Hedge your costs: exchange rate risk and endogenous currency invoicing

The choice of invoicing currency for trade is crucial for the international transmission of macroeconomic policy. This paper develops a three-country model that endogenizes the choice of invoicing currency and that allows for a share of firms' costs to be denominated in foreign currency, consistent with the empirical evidence on the high degree of pass-through to import prices. Invoicing decisions are driven by firms' desire to hedge costs but also by exchange rate volatility and currency comovements. The model is tested empirically with a data set that spans ten currencies and 24 reporting countries, confirming the importance of currency comovements for the decision to invoice in vehicle currency. The findings also imply that if the U.S. share of world output continues to fall, other currencies will increasingly replace the U.S. dollar as an international vehicle currency

International trade without CES : estimating translog gravity

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country’s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor

International Trade without CES: Estimating Translog Gravity

This paper derives a micro-founded gravity equation in general equilibrium based on a translog demand system that allows for endogenous markups and substitution patterns across goods. In contrast to standard CES-based gravity equations, trade is more sensitive to trade costs if the exporting country only provides a small share of the destination country’s imports. As a result, trade costs have a heterogeneous impact across country pairs, with some trade flows predicted to be zero. I test the translog gravity equation and find strong empirical support in its favor.translog, gravity, trade costs, distance, trade cost elasticity

Hedge Your Costs: Exchange Rate Risk and Endogenous Currency Invoicing

The choice of invoicing currency for trade is crucial for the international transmission of macroeconomic policy. This paper develops a three-country model that endogenizes the choice of invoicing currency and that allows for a share of firms' costs to be denominated in foreign currency, consistent with the empirical evidence on the high degree of pass-through to import prices. Invoicing decisions are driven by firms' desire to hedge costs but also by exchange rate volatility and currency comovements. The model is tested empirically with a data set that spans ten currencies and 24 reporting countries, confirming the importance of currency comovements for the decision to invoice in vehicle currency. The findings also imply that if the U.S. share of world output continues to fall, other currencies will increasingly replace the U.S. dollar as an international vehicle currency.Invoicing Currency ; Exchange Rate Risk ; Hedging

Gravity Redux : Measuring International Trade Costs with Panel Data

Barriers to international trade are known to be large. But have they become smaller over time? Building on the gravity framework by Anderson and van Wincoop (2003), I derive an analytical solution for time-varying multilateral resistance variables that can be related to observable trade data. This solution makes it possible to infer time-varying bilateral trade costs directly from the model's gravity equation without imposing arbitrary trade cost functions. As an illustration, I show that U.S. trade costs with major trading partners declined on average by about 40 percent between 1970 and 2000, with Mexico and Canada experiencing the biggest reductions.Trade Costs ; Gravity ; Multilateral Resistance ; Panel Data

Trade Costs and the Open Macroeconomy

Trade costs are known to be a major obstacle to international economic integration. Following the approach of New Open Economy Macroeconomics, this paper explores the effects of international trade costs in a micro-founded general equilibrium model that also allows for pricing to market. Trade costs are shown to create an endogenous home bias in consumption and reduce cross-country consumption correlations. In addition, trade costs magnify exchange rate volatility in response to monetary shocks and typically turn a monetary expansion into a beggar-thy-neighbor policy. It is striking that trade costs generally lead to these results both under producer and local currency pricing.Trade Costs ; New Open Economy Macroeconomics ; Pricing to Market ; Exchange Rates ; Consumption Correlations

Analysing development to shape the future

This article links theory and politics in a systematic way by proposing Is-Shall-Do as a didactical model for analysing a concrete conjuncture, relating it to the desired future in the form of a concrete utopia. Aware of structural limits and potential space of manoeuvre for political agency adequate practical steps to implement the concrete utopia are elaborated. The paper is divided in a first section which exposes three interwoven aspects of development: the the idea of a good life, the complexity and multi-dimensionality of development and the relationship of knowledge and power. Section two exposes the model of Is-Shall-Do abstractly, while section 3 exemplifies it by exposing the challenges for the European left. The analysis of conjuncture as a concrete analysis of a concrete situation is centred in Europe today on the topic of inequality produced by finance-based accumulation. As the concrete utopia of a good life , the authors propose the values of the French revolution, freedom, equality and solidarity which are unfulfilled promises of European development. The paper ends with a plea for organising democratic and egalitarian alternatives. (...) (authors' abstract)Series: SRE - Discussion Paper

Trade costs and the open macroeconomy

Trade costs are known to be a major obstacle to international economic integration. Following the approach of New Open Economy Macroeconomics, this paper explores the effects of international trade costs in a micro-founded general equilibrium model that also allows for pricing to market. Trade costs are shown to create an endogenous home bias in consumption and reduce cross-country consumption correlations. In addition, trade costs magnify exchange rate volatility in response to monetary shocks and typically turn a monetary expansion into a beggar-thy-neighbor policy. It is striking that trade costs generally lead to these results both under producer and local currency pricing

International Trade Integration: A Disaggregated Approach

This paper investigates the sources and size of trade barriers at the industry level. We derive a micro-founded measure of industry-specific bilateral trade integration that has an in-built control for time-varying multilateral resistance. This trade integration measure is consistent with a broad range of recent trade models including the Anderson and van Wincoop (2003) framework, the Ricardian model by Eaton and Kortum (2002) and heterogeneous firms models. We use it to explore trade barriers for manufacturing industries in European Union countries between 1999 and 2003. We find a large degree of trade cost heterogeneity across industries. The most important trade barriers are transportation costs and policy factors such as Technical Barriers to Trade. Trade integration is generally lower for countries that opted out of the Euro or did not abolish border controls in accordance with the Schengen Agreement. Reductions in trade barriers explain about one-half of the growth in trade over the period 1999-2003 and are therefore a major driving force of the EU Single Market.Trade Integration, Gravity, Trade Costs, Multilateral Resistance, Industries, Disaggregation, European Union

‘Destination’ Berlin revisited. From (new) tourism towards a pentagon of mobility and place consumption

This article is concerned with the increasing role and relevance of tourism in processes of urban change as well as its overlap and interplay with other mobilities and place consumption practices. It responds to recent debates surrounding the extension and intensification of ‘touristification’ processes in urban areas and uses the case of Berlin to draw attention to a number of intricacies and complexities that complicate their interpretation. The main argument the article advances is that developments in Berlin which are currently discussed under the rubric of ‘touristification’ can by no means be exclusively attributed to tourism, however conceived, and instead illustrate the need to adopt new ways of approaching and understanding what is perceived as tourism-induced urban change. To this end, the article will present a preliminary heuristic portrayal of (tourism) mobility and place consumption as a pentagon with five interrelated but distinct dimensions and present several salient issues and questions that warrant further investigation. The paper will conclude with some brief reflections concerning the wider implications of the increased centrality of mobility flows and place consumption practices in today's cities. These, it will be argued, not only challenge the way we think about tourism. Rather, they also raise fundamental questions concerning our understanding of cities and neighbourhoods, the ‘legitimacy’ of particular claims over them, as well as several traditional precepts of modern urban planning and management