Claudio Vicarelli

Eplaining the Performance of Italian Exports during the Crisis: (Medium) Quality Matters

Claudio Vicarelli et al. — Thu, 22 Dec 2011 08:36:46 PST

A recent study argues that the contraction in total trade that occurred during the crisis was mainly driven by the fall in high quality goods, which should have higher income elasticity owing to a non-linear Engel curve. Our aims are, on the one hand, to test the quality Engel curve assumption for EU15 imports from Italy and, on the other hand, to ascertain whether a break in income elasticities – either temporary or permanent – occurred during the global financial crisis as a result of the changing preference for quality of consumers in the old EU member states. We test these hypotheses by estimating income and price elasticities of EU imports of consumption goods from Italy for both volumes and market shares. The contribution of this paper is twofold. First, we introduce a medium quality category, allowing us to make a more detailed reading of the stylised facts about the performance of Italian trade during the crisis. Second, we perform three different versions of the mean group estimator. Our results are consistent with the assumption of a change in the preference for quality. This change may be due either to a shift in consumption from high to medium quality Italian products or to the higher quality, actual or perceived, of Italian medium quality goods compared with the varieties imported from the rest of the world.

The New Stability and Growth Pact: Primum non nocere

Claudio Vicarelli et al. — Thu, 31 Mar 2011 07:58:16 PDT

The recent economic and financial crises have shown the weakness of EU economic governance. A process of strengthening macroeconomic and fiscal surveillance started in the course of 2010; the European Commission, among other proposals, suggested a new binding criterion of debt reduction: debt-to-GDP ratio is to be considered sufficiently diminishing if its distance with respect to the 60% of GDP reference value has reduced over the previous three years at a rate of the order of one-twentieth per year. In this paper we try to evaluate, with the support of the Oxford Economic Global Model, the economic consequences of the simultaneous attempt of all euro area countries to fulfill this one-twentieth criterion in the 2011-2015 period. Simulation results show that the mechanical application of the debt rule proposed by the European Commission would be only marginally efficient in reducing the debt to GDP ratio at best, but with high costs represented by the loss of flexibility, and counterproductive at worst.

The Euro adoption’s impact on extensive and intensive margins of trade: the Italian case.

Claudio Vicarelli et al. — Thu, 03 Jul 2008 05:38:56 PDT

The recent theoretical literature has focused on the importance of extensive and intensive margins of trade in the case of the Euro adoption. But few works have investigated the effects of the euro introduction on the extensive and intensive margins of trade. All these studies have used disaggregated bilateral flows data (6 digit). However, not even the finest level of disaggregation in the publicly available trade data is enough to single out individual products. We try to fill this gap by using a unique dataset taken from ISAE surveys on Italian manufacturing firms. From this quarterly survey it is possible to obtain information about both the structural characteristics (geographical location, industrial sector of activity, number of employees) and exporting behaviour of firms. We concentrate our analysis on the period 1997-2001, covering the two years before and the three years after the euro introduction., In line with large part of the empirical literature on bilateral trade, we estimate a gravity equation using a Hausman and Taylor estimator (HT). Our results show that the introduction of the euro has not had any effect on export turnover. This evidence seems to match other empirical findings on Italy, both at aggregate and sectoral level. However, interaction terms between the euro dummy and the group of “entering firms” (firms that started to export after the euro introduction) and that of “persistent firms” (firms that exported in the euro area before and after 1999) are positive and statistically significant, showing a positive effect of the common currency on extensive and intensive margins of trade. Indeed, the magnitude of the coefficient of the former is higher than the latter: in the Italian case, empirical findings for the Euro area as a whole seem to be confirmed. In our view, the euro introduction has had a positive effect on the extensive margin: a small group of firms benefited from it by starting to export in the Eurozone market. However, the total size of this group is very small; this finding may be due to the average small size of Italian manufacturing firms and to their scarce presence in the ICIR sectors (Imperfect Competition and Increasing Return sectors). Following theoretical indications, these latter are sectors that may have benefited more from the euro introduction: firms usually have lower marginal costs and they can easily cover the fixed costs of export activity if these costs are reduced, as they are when a common currency is introduced.

Currency Union and Trade: the Special Case of EMU

Claudio Vicarelli et al. — Wed, 09 Jan 2008 04:59:39 PST

In this paper, the impact of the euro on the commercial transactions of EMU countries is investigated. It seeks to disentangle the effects of eliminating exchange rate volatility - and those of other policy factors that promote integration - from the influence of the emergence of the European currency union. Since EMU is a relatively new phenomenon, a panel estimation of the gravity equation in a dynamic framework is used in order to capture effects like trade persistance. The main finding is that the adoption of the euro has had a positive but not an exorbitant impact on bilateral trade between European countries (ranging between 9 and 10 per cent). The impact is much lower than that shown in the recent literature on a larger and heterogeneous set of countries. One reason for this divergence seems to be that the euro was adopted after decades of integration policies had already worked through in Europe.

The Single Currency's Effects On Eurozone Sectoral Trade: Winners and Losers?

Claudio Vicarelli et al. — Wed, 12 Dec 2007 09:34:28 PST

In this paper we study the effect of the single currency across industries for euro area members. This analysis may help to shed light on the main factors influencing the euro effect on trade flows. We intend to verify whether these factors are specific to individual sectors and/or countries or common to the entire euro area. We use a dynamic specification of an augmented gravity equation. Following the most recent econometric literature, we apply the “System GMM” dynamic panel data estimator of Blundell and Bond to avoid inconsistency and biases in the estimates, and introduce controls for heterogeneity. Aggregate sector results average out country-level behaviours that, on their turn, are affected by different (unobserved) responses of firms, endowed with diverse production costs, to the enhancing and dampening impacts due to the euro. Due to this reason, the cancelling out at aggregate level of heterogenous behaviours induces an aggregation bias. So it is not surprising that when moving from sector to sector/country analysis the picture becomes much more variegated, with the emergence of a whole range of winners and lossers among industries in the different nation. Our empirical results are in line with theoretical framework we assumed as reference that considers the possibility of both stimulative and dampening effects coming from trade integration and points out the fact that sector exports impacts are the aggregation results of firm-level heterogenous behaviours.

The Impact Of The Euro On Trade: The (Early) Effect Is Not So Large

Claudio Vicarelli et al. — Wed, 12 Dec 2007 07:34:41 PST

We investigate the impact of adoption of the euro on the commercial transactions of EMU countries. Since the EMU is a relatively new phenomenon, we use a panel estimation of the gravity equation in a dynamic framework allowing for short run effects like trade persistence. Our main finding is that adoption of the euro has had a positive but not exorbitant impact on bilateral trade among European countries (ranging between 9 and 10%), which is much lower than that derivable from recent literature relative to a larger and heterogeneous set of countries.

Taxes and Location of Foreign Direct Investments: an Empirical Analysys for the European Union Countries

Roberta De Santis et al. — Wed, 12 Dec 2007 05:15:44 PST

This paper aims at verifying the impact of fiscal variables in the multinational firms' localisation choices within the European Union Member States. In particular, the sensitivity of bilateral foreign direct investments towards EU member countries to the receiving country's fiscal characteristics is tested. Among fiscal variables, the empirical analysis shows that FDI inflows in the European Union countries are influenced by the total fiscal wedge on labour more than the corporate tax rate. This suggests that Multinationals, while making their localisation choices, focus their attention on the overall tax and contribution burden more than on single corporate tax rates, which indeed provide only a partial (even though immediate) information. The estimated elasticities of FDI inflows to fiscal variables suggest that a high-taxation country might draw considerable benefits in terms of FDI through a relatively modest tax rate reduction. This means that not necessarily each Member State must switch to very low tax rates (for example those of Ireland) to obtain an optimal combination between costs (associated to the tax rate reduction) and benefits (linked to the tax base enlargement, i.e. larger FDI flows).

The determinants of FDI inflows in Europe: the role of the institutional context and Italy's relative position

Roberta De Santis et al. — Wed, 12 Dec 2007 05:15:43 PST

Worldwide Foreign Direct Investment (FDI) flows have showed an impressive upward trend over the past two decades, which prompted the expansion of international production and the economies' globalisation process. Developed countries were both the main sources and destinations of those flows: in 1999 they accounted for 92 % of global outflows and 74 % of global inflows.

In 1999, the EU area was the world's main outward investor and inward host area for FDI. Among European countries, Italy has lagged behind in the internationalisation process. Insofar as FDI inflows contribute to the country’s accumulation process, the situation is worrying.

The present paper tries to analyse Italy’s relative disadvantage, by focusing on FDI location determinants. An empirical analysis is performed to define FDI inflows determinants common to a narrow group of (most representative) industrialised countries. Then, on the basis of the empirical results, Italy's endowment of factors affecting FDI is compared to the one of other major European countries included in the sample.

The results of empirical estimates reinforce the evidence stemming from the descriptive analysis: Italy’s appeal as FDI host country is poor compared to other major European countries. In fact comparing the FDI determinants' endowments of the European countries, Italy ranks low for competitiveness in terms of employers' social security contributions, Government interference with the market and R&D expenditure.

In order to reduce this gap, Italy should improve its location-specific advantages. These determinants are in fact the only factors the host Governments can directly influence. Thus, a suitable policy might improve a country's FDI attractiveness by creating a more FDI-friendly institutional context.

The Euro's Effect on Trade in a Dynamic Setting

Claudio Vicarelli et al. — Wed, 12 Dec 2007 05:15:42 PST

This paper provides an update on estimates of the euro effect on trade integration among EMU economies, taking into account the aggregate bilateral exports of 23 OECD countries for the sample period 1988-2004. We consider 13 exporting European countries and 23 importing industrialized countries We utilize the dynamic panel data estimator proposed by Blundell and Bond (1998) and introduce controls for heterogeneity. The results of our dynamic specification of the gravity equation yield an estimate of the short run intra-Eurozone pro-trade effect, following the adoption of the single currency, which is as high as around 4% (17% in the long run). This finding, slightly lower than the results set out in our previous studies, is in line with those of very recent empirical analyses using dynamic specification of the gravity equation. It is also consistent with the already tight trade links characterizing the economies that have adopted the euro.

The "Deeper" and the "Wider" EU Strategies of Trade Integration: An Empirical Evaluation of EU Common Commercial Policy Effects

Roberta De Santis et al. — Wed, 12 Dec 2007 05:15:40 PST

Since the post war period, the EU Common Commercial Policy (CCP) has moved in two directions mainly through Preferential Trade agreements (PTAs): a ``deeper" (internal) trade integration process intended to reinforce trade relations among European countries (i.e. Custom Union, Single Market, European Monetary Union, Enlargement Process), and a ``wider" (external) integration process intended to reinforce trade relations with third countries.

Surprisingly, there are very few empirical studies in the literature which specifically quantify the effects of the overall EU PTAs on the European countries’ trade flows. This paper seeks to fill this gap by conducting an empirical investigation on whether and how the CCP had a significant impact on European countries' imports. It adopts an extended version of the gravity model. In line with recent studies, it uses a Hausman Taylor estimator, controls for heterogeneity and includes a set of variables to proxy for the ``multilateral trade resistance index"

According to our results, the EU ``free trade area" has been a successful experiment in trade liberalisation. However, the positive and significant coefficient of PTAs signed by the EU with third countries may somehow have limited the occurrence of trade diversion effects. Indeed, the coefficient of the trade diversion dummy is significant but relatively small.

Hub-and-Spoke or else? Free trade agreements in the 'enlarged' European Union

Luca De Benedictis et al. — Wed, 12 Dec 2007 05:15:39 PST

The object of this paper is to estimate if and how the Central European Free Trade Agreement (CEFTA) and the Baltic Free Trade Agreement (BFTA) exerted a significant impact on intra-European trade, effectively reducing the influence of the European Association Agreements (EAs) in shaping the European trade structure has a hub-and-spoke system – with the EU15 being the hub and the CEECs the spoke. This paper analyses bilateral trade flows between eight CEECs and EU-23. We estimate a gravity equation using a system GMM dynamic panel data approach. Results support the assumptions that gravity forces and “persistence effects” matter. With respect to the effect of free trade agreements, evidence is found that Free trade agreements between CEECs matter: There is evidence that the presence of intra-periphery agreements helped expand intra-periphery trade and limited the emergence of a “hub-and-spoke” relationship between CEECs and EU. This results have important policy implications for the trade strategy of “future” EU members of the Southeastern European Countries as well as of the Southern Mediterranean Countries. According to the empirical results, these countries should move towards a regional free-trade area as exemplified by the CEFTA and the BFTA to avoid “hub-and-spoke” effects.

Trade Potentials in Gravity Panel Data Models

Luca De Benedictis et al. — Wed, 12 Dec 2007 05:15:36 PST

The paper shows how - using as an example the trade flows between eleven European countries and 31 OECD `reporting' countries - the result of a gravity model, in terms of potential trade, changes substantially when country heterogeneity and dynamics are taken into account.

Comparing the in-sample trade potential index derived from various estimators yields three different results: (a) the average trade potential index poorly represents the distribution of yearly trade potentials; (b) the index converges towards the demarcation value corresponding to the equality between observed and predicted trade flows when country heterogeneity and dynamics are taken into account; (c) the sign of its yearly average is not the right statistic with which to determine the (in)existence of unrealized trade potentials.

Finally, the index derived from a dynamic specification with multilateral fixed-effects is better able to reflect the role played by the time-variant country-specific unobservable element associated with the possible presence of positive or negative trade potentials.