abstract: The India–Sri Lanka Free Trade Agreement has been in operation for more than a decade. The paper provides the Sri Lankan perspective of the Free Trade Agreement (FTA) highlighting both the positive outcomes and the negative aspects. The paper shows that the FTA has worked in favor of Sri Lanka but its full potential has not yet been realized due to market access problems in India, and the lack of supply capacity for some products in Sri Lanka. The India–Sri Lanka Comprehensive Economic Partnership Agreement addressed many of the negative aspects of the FTA in a broader economic integration framework but was unable come into operation due to public misconceptions and lack of entrepreneurial and political leadership in Sri Lanka.
    Keywords: bilateral free trade agreements; economic integration; free trade agreement; economic partnership agreement
    JEL: F13 F15
    Date: 2014–02–06
  19. By: Christoph Böhringer (University of Oldenburg - Economic Policy & ZenTra); Andre Müller (Ecoplan); Jan Schneider (University of Oldenburg - Economic Policy)
    Abstract: Concerns about adverse impacts on domestic energy-intensive and trade-exposed (EITE) industries are at the fore of the political debate about unilateral climate policies. Tariffs on the carbon embod-ied in imported goods from countries without emission pricing appeal as a measure to reduce carbon leakage and protect domestic EITE industries. We show that the introduction of carbon tariffs can do more harm than good to domestic EITE industries. Two determinants drive the sign and magnitude of EITE impacts. Firstly, the composition of embodied emissions in goods: if a large share of embodied carbon is imported in intermediate inputs, industries might suffer from carbon tariffs. Secondly, the share of domestic output that is supplied to the export market: while carbon tariffs level the playing field on domestic markets, they increase the cost-disadvantage vis-à-vis competitors from abroad in foreign markets.
    Keywords: carbon tariffs, unilateral climate policy, multi-region input-output analysis, CGE
    JEL: Q58 D57 D58
    Date: 2014–02
  20. By: Frigant, Vincent; Miollan, Stéphane
    Abstract: The paper seeks to provide a quantitative and macroeconomic picture of the new geography of the automotive industry in Europe. Since ten new members joined the European Union in 2004, automakers and suppliers have changed their location strategies and now view the whole of Europe as a single fully integrated space. Using data on employment, production, trade and foreign control of affiliated firms, the paper measures the East-West relocation process. The first section studies the motor vehicle sector, highlighting a sharp rise in the activity levels of Central and Eastern European countries (CEEC), as well as the specific role that Germany plays. It is crucial to remember that motor vehicle manufacturing remains a key traditional economic activity for some of the larger Western European countries. The second section looks at the automotive parts sector. The CEECs’ growth is particularly impressive when consideration is given to employment, a variable largely driven by foreign firms’ decision to export much of their local production. At the same time, the offshoring process remains more or less selective even if it often revolves around labour-intensive activities – explaining in turn the creation today of embedded East-West networks.
    Keywords: automobile; Europe; deindustrialisation; relocation; offshoring; industry geography; auto parts industry
    JEL: F23 L23 L62 R12
    Date: 2014–01–07
  21. By: Pasquale Commendatore (University of Naples Federico II); Ingrid Kubin (Department of Economics, Vienna University of Economics and Business); Carmelo Petraglia (University of Basilicata); Iryna Sushko (Institute of Mathematics, National Academy of Sciences of Ukraine)
    Abstract: This paper presents a 3-Region footloose-entrepreneur new economic geography model. Two symmetric regions are part of an economically integrated area (the Union), while the third region represents an outside trade partner. We explore how the spatial allocation of industrial production and employment within the Union is affected by changes in two aspects of trade liberalisation: regional integration and globalisation. Our main contribution pertains to the analysis of the local and global dynamics of the specified factor mobility process. We show that significant parameter ranges exist for which asymmetric distribution of economic activities is one of the possible long-run outcomes. This is a remarkable result within the NEG literature. We then analyse the impact of international trade liberalisation on the dynamics of agglomeration conditional on the endowments of skilled and unskilled labour of the outside region.
    Keywords: Industrial agglomeration, New Economic Geography, footloose entrepreneurs, local and global dynamics, bifurcation scenarios
    JEL: C62 F12 F2 R12
    Date: 2014–01
  22. By: Arjan Lejour
    Abstract: We examine the impact of bilateral and multilateral tax treaties on bilateral FDI stocks. First, we present panel regressions of the effects of treaties on FDI based on an extensive database of all OECD countries from 1985 onwards. We use geographic instruments to correct for the endogeneity of tax treaties. In contrast to many papers, we find that these treaties increase bilateral FDI significantly. The increase is about 16 percent and for new treaties this is even 21 percent. Moreover, the EU parent subsidiary directive doubles bilateral FDI stocks. Second, we analyse the effects of treaty shopping on FDI using the number of tax treaties as a proxy for the attractiveness of a country for establishing a holding. This indicator has a significant impact on FDI: twenty extra tax treaties increase bilateral FDI stocks by about 50 percent. Lower withholding tax rates of dividends do also attract FDI.
    JEL: F21 F23 H25
    Date: 2014–02
  23. By: Kersting, Erasmus K. (Federal Reserve Bank of Dallas); Gorg, Holger (Federal Reserve Bank of Dallas)
    Abstract: We investigate the financial implications of a multinational firm's choice between outsourcing and integration from the perspective of the supplier. Using a simple model, we explore the extent to which an integrated supplier's access to finance, as well as its sources of funding, change relative to a firm supplying a multinational at arm's-length. The model predicts that integrated firms have better access to finance and cover a larger share of their costs using internal funds. Furthermore, improvements in a host country's level of financial development have less of an impact on the financial situation of integrated suppliers. We present empirical evidence from firm-level data for over 60 countries broadly supporting the predictions.
    JEL: F23 G32
    Date: 2014–01–31
  24. By: Mehmet Fatih Ulu
    Abstract: Firm-level data indicates a positive relationship between a firm’s revenues from a market and the number of markets penetrated by that firm, and previous presence in that market. After studying the role of different types of firm and market-specific shocks in firms’ selection decisions, I quantify an entry-cost-reducing effect of previous presence in a market, and increasing returns to being in more markets. I find that being in an additional market increases the demand in other markets between 1% and 3% across different sectors. Additionally, a variance decomposition between firm and market-specific heterogeneity and idiosyncratic uncertainty in firms’ selection problem indicates that 1) firm-specific heterogeneity explains more of the total residual variation in revenues from foreign markets as opposed to idiosyncratic variation in technology intensive indus- tries than less technology intensive ones and 2) the relative importance of idiosyncratic components diminishes as the level of per capita income of a destination market increases.
    JEL: C35 D21 D22 F14
    Date: 2014
  25. By: Keith Head (Sauder School of Business [British Columbia]); Thierry Mayer (Département d'économie); Mathias Thoenig (Centre Universitaire d'Informatique)
    Abstract: This paper investigates the consequences of replacing the assumption of Pareto heterogeneity with log-normal heterogeneity. This case is interesting because it (a) maintains some desirable analytic features of Pareto, (b) ts the complete distribution of rm sales rather than just approximating the right tail, and (c) can be generated under equally plausible processes (see online appendix). The log-normal is reasonably tractable but its use sacrices some \scale-free" properties conveyed by the Pareto distribution. Aspects of the the calibration that do not matter under Pareto lead to important dierences in the gains from trade under log-normal.
    Date: 2014–01
  26. By: Patricia Esteve-González; Bernd Theilen
    Abstract: In this paper we examine the influence of economic factors on partisan support for European integration over the last three decades. We find that partisan support is larger in ‘poorer’ countries with direct economic benefits from EU membership. On the other hand, parties in countries affected by the Maastricht criteria are more Euro-sceptical. We also find weak evidence for larger partisan support in countries with more developed welfare states, and that the support for European integration fluctuates in parallel with the business cycle. Finally, our results indicate that the importance of economic factors in determining partisan support for European integration has grown in recent periods.
    Keywords: European Integration; Partisan Ideology; Maastricht Criteria; European Budget; Benefits from Trade
    JEL: F42 F53 F55 H60
    Date: 2014–02
  27. By: Michel Beinea; Simone Bertolib; Jesús Fernández-Huertas Moraga
    Abstract: The use of bilateral data for the analysis of international migration is at the same time a blessing and a curse. It is a blessing since the dyadic dimension of the data allows researchers to analyze many previously unaddressed questions in the literature. This paper reviews some of the recent studies using this type of data in a gravity framework in order to identify important factors affecting international migration ows. Our review demonstrates that considerable efforts have been conducted by many scholars and that overall we have a much better knowledge of the relevant determinants. Still, the use of bilateral data is also a curse. The methodological challenges that are implied by the use of this type of data are numerous and our paper covers some of the most significant ones. These include sound theoretical foundations, accounting for multilateral resistance to migration as well the choice of appropriate estimation techniques dealing with the nature of the migration data and with endogeneity concerns.
    Date: 2014–02
  28. By: Faruk Balli; Faisal Rana
    Abstract: The sending of remittances is a decentralised decision of migrant workers, nevertheless it has its macroeconomic implication in providing insurance against domestic output shocks in the recipient economies – a phenomenon known in literature as risk sharing. Using a large sample of 86 developing countries for the period 1990–2010, we establish that remittance inflows serve as an important channel through which risk sharing takes place in the developing world. Although the extent of risk sharing on average stands at 3.3%, there is substantial cross-country variation found in our sample, ranging from 38% for Tajikistan (38%) for Haiti (-13%). Subsequently, we explore why the extent of risk sharing through remittances is so diverse across developing countries. The diversification of migrants turns out to be the leading explanation for the extent of risk sharing via remittances: the more diverse the migration destinations of a country, higher will be the amount of risk shared. In addition, the size of remittance flows appears to have a strong and statistically significant impact on enhancing risk sharing. We also find suggestive evidence that remittances originating from more distant countries facilitate more risk sharing compared to those originating from neighbouring or regional economies. Even after splitting the sample on the basis of country characteristics, our results remain robust.
    Keywords: Diversification, International migration, Remittances, Risk sharing
    JEL: F15 F22 F24 F41
    Date: 2014–01
  29. By: Hirakata, Naohisa (Asian Development Bank Institute); Iwasaki, Yuto (Asian Development Bank Institute); Kawai, Masahiro (Asian Development Bank Institute)
    Abstract: This paper examines the international transmission effects that a positive supply shock in emerging economies may have on inflation in developed economies. A three-country dynamic stochastic general equilibrium (DSGE) model is constructed to analyze the impact of a supply shock in an emerging economy, the People's Republic of China (PRC), on inflation rates in two developed economies, Japan and the United States (US). The assumed asymmetric trade structures among the three countries and the PRC's choice of exchange rate regime appear to influence the international transmission of a supply shock in the PRC. Specifically, Japan is under a greater deflationary pressure than the US because of its vertical trade specialization vis-à-vis the PRC and the PRC's US-dollar-pegged regime. This outcome suggests that, even though Japan and the US may face common positive supply shocks from emerging economies, the deflationary impact of the shock is greater for Japan.
    Keywords: supply shocks; emerging economies; trade structure; exchange rate regimes; three-country DSGE model
    JEL: F32 F41 F44 F47
    Date: 2014–02–07
  30. By: Patrick Carvalho; Renee A. Fry-McKibbin
    Abstract: A fivefold increase in central bank foreign reserves across the globe over the past fifteen years has prompted the question of whether this constitutes a new form of mercantilism. According to this view, countries accumulate foreign reserves in order to support export promotion by influencing exchange rates and/or to signal relative economic strength as a modern version of bullionism. Using a unique dataset on daily foreign exchange intervention, this paper investigates the mercantilist motive hypothesis for the case of Brazil over the period 2009-2012. The findings support reserve accumulation as a byproduct of successful central bank intervention in the Brazilian foreign exchange market. The results also indicate regional currency intervention spillovers to Brazil’s neighbouring countries, including on their foreign reserve build-ups.
    Keywords: Foreign exchange intervention, currency intervention, exchange rate volatility, reserve accumulation, factor model, emerging markets
    Date: 2014–02
  31. By: Carlo Ciccarelli (University of Rome Tor Vergata); Alessandro Nuvolari (Scuola Superiore Sant'Anna, Pisa)
    Abstract: In this paper we examine the dynamics of technical change in the Italian locomotive industry in the period 1850-1913. From an historical point of view, the case of the Italian locomotive industry presents a major point of interest: it was one of the few relatively sophisticated “high-tech” industries in which Italy, a latecomer country, was able to firmly set foot before 1913. Using technical data on the performance of different vintages of locomotives, we construct a new aggregate index of technical change for the industry. Overall the most successful phase for the Italian locomotive industry seems to be period 1895-1913 characterized by a very rapid technical progress and by the effective consolidation of the technological capabilities in this area of two major firms: Breda and Ansaldo. Our re-assessment reveals the critical role of non-tariff trade barriers in the development of this industry.
    Keywords: technical change, non-tariff barriers, locomotives industry, 19th century Italy
    JEL: N73 O33 F13
    Date: 2014–02–07
  32. By: Rhee, Changyong (Asian Development Bank Institute); Sumulong, Lea (Asian Development Bank Institute)
    Abstract: The squeeze in United States dollar liquidity that emerged with the global financial crisis highlighted the risks inherent in the current global financial system. Asia was adversely affected by the crisis not only because of its dependence on trade, but also because of its heavy reliance on the US dollar for regional and international transactions. As Asia’s role in the global economy continues to expand, its dependence on the US dollar is bound to increase, raising further its vulnerability to future liquidity shocks. The use of regional currencies for bilateral trade settlement could reduce such vulnerability. As demonstrated by the renminbi trade settlement scheme piloted between the People’s Republic of China; Hong Kong, China; and Macao, China, the existence of appropriate financial infrastructure could reduce the relatively larger costs of bilateral currency transactions compared with triangular transactions through the United States dollar. As most central banks are securities depositories of government bonds, combining trade settlement with government bond securities settlement could also have large synergy effects without substantial extra costs. This proposal does not require full liberalization of the capital account or full deregulation of capital markets, and is more politically feasible in transition. As such, extending the trade settlement scheme to the rest of Asia and appending a government bond payment and securities settlement system could be a practical solution to international monetary system reform and the diversification of settlement currencies.
    Keywords: global financial crisis; international monetary system; renminbi internationalization; renminbi trade settlement; government bond payment and settlement
    JEL: F33 F34 F42
    Date: 2014–02–05
  33. By: William R. Kerr (University, NBER, and Bank of Finland.)
    Abstract: High-skilled immigrants are a very important component of U.S. innovation and entrepreneurship. Immigrants account for roughly a quarter of U.S. workers in these fields, and they have a similar contribution in terms of output measures like patents or firm starts. This contribution has been rapidly growing over the last three decades. In terms of quality, the average skilled immigrant appears to be better trained to work in these fields, but conditional on educational attainment of comparable quality to natives. The exception to this is that immigrants have a disproportionate impact among the very highest achievers (e.g., Nobel Prize winners). Studies regarding the impact of immigrants on natives tend to find limited consequences in the short-run, while the results in the long-run are more varied and much less certain. Immigrants in the United States aid business and technology exchanges with their home countries, but the overall effect that the migration has on the home country remains unclear. We know very little about return migration of workers engaged in innovation and entrepreneurship, except that it is rapidly growing in importance.
    Keywords: Immigration, innovation, entrepreneurship, diaspora
    JEL: F15 F22 J15 J31 J44 L14 L26 O31 O32 O33
    Date: 2014–01
  34. By: Tovonony Razafindrabe
    Abstract: This paper develops an estimated multi-country open economy dynamic stochastic general equilibrium (DSGE) model with incomplete Exchange Rate Pass-Through (ERPT) for the Euro-area. It is designed to model global international linkages and to assess international transmission of shocks under an endogenous framework and incomplete ERPT assumption. On the one hand, we relax the small open economy framework (SOEF) but derive a canonical representation of the equilibrium conditions to maintain analytical tractability of the complex international transmission mechanism underlying the model. Namely, the model considers economies of different size that are open and endogenously related. On the other hand, in order to take into account international linkages, possible cointegration relationships within domestic variables and between domestic and foreign variables, and the role of common unobserved and observed global factors such as the oil price, we use the Global VAR model to estimate the steady state of observed endogenous variables of the multi-country DSGE model. Namely, steady states are computed as long-horizon forecasts from a reduced-form cointegrating GVAR model. ERPT analysis conducted from the estimated multi-country DSGE model for the Euro-area in relation with its …ve main trade partners which are the United Kingdom, the United States, China, Japan and Switzerland yields the following results. First, exchange rate volatility contributes to a large part of import price inflation variation of the Euro-area in contrast to foreign mark-up shocks. Second, deviation from inflation objective of the foreign trade partners contributes to another source of the Euro-area import price variability. Third, nominal rigidity induces a persistent but a lower impact of the exchange rate changes on import inflation.
    Keywords: Pass-through, multi-country DSGE, Bayesian estimation, monetary policy
    JEL: F31 F41 E52 C11
    Date: 2014
  35. By: Docquier, Frédéric; Lodigiani, Elisabetta; Rapoport, Hillel; Schiff, Maurice
    Abstract: International migration is an important determinant of institutions, not considered so far in the empirical growth literature. Using cross-section and panel analysis for a large sample of developing countries, we find that openness to emigration (as measured by the general emigration rate) has a positive effect on home-country institutional development (as measured by standard democracy indices). The results are robust to a wide range of specifications and estimation methods. Remarkably, the cross-sectional estimates are fully in line with the implied long-run relationship from dynamic panel regressions.
    Keywords: Migration; Institutions; Democracy; Development
    JEL: O15 O43 F22
    Date: 2014–02
  36. By: Andersson L. (UNU-MERIT)
    Abstract: This paper investigates the effect of international remittances and migration on household welfare in Ethiopia. We employ both subjective a households subjective economic well-being and objective measures asset holdings and asset accumulation to define household welfare. A matching approach is applied to address self-selection, and by exploiting information before and after the households began receiving remittances, the study sheds light on the changes in welfare associated with international migration and remittances. The results reveal that remittances have a significant impact on a welfare variable that has previously not received much attention in the migration literature, namely household subjective economic well-being. In addition, we find that remittances have positive effects on consumer asset accumulation, especially in rural areas, but no effect on productive assets.
    Keywords: International Migration; Remittances; Economic Development: Human Resources; Human Development; Income Distribution; Migration;
    JEL: F22 F24 O15
    Date: 2014
  37. By: Giuseppe Berlingieri
    Abstract: Giuseppe Berlingieri looks at the structural transformation of the US economy over the past 60 years.
    Keywords: Structural transformation, outsourcing, professional and business services, inputoutputtables, intermediates
    JEL: D57 L16 L24 L84 O14 O41 O51
    Date: 2014–02
  38. By: Robert Stehrer; Los, Bart; Dietzenbacher, H.W.A.; Timmer, Marcel; Gaaitzen J. de Vries (Groningen University)
    Abstract: This article describes the contents and construction of the World Input-Output Database (WIOD). This database contains annual time-series of world inputoutput tables, covering the period from 1995 onwards. Underlying concepts, construction methods and data sources are considered. In addition, the WIOD provides data on labour and capital inputs for forty countries, making it useful for a wide range of applications. We illustrate this by analysing recent trends in international production fragmentation, competitiveness and patterns of specialisation. We give guidance to prudent use and discuss possible improvements and extensions.
    Date: 2014
  39. By: Pierucci, Eleonora; Pericoli, Filippo; Ventura, Luigi
    Abstract: We show that recent methodological advances in econometric theory raise questions about the results obtained by Lane and Milesi-Ferretti (LMF) in relation to the determinants of international investment patterns (International Investment Patterns, The Review of Economics and Statistics 2008; 90(3): 538{549). We find that LMF's estimated equations are affected by heteroscedasticity (which can lead to inconsistent estimates in log-linearized models), and that the results depend on the pattern of heteroscedasticity assumed and on the estimation method applied. Thus, LMF's findings need to be reassessed. Moreover, we extend the dataset over time to estimate the panel version of the LMF's equations (over years 2001{2009). Our panel allows for the proper accounting of unobserved heterogeneity through country-pair fixed effects and improves the cross-section analysis reconciling empirical evidence with economic theory. Irrespective of the estimation method, we identify a clear diversification motive which drives international equity purchases.
    Keywords: International investment patterns, portfolio choices, gravity models.
    JEL: F21 G11 G15
    Date: 2014–02–07
  40. By: Santra, Swarup; Bagaria, Nidhi
    Abstract: India being second most-populous country has immense scope for retail expansion as along with time urbanization and consumerism has also been increasing. Further, India‘s GDP has also been growing at fast rate as it continued to be the second fastest growing economy in the world after China and as the income of the country increases, demand for goods also increases because there is positive relation between demand and income. Initially India was conservative regarding FDI; it imposed restriction on foreign companies to limit their share in equity capital of their Indian subsidiaries but over the time Government of India gradually liberalized foreign investment in various sectors. Recently in 2011 India permitted 100% FDI in single brand retail and in 2012, 51% FDI permitted in multi brand. In this paper we are analyzing the impact of such decision on various sectors like food retail sector, farmers, traditional & employment and food inflation.
    Keywords: Foreign Direct Investment (FDI), Retail Sector, India, Food Sector, Multi-brand Retail
    JEL: F21 F36
    Date: 2014–01–20
  41. By: Mark Weisbrot; Stephan Lefebvre; Joseph Sammut
    Abstract: This paper compares the performance of the Mexican economy with that of the rest of the region over the past 20 years, based on the available economic and social indicators, and with its own past economic performance. Among the results it finds that Mexico ranks 18th out of 20 Latin American countries in growth of real GDP per person, the most basic economic measure of living standards; Mexico’s poverty rate of in 2012 was almost identical to the poverty rate of 1994; real (inflation-adjusted) wages for Mexico were almost the same in 2012 as in 1994; and unemployment has increased significantly. It also notes that if NAFTA had been successful in restoring Mexico’s pre-1980 growth rate – when developmentalist economic policies were the norm – Mexico today would be a relatively high income country, with income per person significantly higher than that of Portugal or Greece. It is unlikely that immigration reform would be a major political issue in the United States, since relatively few Mexicans would seek to cross the border.
    Keywords: mexico, nafta, trade, poverty, employment, inequality
    JEL: F F5 E E2 E6 F1 F4 F13 F16 F17 F18
    Date: 2014–02
  42. By: Jair N. OJeda; Julián A. Parra Polanía; Carmiña O. Vargas
    Abstract: This document analyzes the macroeconomic effects of a boom in a small-open economy’s natural-resource sector. We study the effects of this shock on the most important macroeconomic variables, the resource reallocation across sectors and on welfare under alternative fiscal rules. We employ a DSGE featuring three productive sectors (non-tradable, manufacturing and commodity goods), government and two types of consumers (Ricardian and non-Ricardian). Our results show that the natural-resource boom leads to an initial reduction of the manufacturing sector’s employment and production. The opposite temporal effect is obtained in the remaining two productive sectors. However, the effect on welfare is positive for all consumers since the boom increases consumption in all households. Finally, we find that a countercyclical fiscal rule leads to a slight increase in welfare compared with a balanced-budget rule.
    Keywords: Fiscal rule, Natural-Resource Boom, Consumer Welfare, Equilibrium Model Classification JEL: E62, F47, H30, H63
    Date: 2014–01
  43. By: Wieck, Christine; Rudloff, Bettina; Heucher, Angela
    Abstract: Using a panel data set for about 70 countries, this paper jointly analyzes agri-investment trends and food security developments in vulnerable countries. This work empirically connects two mainly independent debates about impacts of agri-investments on food security and on the proposed responsible investment policy frameworks and its contribution to achieve food security. The results indicate the special relevance of private investments, domestic or foreign. The domestic situation in target countries in terms of governance is relevant: Good governance supports food security. The findings underline the importance of the recently developed responsible investments guidelines as they shall contribute that investments maintain their potential positive influence on economic development and food security.
    Keywords: Agri-investments, food security, determinants, responsible investment, Agribusiness, Agricultural and Food Policy, Agricultural Finance, Food Security and Poverty, International Development, F53, F21, 013, 016,
    Date: 2014–01–30
  44. By: Dietmar Janetzko
    Abstract: Fast, global, and sensitively reacting to political, economic and social events of any kind, these are attributes that social media like Twitter share with foreign exchange markets. The leading assumption of this paper is that information which can be distilled from public debates on Twitter has predictive content for exchange rate movements. This assumption prompted a Twitter-based exchange rate model that harnesses regARIMA analyses for short-term out-of-sample ex post forecasts of the daily closing prices of EUR/USD spot exchange rates. The analyses used Tweet counts collected from January 1, 2012 - September 27, 2013. To identify concepts mentioned on Twitter with a predictive potential the analysis followed a 2-step selection. Firstly, a heuristic qualitative analysis assembled a long list of 594 concepts, e.g., Merkel, Greece, Cyprus, crisis, chaos, growth, unemployment expected to covary with the ups and downs of the EUR/USD exchange rate. Secondly, cross-validation using window averaging with a fixed-sized rolling origin was deployed to select concepts and corresponding univariate time series that had error scores below chance level as defined by the random walk model. With regard to a short list of 17 concepts (covariates), in particular SP (Standard & Poor's) and risk, the out-of-sample predictive accuracy of the Twitter-based regARIMA model was found to be repeatedly better than that obtained from both the random walk model and a random noise covariate in 1-step ahead forecasts of the EUR/USD exchange rate. This advantage was evident on the level of forecast error metrics (MSFE, MAE) when a majority vote over different estimation windows was conducted. The results challenge the semi-strong form of the efficient market hypothesis (Fama, 1970, 1991) which when applied to the FX market maintains that all publicly available information is already integrated into exchange rates.
    Date: 2014–02
  45. By: Vardhan, Harsh; Sinha, Pankaj
    Abstract: The study examines influence of FIIs on the Indian equity market and its role in integration with US equity market. It provides insight for policy formulation in order to move towards greater liberalized FII’s policy regime for regaining FIIs confidence in the Indian equity market. The time line from January 1999 to December 2010 has been partitioned into smaller time frames due to existence of structural breaks in order to capture clear picture of dynamic relationships between variables in the sub - periods. The daily data has been analyzed by Vector Autoregressive framework using different VAR models for determining existence of short term and long run relationships during sub periods and for ascertaining causality between emerging relationships between FIIs, Sensex and other key variables. Despite global recessionary condition both purchase and sales of FIIs have steadily increased due to gradual economic liberalization and it has substantially picked up the pace during the last five years. It was observed for 1/3/1999 to 31/7/2003 period that FII inflows and out flows are significantly influenced by the returns in the domestic equity market. The exchange rate has no effect on the inflows of FIIs; however the outflows are influenced by the change in the exchange rate. SENSEX returns bring change in the exchange rates. Change in the exchange rate affects the outflow of FIIs. The US equity market has no influence on FII’s inflows but has marginal influencing role on its outflows.
    Keywords: Foreign Intuitional Investments (FIIs), Structural change, VAR
    JEL: C54 C58 G15 G18 G23
    Date: 2014–01–25
  46. By: Guglielmo Maria Caporale; Michael Donadelli; Alessia Varani
    Abstract: A canonical two country-two good model with standard preferences does not address three classic international macroeconomic puzzles as well as two well-known asset pricing puzzles. Specifically, under financial autarky, it does not account for the high real exchange rate (RER) volatility relative to consumption volatility (RER volatility puzzle), the negative RER-consumption differentials correlation (Backus-Smith anomaly), the relatively low cross- country consumption correlation (consumption correlation puzzle), the low risk-free rate (risk-free rate puzzle) and the high equity risk premium (equity premium puzzle) in the data. In this paper, we show that instead a two country-two good model with recursive preferences, international complete markets and correlated long-run innovations can address all five puzzles for a relatively large range of parameter values, specifically in the case of the US and China. Therefore, in contrast to other IBC models, its performance does not rely on any financial market imperfections.
    Keywords: Financial autarky, complete markets, long-run risk, anomalies
    JEL: F3 F4
    Date: 2014

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