The FIW - Research Centre International Economics (https://www.fiw.ac.at/) 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).
Abstract: This paper analyzes the influence of financial integration on institutional quality. We construct a dynamic political-economic model of an autocracy in which a ruling elite uses its political power to expropriate the general population. Although financial integration reduces capital costs for entrepreneurs and thereby raises gross incomes in the private sector, the elite may counteract this effect by increasing the level of expropriation. Since de facto political power is linked to economic resources, financial integration also has long-run consequences for the distribution of power and for the rise of an entrepreneurial class.
Abstract: In this article, a new composite globalisation index will be presented. With its 21 variables, it accounts for the multidimensionality of this phenomenon instead of relying purely on economic indicators. As compared to other existing globalisation indices, three major innovations are introduced in this New Globalisation Index (NGI). Firstly, five variables that have until now not been used in globalisation indices enter the calculations. Secondly, geographical distances between countries are incorporated into the index in the trade variable, so as to account for the distinction between globalisation and regional integration. A final innovation is a methodological one, which concerns the use of a statistical method (principal component analysis) to form subindices according to the statistical features of the variable structure. A control for country size is employed for significantly affected variables, as was done in some other globalisation indices before. The final index contains 70 countries and covers a period between 1995 and 2005.
Abstract: This paper studies the effects of agglomeration economies on the location choices by foreign firms in Vietnam. By using a large dataset that provides detailed information about individual firms, the study examines the location choices by 568 newly created foreign firms in 2005 in about 150 different 4-digit industries. This is one of the few studies of agglomeration effects on the location choices by foreign investments in transition economies in general and in Vietnam in particular. The estimates of the negative binomial regression model and the conditional logit model show that agglomeration benefits motivate foreign firms in the same industries and from the same countries of origin to locate near each other. However, the empirical results also indicate that there is competition among provinces in Vietnam in attracting foreign investors, and the locations of Vietnamese firms have no effects on the location decisions by foreign firms in the same industry.
Abstract: This paper investigates the effect of financial instability on the design of monetary policy rule for a small open economy. We find evidence that optimal monetary policy rule reacts directly to financial imbalances and, as a result, to the real exchange rate movements. However, optimal rule would not react to the real exchange rate changes directly if central bank does not care about the financial instability. For a quantitative analysis, impulse responses of some macroeconomic variables and financial instability to the domestic productivity and foreign country output shocks, resulting from simulation, are also analysed in this paper.
Abstract: This paper assesses the role of financial frictions and Foreign Direct Investment (FDI) on an economy´s growth rate, business cycle volatility, and firm´s capital structure. We gauge these effects within the Financial Accelerator framework, where entrepreneurs can establish affiliates of local firms abroad through Foreign Direct Investment. Model simulations suggest that in the presence of credit market imperfections FDI is associated with faster growth, less leverage, and lower aggregate volatility. These features are consistent with the macroeconomic dynamics of the more globally integrated economies over the last three decades.
Abstract: We estimate the impact of international trade and of trade-induced technological change on the wage inequality in the OECD countries, by estimating a two-stage mandated-wage regression. From our estimation we find no evidence on the Stolper-Samuelson effect of trade with the developing and newly industrialized countries. On the other hand, the evidenced technological change from technological competition did not have a strong effect on the increase of the wage differential between the different types of labour in the analyzed sample of OECD countries, which would have indicated that the bias of the technological change towards the skilled-intensive sectors is determined by trade in innovation-intensive goods.
Abstract: The present paper provides a new explanation for the dynamics of exchange rates based on conventions that prevail among market participants. The model relies on a two states Markov switching framework: a bull state and a bear state. In the bull state, agents are optimistic and put more weight on positive news about the domestic economy inducing an appreciation of the domestic currency. In the bear state, agents are pessimistic and overweight negative news associated to the domestic economy leading to a depreciation of the domestic currency. Results show that market switches between a bull state and a bear state explain the dynamics of the euro/dollar exchange rate between January 1995 and December 2008. Besides, the model highlights the life-cycle of conventions in the foreign exchange market and provides lessons for public authorities to reduce exchange rate volatility. Eventually, the model offers a solution to the exchange rate disconnection puzzle.
Abstract: Trade policy has well documented effects on trade volumes. Reaching beyond volumes, I explore the impact of European emerging economies’ recent institutional trade liberalisation on extensive (i.e., the set of imported goods) versus intensive import margins (volumes per imported good) with highly disaggregated data. Differentiating goods categories by use, I find robust evidence of stronger extensive import margin effects of liberalisation for intermediate and capital goods compared to consumer goods. This identifies an important channel for the link between reforms and growth in transition. The results also support new models of heterogeneous firms and trade, which predict that extensive import margin effects of a country’s institutional trade liberalisation should – via lowering fixed costs for rest of the world exporters – increase with decreasing substitutability among products.
Abstract: We study trade policy in a two-sector Krugman type model of trade. We conduct a general analysis allowing for three different instruments: tariffs, export taxes and production subsidies. For each instrument we consider unilateral trade policy without retaliation. When carefully disentangling the different effects that determine policy makers' choices and modeling general equilibrium effects of taxes/tariffs, we find that production subsidies are always inefficiently low and driven by terms of trade effects. In the cases of tariffs and export taxes the home market effect prevails for some parameter combinations but mostly trade policy is determined by terms of trade effects and the desire to reduce distortions arising from monopolistic competition. Hence, our analysis sheds new light on trade policy in a model of intra-industry trade.
Abstract: The study investigates the business cycle dynamics in the euro area using an empirical framework which comprises common global and euro area shocks as well as allows bilateral spillovers of country-specific shocks across the member economies. Three core questions lie at the heart of the analysis: (i) To what extent are the business cycles of the euro area countries driven by common and spillover shocks? (ii) What are the extent and sources of business cycle heterogeneity in the euro area? (iii) Which mechanisms led to the moderation of business cycle activity in the euroarea until recently?
Abstract: n the debate on the benefits of international financial integration, recent literature has emphasized the development of domestic markets as a precondition. This paper offers an alternative view. Lack of competition in domestic financial systems may prevent countries from reaping the benefits of international integration simply because it prevents them from being integrated in a meaningful way - that of price equalization. A new index of de-facto financial integration is used to explore this question and confirms a strong link. The level of de-jure controls, volatility and institutions matter for price integration but their importance differs between developed and developing countries.
Abstract: Needless to say, it is necessary to study the relative scales of the trade creation effect and the trade diversion effect to evaluate success of ASEAN trade integration and to determine whether or not the intra-bloc trade share is appropriate as an indicator of the progress of reducing intra-regional disparities in ASEAN. Therefore, this paper first uses descriptive statistics and some key indicators to track the progress in economic growth and in trade integration that is the main pillar of building ASEAN Economic Community. Second, we make an attempt to provide answers to the question of whether trade integration matters for reducing intra-regional disparities among ASEAN member states over the period 1995-2007. We perform the panel co-integration method developed by Pedroni (1999) that allows for heterogeneity across ten ASEAN countries. Our major finding shows that trade integration, which is captured by intra-regional exports and imports flows, is appropriate as an indicator of progress of reducing income disparities in the ASEAN zone. Finally, applying the General Method of Moments (GMM) estimation, we also find that deepening of intra-regional trade integration creates more trade flows among ASEAN member states without diverting trade flows with non-members.
Abstract: The aim of the analysis is to investigate the impact of inward FDI on Italian manufacturing and services firm survival. The paper is organized in two steps. First, we carry out theoretically and empirically the analysis of firm survival distinguishing between foreign multinationals, domestic multinationals and domestic non multinational firms. The empirical analysis is based on survival functions as well as a Cox proportional hazard model, controlling for firm and industry specific covariates. Second, we examine the effect of foreign presence on the survival of host country firms distinguishing between the impact on Italian-owned (indigenous) multinational and non multinational firms and on other foreign-owned firms (i.e., other MNEs) located in the host country. The finding reveals that during the period 2005-2007 while manufacturing and service firms owned by foreign MNEs are more likely to exit the market than national firms, on the other hand domestic MNEs have a higher chance of survival. These results stand even when other firm and industry specific variables are controlled for. This result support the idea that foreign MNEs are inherently footloose while Italian MNEs are more firmly rooted in the local economy. The estimates also indicate that older, larger and more productive firms have higher survival rates. Finally, firm survival of foreign MNEs and domestic MNEs is unaffected by the increased presence of foreign MNEs. On the other hand, the increased foreign presence has a positive impact on Italian non-MNEs’ survival only in the service sector.
Abstract: We build a fully micro-founded dynamic general equilibrium (DSGE) model, which is estimated employing Bayesian methods. The model captures the most salient features of Austria as a small open economy, the Euro Area (EA) and the United States (U.S.). Further analysis is conducted through numerical simulations to examine how nominal and real shocks are propagated. Besides, welfare costs of nominal rigidities are calculated. We distinguish two sample periods, ‘pre-EMU’ and ‘EMU’. In the former, we maintain the assumption of full commitment of respective (independent) Central Banks towards their monetary rules, whereas in the latter, the monetary policy of Austria is fully aligned with the European Central Bank. Main results are derived from Bayesian estimation and simulation of the estimated model. Welfare calculations from the estimated model suggest that in the pre-EMU period, the EA and Austria present welfare costs close to one percent of steady-state consumption, whereas the U.S. welfare costs is slightly higher (-1.52 percent). As it would be expected, in the second subsample, welfare costs in the EA decrease, indicating an improvement in the allocation during the EMU regime (similarly in the U.S.), whereas in Austria welfare costs go up.
Abstract: This paper implements a methodology to evaluate the desiderability of monetary and fiscal rules within the context of the EMU using a DSGE model within a New Keynesian framework with sticky prices. The approach adopted is a welfare-based criterion that measures the welfare losses associated with these rules through a welfare loss function. Monetary policy follows a standard Taylor rule augmented by a stochastic component, driven by a union-wide monetary shock, whereas fiscal policy is made up of a countercyclical and debt-stabilizing public expenditure and of distortionary taxation on labor, dividends and interests on public bonds. We find that: 1) in the presence of our monetary rule alone, domestic inflation variance falls more than in the only presence of fiscal rules, whereas output gap smoothing is stronger in the only presence of fiscal rules; 2) the combination of our monetary rule and fiscal rules reduces welfare losses more than the same rules singly considered.
Abstract: A distinctive feature of present globalization is the development of international production sharing activities i.e. production fragmentation. The increased importance of fragmentation in world trade has created an interest among trade economists in explaining the determinants of intra-industry trade (IIT) in intermediate goods. In this study the extent of IIT in Austria’s auto-parts trade is analyzed by decomposing Austria’s auto-parts trade into one-way trade, vertical IIT and horizontal intra-industry trade IIT. Then development of the vertical IIT in the auto-parts industry, as an indicator for international fragmentation of production process between Austria and its 29 trading partners, is examined and various country-specific factors suggested by fragmentation literature are tested using newly developed panel econometrics techniques and more recent data from 1996 to 2006. The results show that a substantial part of IIT in the Austrian auto-parts industry was vertical IIT and the econometric results mainly support the hypothesis drawn from the fragmentation results. In particular, the findings show that the extent of Austria’s vertical IIT in auto-parts is positively correlated with average market size, differences in per capita GDP, and foreign direct investment while it is negatively correlated with distance.
Abstract: This constant-market-shares (CMS) analysis shows the development of competitiveness, market and product structure of the Austrian merchandise exports from 1990 to 2006. The traditional CMS application was transformed to a dynamic model, such that the static indicators have been replaced by time series. This dynamic consideration of the CMS analysis helps to track all changes in the trade structure and competitiveness over time. The long-term trend of the indicators suggests that the Austrian foreign trade sector was able to maintain its market share in the global environment. While the Austrian foreign trade performance only slightly deviates from the pattern of the traditional industrialised countries, a strong structural change is observable in the external sector of the emerging markets. The disadvantages in competitiveness of the Austrian foreign sector have vanished, however, the market and product structure effects show negative trends after 2000, pointing to vulnerability in the Austrian export sector.
Abstract: Since the pioneering work of Krugman (1980) economists try to quantify the welfare gains from an increase in traded variety. The seminal work of Feenstra (1994) and its application to the U.S. of Broda and Weinstein (2006) allowed this quantification for the first time using highly disaggregated trade data. In this paper it is argued that size and openness of a country are important factors in determining these welfare gains. The gains from traded variety of a small open economy are calculated and compared to those of the U.S.; the differences between the countries are then analysed carefully. To achieve this, the methodology of Feenstra (1994) is extended. While the Armington definition of a variety forces the researcher to assume no growth at the extensive margin, in this paper the Feenstra ratios are reinterpreted in a way that allows for full growth at the extensive margin. The resulting two polar cases will influence the country comparison with respect to the gains from variety: Depending on how much growth at the extensive margin a researcher is willing to assume, the relative gains from variety of a small open economy compared to a larger economy like the U.S. are changed. It is also argued that this result may hold generally for other small and large OECD economies.
Abstract: Testing whether real exchange rates are stationary and, thereby, obtaining evidence of whether the absolute version of the purchasing power parity (PPP) hypothesis holds, have, initially, be done by using the ADF statistic to test for a unit root. Subsequently, to mitigate the low power of the ADF test, several alternatives have been used for the same purpose. Panel unit root testing is one of these alternatives. In Erlat (2003), I had previously considered two other alternatives; namely, introducing multiple structural shifts in the deterministic terms and fractional integration, in the context of the two primary bilateral Turkish real exchange rates; the $US and the German DM based rates. This investigation did indicate that these two rates may, in fact, be taken to be stationary with significant long-memory components. In the present paper, I utilise panel procedures to see if they, also, give corroborating evidence. I used monthly data for the period 1984.01-2001.06 and constructed a panel of 17 bilateral CPI-based real exchange rates corresponding to Turkey's main trading partners for which complete data were available. I implemented seven panel procedures. The first two, Levin, Lin and Chu (LLC) (2002) and Im, Pesaran and Shin (IPS) (2003) are the most commonly used procedures. LLC assumes a common coefficient for the lagged dependent variable in the autoregressions while IPS recognises the full heterogeneity of the coefficients. The third procedure utilised, Hadri (2000), also assumes full heterogeneity but has stationarity as its null hypothesis. These three procedures take account of the dependence between the series that make up the panel by subtracting the means obtained for each time period across cross sections, from the observations. On the other hand, the remaining four procedures, due to Taylor and Sarno (TS) (1998), Breuer, McNown and Wallace (BMW) (2001), Pesaran (P) (2007)and Bai and Ng (BN) (2004a) handle the problem of dependence in a somewhat more elaborate manner. TS and BMW do this by considering the autoregressions corresponding to each series as set of seemingly unrelated regressions. TS consider a joint test of a unit root while BMW consider individual tests, thereby complementing each other. P and BN, on the other hand, assume that there is a common factor in the panel of series. P adds this common factor, proxied by the time-wise mean, as a regressor to the autoregressions and performs the ADF test while BN decompose the series into this common factor and the idiosyncratic components and test for a unit root in both components, thereby enabling us to determine the source of the persistence if it exists. Of these seven procedures, LLC and IPS lead to the rejection of the null hypothesis of a unit root, while Hadri, TS and BMW do not. The LLC result has the, rather sharp, implication that all 17 series are stationary which, obviously, is not realistic. The IPS result, on the other hand, implies that, at least one series is stationary. This is corroborated by individual ADF tests for, say, the UK, Italy, France, the Netherlands and Belgium based series. The same corroboration is, however, lacking from the other panel approaches, implying that the evidence about the stationarity of the Turkish real exchange rate is mixed and not very strong if panel procedures are used alone as an alternative to univariate ADF tests. Structural shifts in the deterministic terms may need to be introduced into these procedures to obtain stronger evidence of stationarity but this is the subject of further research.
Abstract: International Outsourcing effects on labor markets are mostly analyzed within flexible wage settings. Using a modern duality approach, this paper formally investigates differences occurring in industries with low skilled wage rigidity and, for the first time in literature, presents empirical evidence supporting the theoretical findings. Using a logit model to analyze microeconomic German panel data, results show that International Outsourcing significantly increases low skilled unemployment when taking place in industries characterized by low skilled wage rigidity. Thus, in terms of unemployment, not International Outsourcing but inflexible labor market institutions instead should be blamed for harming low skilled labor.
Abstract: This paper demonstrates that, after integration, equity portfolios of countries that joined the European Monetary Union have converged at faster rate than those of NON EMU countries. This outcome can be interpreted as a combination of the convergence of inflation rates and the convergence of investment barriers. On the one hand, the common monetary policy might have driven a stronger comovement in inflation rates, leading to increasingly similar hedging strategies among member countries. On the other hand, exposure to the common currency might have homogenized bilateral investment barriers, thus inducing increasingly similar portfolio allocations among member countries. We find that the comovement of inflation rates has not significantly increased after EMU inception, pointing toward an exclusive role for convergence in investment barriers.
Abstract: This paper tests for one mechanism that can explain the existence of a language barrier to trade. Specifically, I ask if those industries that require more cross-border communication in order to export their products trade more between Canadian provinces that know the other's language(s). I find that trade in industries with a need to communicate directly (orally) with importers increases with the probability that people in another province speak the same language. This finding can fill a missing link in the empirical trade literature, which lacked convincing arguments for the observed correlation between language commonality and the total volume of trade.
Abstract: In this paper a stylized CGE model is constructed to study the impact of liberalization of barriers for foreign providers of intermediate producer services under imperfect competition on the welfare, the downstream industry output, the prices of the factors of production and the pattern of trade. An attempt is made at incorporating oligopoly market structure into the services sector within general equilibrium model. Consequently, a model with firms making output conjectures about domestic and foreign rivals is adopted. The case of a small developing country with less efficient services sector relative to the foreign firms is assumed. In this framework, interaction and the relative significance of mechanisms resulting from the love of variety, anti and pro competitive and the efficiency effects on the outcomes of the services liberalization is analyzed. It is found that the liberalization services trade might be negative in terms of welfare and downstream industry expansion even if the profits of the foreign firms are not shifted abroad. This represents the evidence of dominant anticompetitive effect. It is therefore important to take into consideration the underlying market structure while liberalizing services trade.
Abstract: Will incomes of low and high skilled workers continue to diverge? Yes says our paper's dynamic, six-good, five-region - U.S., Europe, N.E. Asia (Japan, Korea, Taiwan, Hong Kong), China, and India -, general equilibrium, life-cycle model. The model predicts a near doubling of the ratio of high- to low-skilled wages over the century. Increasing wage inequality arises from a traditional source - a rising worldwide relative supply of unskilled labor, reflecting Chinese and Indian productivity improvements. But China's and India's education policies matter. If successive Chinese and Indian cohorts become more skilled, major exacerbation of inequality will be precluded.
Abstract: This paper makes two contributions to the literature on the impact of trade on income. First, we use heterogeneous panel cointegration techniques that are robust to omitted variables and endogenous regressors to estimate the effect of trade on income for 81 developed and developing countries, both for the sample as a whole and for each individual country. Second, we use a general-to-specific variable selection approach to identify important determinants of the effect of trade on income. Our main findings are: (i) A one percent increase in the trade share of GDP yields, on average, a statistically significant increase in income per worker of about 0.16 percent. This result is in contrast to previous studies, which tend to produce either unreasonably large or statistically insignificant estimates of the impact of trade on income. (ii) There are large cross-country differences in the income effects of trade, in particular between developed and developing countries. For developed countries the income effect of trade is positive, whereas trade has, on average, a negative impact on income in developing countries. (iii) The cross-country heterogeneity in the impact of trade on income can be explained mainly by cross-country differences in primary export dependence, labour market regulation, and property rights protection. The level of property rights protection is positively related, while the level of primary export dependence and labour market regulation is negatively related to the income effect of trade.