Extra-euro area manufacturing import prices and exchange rate pass-through

This paper uses a model of import prices whereby exporters to the euro area set export prices partly as a mark-up on their production costs (i.e., the degree of exchange rate pass-through) and partly in line with euro area producer prices (i.e., pricing-to-market). Using both time series and panel estimation techniques, the econometric results suggest that the pass through of changes in the effective exchange rate of the euro to the price of extra-euro area imports of manufactures is around 50% - 70%, while pricing-to-market has an estimated weight of between 50% - 30%. We also find some evidence of differences across import suppliers, with EU member states who are not part of the euro area assigning a relatively larger weight to pricing-to-market, while euro area imports from the United States seem to be characterised by a relatively higher degree of exchange rate pass-through. JEL Classification: D40, E30, F10, F31

Exchange rate volatility and euro area imports

This paper estimates an import demand function for the euro area vis--vis its main extra-area trading partners which takes into account the possible impact of both intra- and extra-euro area exchange rate uncertainty. We derive a theoretical model which captures various mechanisms by which exchange rate volatility may influence the demand for extra-euro area imports. If importers are risk averse, the model predicts not only a negative effect of exchange rate volatility, but also substitution possibilities between extra- and intra-area imports due to differences in the degree of extra- and intra-area exchange rate volatility. The magnitude of these impacts also depends on the share of trade invoiced in foreign currency (and not hedged) as well as the degree of substitutability between the imports of different suppliers. Using quarterly data for the past eleven years, panel estimates suggest that extra-area exchange rate volatility may have decreased extra-euro area imports by around 10 per cent. Although such quantitative estimates should be treated with caution, the magnitude of our estimate is similar to other studies which find a statistically significant impact of exchange rate volatility on trade flows. Finally, we also provide some limited evidence that differences in extra- and intra-area exchange rate volatility may have resulted in substitution between extra- and intra-area imports. JEL Classification: F15, F31

The Impact of Globalisation on the Euro Area Macroeconomy

The general acceleration of trade globalisation over the last decade –or a growing interdependence of economies via trade, production and financial market linkages– has engendered several macroeconomic implications for the euro area. This paper focuses on assessing the key impacts on the euro area macroeconomy through an analysis of prospective channels, stylised facts and review of relevant empirical findings. It takes a long-term perspective over a period predominantly characterised by the rapid growth of globalisation, nothwithstanding the more recent interruption to the growth of global trade and capital flows that emerged towards the end of 2008 associated with the global financial turmoil and the associated downturn in global economic activity. Following an overview of the salient aspects of globalisation, which highlights the increasing openness of the euro area in terms of both trade and capital flows as well as the global reduction in transportation and information costs and the rise in the effective global supply of labour, the paper then assesses the external impacts of globalisation on the euro area, focussing on trade performance, export specialisation and import prices. It then investigates euro area domestic adjustment to globalisation with a supply-side focus, analysing separately impacts on productivity, labour markets and prices.Globalisation, trade performance, export specialisation, productivity, labour markets and prices.

The global financial crisis: trying to understand the global trade downturn and recovery

This paper aims to shed light on why the downturn in global trade during the intensification of the financial crisis in 2008Q4-2009Q1 was so severe and synchronized across the world, and also examines the subsequent recovery in global trade during 2009Q2-2010Q1. The paper finds that a structural imports function which captures the different and time-varying importintensities of the components of total final expenditure can explain the sharp decline in global imports of goods and services. By contrast, a specification based on aggregate total expenditure can not fully capture the global trade downturn. In particular, panel estimates for a large number of OECD countries suggest that the high import-intensity of exports at the country-level can explain a significant proportion of the decline in world imports during the crisis, while declines in the highly import-intensive expenditure category of investment also contributed to the remaining fall in global trade. At the same time, the high and rising import-intensity of exports also reflects and captures the rapid growth in “vertical specialisation”, suggesting that widespread global production chains may have amplified the downturn in world trade and partly explains its high-degree of synchronisation across the globe. In addition, the estimates find that stockbuilding, business confidence and credit conditions also played a role in the global trade downturn. Meanwhile, the global trade recovery (2009Q2-2010Q1) can only be partially explained by differential elasticities for the components of demand (although the results confirm that the upturn in OECD imports was also driven by strong export growth and the associated reactivation of global production chains, as well as the recovery in stockbuilding and the fiscal stimulus). This may be due in part to the many policy measures that were implemented to boost global trade at that time and which can not be captured by the specification. JEL Classification: E0, F01, F10, F15, F17financial crisis, forecasting, global trade downturn and recovery, Globalisation, import-intensity of components of total final expenditure, synchronisation, timevarying parameters, vertical specialisation

Extra-euro area manufacturing import prices and exchange rate pass-through

This paper uses a model of import prices whereby exporters to the euro area set export prices partly as a mark-up on their production costs (i.e., the degree of exchange rate pass-through) and partly in line with euro area producer prices (i.e., pricing-to-market). Using both time series and panel estimation techniques, the econometric results suggest that the pass through of changes in the effective exchange rate of the euro to the price of extra-euro area imports of manufactures is around 50% - 70%, while pricing-to-market has an estimated weight of between 50% - 30%. We also find some evidence of differences across import suppliers, with EU member states who are not part of the euro area assigning a relatively larger weight to pricing-to-market, while euro area imports from the United States seem to be characterised by a relatively higher degree of exchange rate pass-through

The Impact of Monetary Union on Trade Prices

Two seemingly unconnected empirical results suggest an intriguing mechanism. First, economic integration helps harmonize prices internationally, with trade being the primary channel (Rogoff 1996, Goldberg and Knetter 1997). Second, monetary union may greatly increase the amount of trade among members (Rose 2001). Putting these together, we see that formation of a monetary union may induce changes that help harmonise inflation rates. The effect might be large if the elimination of exchange rate volatility simultaneously leads to a large increase in intra-union trade and a big increase in the speed at which price shocks are transmitted across members' goods markets. The problem is that standard estimates of price transmission speed suggest that trade's price-homogenising effect operates too slowly to matter much. Some new empirical evidence, however, suggests that a reduction in exchange rate variability reduces the variability of international price differences. Moreover, the effect seems to be highly nonlinear, and monetary union seems to have an effect even controlling for exchange rate volatility. This paper is a first attempt to piece together part of this mechanism, namely the impact of monetary union (and exchange rate volatility more generally) on the international transmission of price shocks via the imported/exported inflation channel. In doing this we generate specific testable hypotheses and confront these with a number of data sets on European trade prices.price arbitrage, exchange rate volatility, monetary union, market segmentation, non-linearities, no-arbitrage bands, harmonisation of price movements

The impact of monetary union on trade prices

Two seemingly unconnected empirical results suggest an intriguing mechanism. First, economic integration helps harmonize prices internationally, with trade being the primary channel (Rogoff 1996, Goldberg and Knetter 1997). Second, monetary union may greatly increase the amount of trade among members (Rose 2001). Putting these together, we see that formation of a monetary union may induce changes that help harmonise inflation rates. The effect might be large if the elimination of exchange rate volatility simultaneously leads to a large increase in intra-union trade and a big increase in the speed at which price shocks are transmitted across members' goods markets. This paper investigates part of this mechanism and finds that monetary union may indeed result in faster cross-border transmission of price movements via the import and export price channel which, in turn, would tend to homogenise price movements across the member countries of a monetary union. JEL Classification: D40, F15, F31Exchange rate volatility, harmonisation of price movements, market segmentation, monetary union, no-arbitrage bands

On the determinants of euro area FDI to the United States: the knowledge- capital-Tobin's Q framework

The long-run determinants of euro area FDI to the United States during the period 1980-2001 are explained by employing the Tobin's Q-model of investment. By using the fixed effects panel estimator, stock market developments in the euro area countries - including a measure adjusted for economic developments common to both the United States and the euro area - are found to influence euro area FDI to the United States. Moreover, the inclusion of the Tobin's Q enhances the traditional knowledge-capital framework specification. Overall, the empirical findings suggest that euro area patents (ownership advantage), various variables related to productivity in the United States (location advantage), the volume of bilateral telephone traffic to the United States relative to euro area GDP (ownership advantage), euro area stock market developments (Tobin's Q), and the real exchange rate are statistically significant determinants of euro area FDI to the United States. JEL Classification: F21, F23euro area, Foreign Direct Investment, Multinational firms, Tobins Q

Exchange rate volatility and euro area imports

This paper estimates an import demand function for the euro area vis--vis its main extra-area trading partners which takes into account the possible impact of both intra- and extra-euro area exchange rate uncertainty. We derive a theoretical model which captures various mechanisms by which exchange rate volatility may influence the demand for extra-euro area imports. If importers are risk averse, the model predicts not only a negative effect of exchange rate volatility, but also substitution possibilities between extra- and intra-area imports due to differences in the degree of extra- and intra-area exchange rate volatility. The magnitude of these impacts also depends on the share of trade invoiced in foreign currency (and not hedged) as well as the degree of substitutability between the imports of different suppliers. Using quarterly data for the past eleven years, panel estimates suggest that extra-area exchange rate volatility may have decreased extra-euro area imports by around 10 per cent. Although such quantitative estimates should be treated with caution, the magnitude of our estimate is similar to other studies which find a statistically significant impact of exchange rate volatility on trade flows. Finally, we also provide some limited evidence that differences in extra- and intra-area exchange rate volatility may have resulted in substitution between extra- and intra-area imports

The global financial crisis: trying to understand the global trade downturn and recovery

This paper aims to shed light on why the downturn in global trade during the intensification of the financial crisis in 2008Q4-2009Q1 was so severe and synchronized across the world, and also examines the subsequent recovery in global trade during 2009Q2-2010Q1. The paper finds that a structural imports function which captures the different and time-varying importintensities of the components of total final expenditure can explain the sharp decline in global imports of goods and services. By contrast, a specification based on aggregate total expenditure can not fully capture the global trade downturn. In particular, panel estimates for a large number of OECD countries suggest that the high import-intensity of exports at the country-level can explain a significant proportion of the decline in world imports during the crisis, while declines in the highly import-intensive expenditure category of investment also contributed to the remaining fall in global trade. At the same time, the high and rising import-intensity of exports also reflects and captures the rapid growth in “vertical specialisation”, suggesting that widespread global production chains may have amplified the downturn in world trade and partly explains its high-degree of synchronisation across the globe. In addition, the estimates find that stockbuilding, business confidence and credit conditions also played a role in the global trade downturn. Meanwhile, the global trade recovery (2009Q2-2010Q1) can only be partially explained by differential elasticities for the components of demand (although the results confirm that the upturn in OECD imports was also driven by strong export growth and the associated reactivation of global production chains, as well as the recovery in stockbuilding and the fiscal stimulus). This may be due in part to the many policy measures that were implemented to boost global trade at that time and which can not be captured by the specification