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

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 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

Key elements of global inflation

Against the background of large fluctuations in world commodity prices and global growth, combined with ongoing structural changes relating to globalization, this paper examines some of the key factors affecting global inflation. The paper empirically investigates various relative price and structural impacts on global inflation by: estimating a GVAR to examine how oil price shocks feed through to core and headline inflation; calculating the impact of increased imports from low-cost countries on manufacturing import prices; estimating Phillips curves in order to shed light on whether the inflationary process in the OECD countries has changed over time, particularly with respect to the roles of import prices, unit labour costs and the output gap. Overall, the paper finds that there seem to be various significant pressures on global trade prices and labour markets associated with structural factors possibly partly due to globalisation which, in addition to monetary policy, seem to be behind some of the changes in the inflation process over the period examined in this paper.Phillips Curve, inflation, output gap, import prices, unit labour costs, globalisation, monetary policy.

Intra- and extra-euro area import demand for manufactures

The aim of this paper is to improve our understanding of the key determinants of intra- and extra-euro area imports. Using a simultaneous equation estimation framework, and pooling the data across nine euro area countries as an approximation of the euro area, we estimate intra- and extra-euro area import demand functions and impose various restrictions within and across equations. We find that there are significant substitution effects between intra- and extra-euro area imports due to changes in their relative prices, while exchange rate volatility decreases trade vis-à-vis regions characterised by volatility and leads to substitution of trade away from higher-volatility regions towards lower-volatility regions. JEL Classification: C32, C33, E00, E32, O3intra- and extra-euro area imports, substitution, three stage least squares, trade integration

Contributors to the May Issue/Notes

Notes by John M. Anderton, Robert F. Burns, B. M. Apker, Thomas F. Broden, James A. Cassidy, John E. Cosgrove, and Robert S. Olivier

Contributors to the May Issue/Notes

Notes by John M. Anderton, Robert F. Burns, B. M. Apker, Thomas F. Broden, James A. Cassidy, John E. Cosgrove, and Robert S. Olivier