Transport liberalization and regional imbalances with endogenous freight rates

This paper develops a tractable two-region New Economic Geography model with footloose capital and endogenous freight rates to investigate the welfare implications and long-run industry reallocation patterns triggered by transport liberalization. Two policy scenarios are considered: one where a unique tariff per route is imposed, independently of the direction of shipment, and one of complete deregulation. Carriers in fully deregulated transport markets are shown to charge higher markups in shipments towards the periphery. This pricing behavior counterbalances the welfare-decreasing agglomeration forces associated with lowering trade costs and ensures welfare gains in both region in the short and long run.JRC.B.3-Territorial Developmen

Verti-zontal Differentiation in Monopolistic Competition

The pattern of trade observed from firm-product-country data calls for a new generation of models. To address the unexplained variation in the data, we propose a new model of monopolistic competition where varieties enter preferences non-symmetrically, capturing both horizontal and vertical differentiation in an unprecedented way. Together with a variable elasticity of substitution, competition effects, varying markups and prices across countries, this results in a tractable model whose predictions differ from existing ones. Using the population of Belgian exporters, our model succeeds in explaining the hitherto unexplained variation. The implications call for a re-thinking of earlier results and measurement practices.Heterogeneous firms, Horizontal differentiation, Vertical differentiation, Monopolistic competition, Non-symmetric varieties

Macro-Economic Models for R&D and Innovation Policies

This report compares the modelling of R&D in four macroeconomic models used by the European Commission for ex ante policy assessment: QUEST, RHOMOLO, GEM-E3 and NEMESIS, which are. Whereas the former three are general equilibrium models, the latter is a reduced form macro-econometric model. The report highlights those parts of the models that are relevant to R&D transmission mechanisms and interfaces for implementing policy shocks.JRC.J.2-Knowledge for Growt

Verti-zontal Differentiation in Monopolistic Competition

The recent availability of trade data at a firm-product-country level calls for a new generation of models able to exploit the large variability detected across observations. By developing a model of monopolistic competition in which varieties enter preferences non-symmetrically, we show how consumer taste heterogeneity interacts with quality and cost heterogeneity to generate a new set of predictions. Applying our model to a unique micro-level dataset on Belgian exporters with product and destination market information, we find that heterogeneity in consumer tastes is the missing ingredient of existing monopolistic competition models necessary to account for observed data patterns.Heterogeneous firms, Product Differentiation, Monopolistic Competition, Nonsymmetric varieties

Modelling of Agglomeration and Dispersion in RHOMOLO

The present paper describes the strategy of modelling endogenous location taken in the newly developed dynamic spatial general equilibrium model RHOMOLO. The model incorporates three mechanisms of endogenous location: mobility of capital, mobility of labour, and vertical linkages of intermediate goods. The spatial equilibrium in RHOMOLO is an outcome of optimisation involving many dispersion/agglomeration forces and channels of adjustment.JRC.J.2-Knowledge for Growt

Moving up the Quality ladder? EU-China Trade Dynamics in Clothing

This paper compares European and Chinese exports in the clothing sector since the end of the Multi-Fiber Arrangement in 2005. Using detailed product-level data from UN Comtrade, we document the pattern of export prices and quantities observed for both countries, considering both exports to the rest of the world and to a particular destination market. We find that within narrowly defined product categories, European varieties typically sell for a higher price than Chinese varieties. But this price gap is narrowing. Despite rising prices, Chinese varieties are increasingly selling more than European varieties, suggesting that quality differences are narrowing. While European “core” products in clothing are stable over time, Chinese exports show strong product dynamics with exit and entry of new “core” products every year and “core” products changing rapidly. Both China and the EU export in every product category, resulting in a perfect product overlap with no products being exported by only one of the two. To make sure that our findings are not driven by a different product mix or a different destination country mix of EU versus Chinese exports, we compare EU and Chinese exports of clothing to the US and limit the comparison to HS6 product categories that are exported by both countries to the US. Again we obtain similar results as those obtained by comparing EU and Chinese exports to the rest of the world. Also, our evidence is suggestive of China exporting its high quality goods, while the EU exporting its most efficiently produced goods.

Measuring quality, willingness to pay and selling capacity at a country-product-destination level using aggregate trade data

This paper shows how a set of indicators can be developed to identify different components of external competitiveness using readily accessible, aggregate trade and macroeconomic data. A methodology is proposed, based on asymmetric quadratic preferences with heterogeneous consumers, to use trade data to identify quality at a country-product level and willingness to pay and selling capacity at a country-product-destination level. These indicators of competitiveness can be used to complement existing ones based on symmetric preferences with constant elasticity of substitution to refine our understanding of the determinants of a country's external position. An example of the type of analysis that can be performed with these indicators is illustrated focusing on two EU countries following diverging trajectories in terms of external competitiveness in recent years, Latvia and Finland.JRC.B.3-Territorial Developmen

Macroeconomic Modelling of R&D and Innovation Policies: An application of RHOMOLO and QUEST

This paper presents and applies a dynamic spatial computable general equilibrium model - RHOMOLO - to assess the impact of research, technological development and innovation policies in the EU. RHOMOLO is parameterised by econometrically estimating the relationship between regional productivity and R&D intensity by applying the technology catch-up model proposed by Benhabib and Spiegel (2005) to the EU-regional context. Our simulation results suggest that a dynamic spatial computable general equilibrium approach is particularly useful for handling spillovers of investments in the innovation capacity of the regions, both of which cannot be captured by models in which the spatial structure is not present. The paper shows the strengths and limitations of the approach, and the advantages of aligning the spatially and sectorally disaggregated models with more aggregated dynamic macro models.JRC.J.2-Knowledge for Growt

Vert-zonal Differentiation in Monopolistic Competition

The pattern of trade observed from firm-product-country data calls for a new generation of models. To address the unexplained variation in the data, we propose a new model of monopolistic competition where varieties enter preferences non-symmetrically, capturing both horizontal and vertical differentiation in an unprecedented way. Together with a variable elasticity of substitution, competition effects, varying markups and prices across countries, this results in a tractable model whose predictions differ from existing ones. Using the population of Belgian exporters, our model succeeds in explaining the hitherto unexplained variation. The implications call for a re-thinking of earlier results and measurement practices

Assessing Policy Options for the EU Cohesion Policy 2014-2020

In this paper we estimate the impact on GDP of Cohesion Policy 2014-2020 for 267 EU regions running a set of simulations with RHOMOLO, a spatial CGE model tailored for economic analysis at the subnational level. We do so by treating the different parts of Cohesion Policy as exogenous and independent shocks, which are first considered separately and then combined to estimate an overall effect. Our simulation suggests that European regions display significant heterogeneity in their deviations from the baseline due to Cohesion Policy, both in absolute terms and relative to the amounts received.JRC.J.2-Knowledge for Growt