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The FIW - Research Centre International Economics ( is a cooperation between the Vienna University of Economics and Business (WU), the University Vienna, the Johannes Kepler University Linz, the University of Innsbruck, WIFO, wiiw and WSR. FIW is supported by the Austrian Federal Ministries of Education, Research and Science (BMBFW) and of Labour and Economy (BMAW).

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G. Felbermayr, H. Mahlkow and A. Sandkamp, Cutting through the Value Chain: The long-run effects of decoupling the East from the West.
Feb. 2022.


Abstract: With ever-increasing political tensions between China and Russia on one side and the EU and the US on the other, it only seems a matter of time until protectionist policies cause a decoupling of global value chains. This paper uses a computable general equilibrium trade model calibrated with the latest version of the GTAP database to simulate the effect of doubling non-tariff barriers - both unilateral and reciprocal - between the two blocks on trade and welfare. Imposing trade barriers almost completely eliminates bilateral imports. In addition, changes in price levels lead to higher imports and lower exports of the imposing country group from and to the rest of the world. The targeted country group increases exports to the rest of the world and reduces imports. Welfare falls in all countries involved, suggesting that governments should strive to cooperate rather than turning away from each other. By imposing a trade war on Russia, the political West could inflict severe damage on the Russian economy because of the latter’s smaller relative size.

G. Felbermayr, M. Larch, E. Yalcin and Y. V. Yotov, On the Heterogenous Trade and Welfare Effects of GATT/WTO Membership.
Feb. 2022.


Abstract: We quantify the partial and general equilibrium effects of GATT/WTO membership on trade and welfare. Using an extensive database covering manufacturing trade for 186 countries over the period 1980-2016, we find that the average impact of GATT/WTO membership on trade among member counties is large, positive, and significant. We contribute to the literature by estimating country-specific estimates and find them to vary widely across the countries in our sample with poorer members benefitting more. Using these estimates, we simulate the general equilibrium effects of GATT/WTO on welfare, which are sizable and heterogeneous across members, and relatively small for non-member countries. We show that countries not experiencing positive trade effects from joining GATT/WTO can still gain in terms of welfare, due to lower import prices and higher export demand.

S. T. Schneider and K. Wacker, Explaining the global landscape of foreign direct investment: knowledge capital, gravity, and the role of culture and institutions.
Apr. 2020.


Abstract: In this paper, we empirically re-assess the question which theoretical models and motives are most suitable to explain global patterns of foreign direct investment (FDI). Compared to previous studies, we use bilateral FDI positions with a much more comprehensive coverage of emerging and developing economies, the IMF’s CDIS. We apply cross validation to assess the performance of the gravity model and the knowledge capital (KK) model and add cultural, institutional, and financial factors, as suggested by theories on FDI determinants. We find the gravity model to achieve the best theory-consistent out-of-sample prediction, particularly when parameter heterogeneity of South and North FDI is allowed for. Controlling for surrounding market potential is important to recover the horizontal effect of the gravity model. Including institutional, cultural, or financial factors does not improve the model performance distinctly although results for those variables are mostly in line with theory.

A. A. Gnidchenko, The Conflicting Ways to Dissect Intra-Industry Trade.
Sep. 2019.


Abstract: Theoretical literature states that intra-industry trade (IIT) should be divided into horizontal and vertical flows (or trade in products with homogeneous and heterogeneous quality) that are influenced by different factors. Yet, the economists are still not sure about the proportion between horizontal and vertical IIT. Traditional approach relies on unit value as an indicator of product quality. However, it is associated with a number of problems such as arbitrariness of the threshold used to separate the types of trade. We propose the two alternative approaches to dissecting IIT: first, applying another product quality indicator (PRODY – per capita GDP associated with exporting a product) and, second, relying on countries’ product-level differences in the revealed comparative advantage (RCA). We also argue in favor of the new continuous treatment of the index-based unit value approach (in the spirit of the overlap calculation of the IIT itself) that finally helps to get rid of the arbitrary thresholds problem. However, then we reject the PRODY- and RCA-based approaches due to an undesirable behavior (low correlation with the share of exports to other EU countries, low shares of horizontal IIT for homogeneous products and other features), while the performance of the continuous form of the index-based unit value approach is found to be in line with the traditional unit value approach. We also argue that the two index-based modifications are preferable to the traditional unit value approach due to the higher shares of horizontal IIT for homogeneous products. We conclude that the median share of horizontal IIT for EU countries is still unknown due to fundamental uncertainty about the dissecting approach. At the same time, relative positions of countries for all forms of the unit value approach are quite stable, so there is much less uncertainty concerning the cross-country differences

D. Tran Lam Anh and I. Deseatnicov, The Impact of Technology Level on Global Value Chain Formation.
Mar. 2019.


Abstract: In this paper, we theoretically investigate the role of technology level in Global Value Chain (GVC) formation from two aspects: position and participation volume. We develop a simple two-country model where countries are heterogeneous with respect to their technology level and labor force. In GVC, there are a number of intermediate production stages with different technology thresholds. A country can produce at a stage if its technology level is higher than the stage's threshold. The unit labor requirement of a country in each stage is assumed to be inversely proportional to the difference between the technology level of the country and the technology threshold of the stage. According to this framework, the country with higher technology level will be producing at the stage with higher technology threshold. In contrast to previous studies that emphasize countries’ position in GVC only, our work focuses on both the “position” and “volume” of participation. We find that GVC participation volume of a country, measured in terms of the number of production stages it holds, will increase if there is an increase in either the country’s technology level or labor force.

J. Loermann, The Impact of CHF/EUR Exchange Rate Uncertainty on Swiss Exports to the Eurozone: Evidence from a Threshold VAR.
Feb. 2019.


Abstract: In light of the recent discussion regarding the measurement of uncertainty and its impact on economic activity, this paper derives forward-looking measures of uncertainty and directional expectations for the CHF/EUR exchange rate based on over-the-counter option data and analyses its impact on exports. First, risk-neutral option-implied probability density functions are estimated and corrected for risk aversion. Second, the standard deviations of the densities are purged from uncertainty spillovers from the Eurozone. The resulting time series serves as a forward-looking measure of exchange rate uncertainty, while the densities’ skewness serves as a measure of directional expectations. Within a nonlinear threshold VAR framework, it is found that the exchange rate uncertainty measure defines a high uncertainty regime during recessions and market turmoil, and a low uncertainty regime during expansionary phases. Nonlinear impulse response analysis demonstrates that shocks to the exchange rate, the uncertainty and the directional expectations exhibit different dynamic impacts on exports during times of high and low uncertainty.

S. Lackner, Earthquakes and Economic Growth.
Dec. 2018.


Abstract: Natural disasters are known to have devastating immediate impacts, but their long-run effect on economic growth is not well understood. For the natural hazard of earthquakes, this paper provides the first global empirical study on this topic that applies a measure of the exogenous physical hazard responsible for earthquake impacts, earthquake ground shaking. I exploit the random within-country year-to-year variation of shaking to identify the causal effect of earthquakes on economic growth. To construct a panel dataset with country-year observations of earthquake exposure and socioeconomic variables, I combine the universe of relevant earthquake ground shaking data from 1973 to 2015 with country-level World Bank indicators. I find negative long-run growth impacts for an average country comparable with recent findings for climate related natural disasters. A typical earthquake reduces GDP per capita by 1.6% eight years later, with substantial heterogeneity by country categories. In particular, low and middleincome countries experience the greatest long-run economic damages while high-income countries may even experience some positive “building back better” effects. Based on an analysis of alternative spatial aggregation approaches, I find earthquake impacts are driven by local high-intensity events rather than spatially diffuse exposure to lower intensity shaking.

X. Chen, Implications of Firm Heterogeneity for Offshoring, Wage and Employment .
Dec. 2018.


Abstract: The received wisdom is that cheaper foreign inputs may replace tasks previously done by domestic labor, and cause displacement of workers at the home country. However, using the U.S. multinational enterprises data, the empirical evidence in this paper does not support the idea that the imported intermediate input from foreign affiliates necessarily substitutes the domestic labor force at the sector-level. In order to better elucidate the offshoring employment relationship, this paper develops a general equilibrium model with monopolistic competition and firm heterogeneity. The model features (i) a fair wage condition where firms pay a real wage that exceeds the market clearing level and varies with productivity; (ii) an open economy in which firms can move a part of their production process to foreign countries. This model allows us to examine how a production-side shock that changes firms' offshoring decision can influence the local economy and its labor market.

F. Amoasah, Trade Liberalization and Economic Growth – A Study on Ghana, Nigeria and Cote d`Ivoire.
Dec. 2018.


Abstract: The study considers the relationship between trade liberalization and economic growth among three sub-Saharan African countries: Ghana, Nigeria, and Cote d’Ivoire. We find no statistically significant increase in the economic growth of the countries following trade liberalization. However, post-trade-liberalization exports (and trade) of the countries did increase. Yet, the need for the promotion of exports in high value-added industries remain an age long unduly overdue problem. Increases in imports following liberalization dominate the increases in exports, export earnings remain susceptible to international price volatility and a chunk of the export commodities remain unprocessed as well as broadly narrow in range. The EU, US and China are the major trading partners to Africa, even more (in percentage terms) than the continent trades among itself. While reasonable efforts are being made on the African Continental Free Trade Area (AfCFTA), it should be seen that regional economic integration does not automatically improve growth. However, proper desegregation with the needed checks and balances may help yield for Africa some gains from trade. It is time, therefore, that the countries devise important measures to ensure that these envisaged significant gains from trade are duly realised.

H. Oberhofer and M. Pfaffermayr, Estimating the Trade and Welfare Effects of Brexit: A Panel Data Structural Gravity Model.
Oct. 2018.


Abstract: This paper proposes a new panel data structural gravity approach for estimating the trade and welfare effects of Brexit. The suggested Constrained Poisson Pseudo Maximum Likelihood Estimator exhibits some useful properties for trade policy analysis and allows to obtain estimates and confidence intervals which are consistent with structural trade theory. Assuming different counterfactual post-Brexit scenarios, our main findings suggest that UKs (EUs) exports of goods to the EU (UK) are likely to decline within a range between 7.2% and 45.7% (5.9% and 38.2%) six years after the Brexit has taken place. For the UK, the negative trade effects are only partially offset by an increase in domestic goods trade and trade with third countries, inducing a decline in UKs real income between 1.4% and 5.7% under the hard Brexit scenario. The estimated welfare effects for the EU are negligible in magnitude and statistically not different from zero.

M. Ghodsi, The Impact of Chinese Technical Barriers to Trade on its Manufacturing Imports.
Oct. 2018.


Abstract: In the past few decades China has put substantial efforts into liberalising its trade and economy that accelerated after its accession to the World Trade Organisation (WTO) in December 2001. In this period China has significantly reduced its tariffs on manufacturing imports. However, the proliferation of non-tariff measures (NTMs) imposed by China has made it the country notifying the second largest number of technical barriers to trade (TBTs) to the WTO after the United States. This paper investigates the impact of Chinese TBTs and tariffs on the imports of manufacturing products at the 6-digit level of the Harmonised System (HS) during 2002-2015. Heterogeneity of exporting firms, sample selection bias, multilateral resistances, and endogeneity bias are controlled for according to the recent strands of gravity modelling. Results suggest a positive impact of tariff reduction and the imposition of TBTs by China on its import values and quantities. The impact of Chinese TBTs is also differentiated across exporting countries. Since import prices are not significantly affected by TBTs, the imposed standards and regulations embedded in these trade policy measures allowed the economy to gain access to more products from the more developed economies, leading to trade creation.

A. A. Gnidchenko, Measuring product-level export quality: Evidence from Asian motor vehicles sector.
Apr. 2018.


Abstract: We provide the combination of the Asian automotive trade case study and the analysis of indicators that may potentially reflect product quality. We try to assess the relevance of different indicators (particularly, weighted unit value, number of export lines, market share, Grubel-Lloyd index and relative net exports) for constructing an unbiased quality measure. We conclude that one should simultaneously use most indicators from the list to eliminate the impact of possible shocks on quality estimations.

A. Wong and J. Zhang, Breakdown of covered interest parity: mystery or myth?.
Feb. 2018.


Abstract: The emergence and persistence of basis spreads in cross-currency basis swaps (CCBSs) since the global financial crisis have become a mystery in international finance, as they violate the longstanding principle of covered interest parity (CIP). We argue that the phenomenon is no mystery but merely a reflection of the different risks involved between money market and CCBS transactions in the post-crisis era. Empirical results based on seven major currency pairs support our hypothesis that the swap dealer behaves as if he tries to align the risks of the transactions in pricing CCBSs, which causes CIP to break down. We also find that the basis spreads are well arbitraged among the currency pairs, which suggests they are fairly priced. Hence, it is a myth that CCBS basis spreads or CIP deviations are evidence of the market not functioning properly.

D. Tran Lam Anh, Effect of International Trade on Wage Inequality with Endogenous Technology Choice.
Feb. 2018.


Abstract: This paper investigates how trade openness affects wage inequality of trading countries, both within and between them. Specifically, based on the theoretical literature on monopolistic competition between two asymmetric countries, we derive a new framework under the assumption of endogenous technology choice. This assumption implies that firms simultaneously choose to adopt different technology compositions which are appropriate for its labor composition. In other words, instead of utilizing standard constant technology as in most of other research, firms in this model are allowed to choose the technology system that maximizes their profits. With this framework, we find that firms in countries which are skilled-labor-abundant choose technologies that are appropriate for skilled labor, and vice versa for firms in unskilled-labor-abundant countries. The wage gap between different types of labor depends on the comparative level of technological capability, the skill composition in the two countries, and the skill bias. During the transition from autarky to free trade, if the size of the labor force and its composition in both countries satisfy a particular condition, we find that the decline in transport cost will increase the relative wage between one country and the other in both types of labor. Moreover, these effects on wage inequality in all phases, i.e., autarky, free trade, and the transition from autarky to free trade, are partially absorbed by the endogeneity in technology choice. In other words, if a firm utilizes a standard constant technology only, the effect on wage inequality is amplified. Based on calibration results utilizing data from 52 countries, we find that in some plausible scenarios, this amplification may generate different understandings of the role of trade openness on wage inequality.

K. A. Damoah, Markups, Market Imperfections, and Trade Openness: Evidence from Ghana.
Feb. 2018.


Abstract: This paper investigates the impact of Ghana's WTO accession on firm-level product and labour market imperfections. We exploit a rich dataset of firm-level information to estimate both markups and the degree of monopsony power enjoyed by manufacturing firms. Results suggest that price-cost margins declined, while the degree of monopsony power increased in the wake of WTO accession. These diverging dynamics suggests that firms compress real wages to offset loss of market power in the product market due to increased international competition. This results in an increase of the market imperfection gap, which gradually erodes the pro-competitive gains from trade. The paper contributes to the literature by identifying channels through which allocative inefficiencies and misallocation can persist even after trade liberalisation.

I. Mensah, The Euro's effect on trade: An analysis of “old" and “new" EMU members .
Dec. 2017.


Abstract: This paper provides new empirical evidence of the “euro effect” on bilateral trade by allowing for a heterogeneous impact on "new" and “old” EMU members. By applying a Poisson estimator and focusing on a sample of 38 countries, our results show a statistically insignificant euro's effect on bilateral exports. However, disaggregating this effect, we report a relatively large euro's effect on bilateral trade for the "new" EMU countries. We also and no evidence of trade diversion, thus corroborating existing evidence. These results are robust to a number of sensitivity checks and, especially, to the use of a larger sample of countries.

S. Jiang, The Ramsey Cooperative and Non-Cooperative Unconventional Monetary Policy .
Dec. 2017.


Abstract: I study the Ramsey problem for three unconventional monetary policies in a two-country model. An equity injection into financial intermediaries is the most efficient policy. Due to precautionary effects of future risk, a central bank should exit from these policies in accordance with but slower than the speed of deleveraging in the financial sector. The optimal policy is changed considerably if cross-country policy cooperation is not imposed. In this case, the unconventional interventions tend to be too strong in one country but too weak in the other. The cooperation gain is a function of policy cost. At last, I evaluate several simple rules and find that the rule responding to gaps in asset prices mimics the optimal policy very well.

E. Wichmann, Crucial Materials? How Export Restrictions Upstream Boost Manufacturing Exports Downstream.
Dec. 2017.


Abstract: This paper shows both theoretically and empirically how raw material rich countries use export restrictions upstream to give manufacturing sectors downstream a competitive advantage. For young and relatively small industries this can be seen as a type of infant industry protection that takes advantage of the global value chain. Estimating a fixed effect model, I provide evidence that export restrictions on industrial raw materials upstream help promote manufacturing exports downstream.

R. Sellner, Non-discriminatory Trade Policies in Structural Gravity Models. Evidence from Monte Carlo Simulations.
Dec. 2017.


Abstract: This paper provides Monte Carlo simulation evidence on the performance of methods used for identifying the effects of non-discriminatory trade policy (NDTP) variables in structural gravity models (SGM). The benchmarked methods include the identification strategy of Heid, Larch & Yotov (2015) that utilizes data on intra-national trade flows and three other methods that do not rely on this data. Results indicate that under the assumption of a data generating process that conforms with SGM theory, data on intra-national trade flows is required for identification. The bias of the three methods that do not utilize this data, is a result of the correlation between the NDTP variable and the collinear fixed effects. The MC results and an empirical application demonstrate the severity of this bias in methods that have been applied in previous empirical research.

K. Vondra, Export market shares – a trivial concept?.
Apr. 2017.


Abstract: The European Commission and euro area central banks use different methods to calculate export market shares and rely on different data sources to do so. Thus, the resulting evidence varies considerably over time, prompting different economic policy conclusions with respect to the development of export competitiveness – which is an undesirable fact. This paper presents methods and data sources used to derive export market shares with a view to explaining these differences. We conclude that the export market share concept is trivial only at a first glance because it can be implemented in a number of ways none of which would appear to be the single best practice.

C. Hirsch and H. Oberhofer, Bilateral Trade Agreements and Trade Distortions in Agricultural Markets.
Feb. 2017.


Abstract: Agricultural support levels are at a crossroad with reduced distortions in OECD countries and increasing support for agricultural producers in emerging economies over the last decades. This paper studies the determinants of distortions in the agricultural markets by putting a specific focus on the role of trade policy. Applying various different dynamic panel data estimators and explicitly accounting for potential endogeneity of trade policy agreements, we find that an increase in the number of bilateral free trade agreements exhibits significant short- and long-run distortion reducing effects. By contrast, WTO’s Uruguay Agreement on Agriculture has not been able to systematically contribute to a reduction in agriculture trade distortions. From a policy point of view our findings thus point to a lack of effectiveness of multilateral trade negotiations.

L. Azarnert, Refugee Resettlement, Redistribution and Growth.


Abstract: This paper studies the effect of refugee resettlement on human capital accumulation. The analysis is performed in a growth model with endogenous fertility. I propose a redistribution scheme and show that refugee resettlement from a more advanced and wealthier economy to a less advanced and less wealthy economy combined with income transfers can give rise to conditions in which utility of indigenous populations in both countries increases. I also derive conditions for the proposed resettlement policy to stimulate human capital accumulation and hence economic growth in both economies.

J. Frank, The empirical consequences of trade sanctions for directly and indirectly affected countries.
Jan. 2017.


Abstract: Economic sanctions are a popular diplomatic tool for countries to enforce political demands abroad or to punish non-complying countries. There is an ongoing debate in the literature if this tool is effective in reaching these goals. This paper adds to the literature by treating sanctions like a negative form of trade agreements. In order to quantify the direct effects of sanctions on the trade flows between countries I make use of a gravity equation controlling for country pair, importer-year, and exporter-year fixed effects. The estimates reveal that there is a significant decrease in the value of trade after the introduction of sanctions. In a second step, trade diversion is introduced as a potential instrument for countries to soften the negative impact of sanctions. However, the estimates reveal no evidence for trade diversion.

R. Mirdala, Real Exchange Rates, Current Accounts and Competitiveness Issues in the Euro Area.
Dec. 2016.


Abstract: The lack of nominal exchange rate flexibility in the monetary union induced the growing divergence of trade performance among the member countries. Intra-Eurozone current account imbalances among countries with different income levels per capita fuel discussions on competitiveness channels under common currency. Asynchronous current account trends between North and South of the Euro Area were accompanied by significant appreciations of real exchange rate in the periphery economies originating in the strong shifts in consumer prices and unit labor costs in these countries relative to the countries of the Euro Area core. The issue is whether the real exchange rate is a significant driver of persisting current account imbalances in the Euro Area considering than, according to some authors, differences in domestic demand are more important than is often realized. In the paper we analyze main aspects of current account adjustments in the Euro Area member countries. From estimated VAR model we calculate impulse-response function of the current account to the real exchange rate (REER calculated on CPI and ULC base) and domestic demand shocks and variance decomposition to examine the relative importance of both shocks. Our results indicate that while the prices and costs related determinants of external competitiveness affected imports more significantly than exports, demand drivers shaped current account balances mainly during the crisis period.

R. Mirdala, Exchange Rate Pass-Through in the Euro Area.
Apr. 2016.


Abstract: Time-varying exchange rate pass-through effects to domestic prices under fixed euro exchange rate perspective represent one of the most challenging implications of the common currency. The problem is even more crucial when examining crisis related redistributive effects associated with relative price changes. The degree of the exchange rate pass-through to domestic prices reveals its role as the external price shocks absorber especially in the situation when the leading path of exchange rates is less vulnerable to the changes in the foreign prices. Adjustments in domestic prices followed by exchange rate shifts induced by sudden external price shocks are associated with changes in the relative competitiveness among member countries of the currency area. In the paper we examine exchange rate pass-through to domestic prices in the Euro Area member countries to examine crucial implications of the nominal exchange rate rigidity. Our results indicate that absorption capabilities of nominal effective exchange rates clearly differ in individual countries. As a result, an increased exposure of domestic prices to the external price shocks in some countries represents a substantial trade-off of the nominal exchange rate stability.