FIW Working Papers

FIW Working Paper N° 129

Lena Tonzer - December 2013

Abstract: Recent events emphasize the role of cross-border linkages between banking systems in transmitting local developments across national borders. This paper analyzes whether international linkages in interbank markets affect the stability of interconnected banking systems and channel financial distress within a network consisting of banking systems of main advanced countries for the period 1993-2009. Methodologically, I use a spatial modelling approach to test for spillovers in cross-border interbank markets. The results suggest that foreign exposures in banking play a significant role in channelling banking risk: I find that countries which are linked through foreign borrowing or lending positions to more stable banking systems abroad are significantly affected by positive spillover effects. From a policy point of view, this implies that especially in stable times linkages in the banking system can be beneficial, while they have to be taken with caution in times of financial turmoil covering the whole system.

FIW Working Paper N° 128

Mina Dragouni, George Filis, Nikolaos Antonakakis - August 2013

Abstract: In this study, we employ the novel measure of a VAR-based spillover index, developed by Diebold and Yilmaz (2012) to investigate the time-varying relationship between tourism and economic growth in selected European countries. Overall, the findings suggest that (i) the tourism-economy relationship is not stable over time in terms of both its magnitude and direction, (ii) the relationship exhibits patterns in its magnitude and/or direction during major economic events, such as the Great Recession of 2007 and the Eurozone debt crisis of 2010, and (iii) the impact of these economic events on the relationship between the tourism sector and the economy is more apparent to Cyprus, Greece, Portugal and Spain, which are the European countries that have experienced the most severe economic downturn since 2009. These results are important to tourism actors and policy makers, suggesting that they should pay particular attention to this time-varying relationship and the factors that influence it when designing their tourism strategies. In addition, the findings of this study carry significant implications for researchers, as they underline a strand of the literature which deserves further attention.

FIW Working Paper N° 127

Antonio Navas Ruiz - August 2013

Abstract: Innovation, mark-ups and the degree of trade openness vary substantially across sectors. This paper builds a multi-sector endogenous growth model to study the influence of asymmetric trade liberalisation and sectoral differences in the degree of product market competition on the effect that trade has on R&D investments at a …firm level. I find that differences in the degree of competition generate large differences in …firm innovative responses to trade liberalisation. A movement from autarky to free trade promotes innovation and productivity growth in those sectors which are initially less competitive. However, when the initial tariff level is common across sectors, a homogeneous tariff reduction promotes innovation in those sectors which are initially more competitive. The paper suggests that trade liberalisation could be a source of industry productivity divergence: firms that are located in industries with greater exposure to foreign trade, invest a greater amount in R&D contributing to industry productivity growth. Finally the paper outlines the importance of reallocation effects within industry and across industries that are the result of these asymmetries. An asymmetric trade liberalisation has a small but negative impact on aggregate productivity growth.

FIW Working Paper N° 126

Rudy Colacicco - August 2013

Abstract: In a two-country general oligopolistic equilibrium model, I study how cross-sector strategic trade policy affects wages, countrywide profits, and welfare. Firms face resource constraints and wages are simultaneously determined. Relative to free trade, cross-sector protectionism generates a reduction in the foreign wage without affecting the domestic wage. Domestic countrywide profits benefit from small import tariffs, whereas the foreign counterpart is hit, but when sectors share the same technology. Domestic welfare is unambiguously penalized. Hence, the general-equilibrium cross-sector perspective goes against the textbook version theory of the optimal tariff in partial equilibrium. Rationalization of these effects suggests a political-economy view on tariff formation in general equilibrium.

FIW Working Paper N° 125

Benjamin Furlan, Martin Gächter, Bob Krebs and Harald Oberhofer - June 2013

Abstract: This paper empirically assesses how democratization affects real exchange rates. By doing this, we combine so far separated strands of the economic literature and argue that democratization reduces currency undervaluation leading to a real exchange rate appreciation. We test this hypothesis empirically for a sample of countries observed from 1980 to 2007 by combining a difference-in-difference (DID) approach with propensity score matching (PSM) estimators. Our results reveal a strong and significant finding: democratization causes real exchange rates to appreciate. Consequently, the ongoing process of democratization observed in a few Arabic and Moslem countries is likely to reduce exchange rate distortions.

FIW Working Paper N° 124

Sergey Kichko, Sergey Kokovin and Evgeny Zhelobodko - June 2013

Abstract: We develop a two-factor, two-sector trade model of monopolistic competition with variable elasticity of substitution. Firm profit and firm size may increase or decrease with market integration depending on the degree of asymmetry between countries. The country in which capital is relatively abundant is a net exporter of the manufactured good, while both firms' size and profits are lower in this country than in the country where capital is relatively scarce. By contrast, the pricing policy adopted by firms does not depend on capital endowment and country asymmetry. It is determined by the nature of preferences: when demand elasticity increases (decreases) with consumption, firms practice dumping (reverse-dumping).

FIW Working Paper N° 123

Nidhaleddine Ben Cheikh - June 2013

Abstract: This paper investigates whether the exchange rate pass-through (ERPT) to CPI inflation is a nonlinear phenomenon for five heavily indebted euro area (EA) countries, namely the so-called GIIPS group (Greece, Ireland, Italy, Portugal, and Spain). Using logistic smooth transition models, we explore the existence of nonlinearity with respect to sovereign bond yield spreads (versus German) as an indicator of confidence crisis/macroeconomic instability. Our results provide strong evidence that the extent of ERPT is higher in periods of macroeconomic distress, i.e. when sovereign bond yield spreads exceed some threshold. For all the GIIPS countries, we reveal that the increasing of macroeconomic instability and the loss of confidence during the recent sovereign debt crisis has entailed a higher sensibility of CPI inflation to exchange rate movements.

FIW Working Paper N° 122

Thomas Sampson - April 2013

Abstract: This paper develops an open economy growth model in which firm heterogeneity increases the gains from trade. Technology spillovers from incumbent firms to entrants cause the productivity threshold for firm survival to grow over time as competition becomes tougher. By raising the profits of exporters, trade increases the entry rate and generates a dynamic selection effect that leads to higher growth. The paper shows that the gains from trade can be decomposed into: static gains that equal the total gains from trade in an economy without technology spillovers, and; dynamic gains that are strictly positive. Since trade raises growth through selection, not scale effects, the positive growth effect of trade vanishes when firms are homogeneous. Thus, firm heterogeneity creates a new source of dynamic gains from trade. Calibrating the model to the U.S. economy implies that dynamic selection approximately triples the gains from trade.

FIW Working Paper N° 121

Fabrice Defever and Alejandro Riaño - April 2013

Abstract: One third of Chinese exporters sell more than ninety percent of their production abroad. We argue that this distinctive pattern is attributable to the widespread use of subsidies that require firms to export the vast majority of their output. We study this type of subsidy in the context of a heterogeneous-

firm model, and show that it is worse from a welfare standpoint than a regular export subsidy, partly because it increases protection of the domestic market. A counterfactual analysis suggests that eliminating these subsidies would result in a welfare gain for China comparable to that of halving its trade costs.

FIW Working Paper N° 120

Julian Donaubauer, Dierk Herzer and Peter Nunnenkamp - April 2013

Abstract: We address the question of whether foreign aid helps attract foreign direct investment (FDI). This could be achieved if well targeted aid removed critical impediments to higher FDI inflows. In particular, we test the hypothesis that aid for education is an effective means to increase FDI flows to host countries in Latin America where schooling and education appears to be inadequate from the viewpoint of foreign investors. We employ panel data techniques covering 21 Latin American countries over the period from 1984 to 2008. We find that aid for education has a statistically significant positive effect on FDI. This effect is robust to potential outliers, sample selection, alternative specifications and different estimation methods.

FIW Working Paper N° 119

Christian Dreger and Jürgen Wolters - April 2013

Abstract: This paper examines the stability of money demand and the forecasting performance of a broad monetary aggregate (M3) in predicting euro area inflation. Excess liquidity is measured as the difference between the actual money stock and its fundamental value, the latter determined by a money demand function. The out-of sample forecasting performance is compared to widely used alternatives, such as the term structure of interest rates. The results indicate that the evolution of M3 is still in line with money demand even in the period of the financial and economic crisis. Monetary indi-cators are useful to predict inflation, if the forecasting equations are based on measures of excess liquidity.

FIW Working Paper N° 118

David Guerreiro - April 2013

Abstract: This paper is interested in linking formally external disequilibriums to the sovereign debt crisis the EMU is experiencing since 2009. Relying on the CHEER approach that connects the goods market to the capital market, we show that when a country belonging to a monetary union faces external disequilibrium relative to its main partner, the corresponding interest rate differential increases. Moreover, when these imbalances are persistent, it may trigger a balance of payments crisis. Our findings indicate that this phenomenon seems to be at play for the European countries under international assistance.

FIW Working Paper N° 117

Johannes Pöschl and Neil Foster - April 2013

Abstract: The paper addresses the link between productivity and labour mobility. The hypothesis tested is that technology is transmitted across industries through the movement of skilled workers embodying human capital. The embodied knowledge is then diffused within the new environment creating spillovers and leading to productivity improvements. The empirical analysis is based on household survey and industry-level data for a sample of 12 EU countries covering the years 1995-2005. The estimates document the importance of positive cross-sectoral knowledge spillovers and indicate that labour mobility has considerable beneficial effects on industry productivity. Possible endogeneity problems related to labour mobility are tackled by employing a two stage instrumental variables approach. Moreover we show that the spillover effects vary considerably by technology level of the giving industry. While workers moving away from high and medium-tech industries are found to produce positive productivity effects for the receiving industry, no effect is found for those coming from low-tech industries.

FIW Working Paper N° 116

Christian Dreger und Yanqun Zhang - April 2013

Abstract: The Chinese economic development affects GDP growth and inflation in the advanced countries. A GVAR approach is used to model the interdependencies between the business cycles in China and industrial countries, including the US, the euro area and Japan. For robustness, the results are compared to those obtained by leading structural econometric models, such as NiGEM and OEF. Evidence is based on the responses to a Chinese shock stemming from the recent fiscal stimulus package. The results indicate that the impact on GDP growth in the advanced economies is substantial for the Asian region. The expansionary effects to the US and the euro area responses are much lower and decrease due to rising inflation pressure. The analysis also reveals that China is still highly vulnerable to shocks in industrial countries, including the government debt crisis in the euro area.

FIW Working Paper N° 115

Barbara Dluhosch, Daniel Horgos and Klaus W. Zimmermann - April 2013

Abstract: Studies on EU enlargement mostly focus on its welfare-economic and much less so on its public-choice dimension. Yet, the latter may be as important as the former when it comes to sustain integration. This paper aims at filling the gap by exploring theoretically and empirically how enlargement of multi-level systems like the EU affects satisfaction with democracy (SWD) and voter turnout (PART). In order to assess the effects of a widening in membership, we present a novel approach that draws on the probability of being outvoted. We find that, given the institutional arrangement, enlargement tends to depress SWD. Our theoretical results are backed by empirical evidence in German Eurobarometer data displaying a tendency towards a decline in SWD that shows up in a significant fall in PART with growth in EU-membership.

FIW Working Paper N° 114

Roman Stöllinger - March 2013

Abstract: Technology is a key element for long-term growth and economic development. Given the stark concentration of innovation activities in a few countries most countries have to rely on the international diffusion of newly developed technologies. Some countries may fail to successfully perform the task of technology adaption leading to a tripartite segmentation of countries into an innovation club, an imitation club whose members are capable of absorbing technologies developed by the former and a stagnation group that lack the capability to absorb foreign technologies. We test the role of the technology gap for growth as suggested by the technology club hypothesis in a threshold regression framework using human capital as the threshold variable. Using this approach, which is related to Benhabib-Spiegel type growth regressions, we are able to identify two distinct thresholds giving rise to three country groupings. As suggested by the theory of technology clubs we find the strongest effects from the catch-up term on economic growth for the intermediate group (imitation club).

FIW Working Paper N° 113

Roman Horváth and Dan Vaško - March 2013

Abstract: We develop a comprehensive index of the transparency of central banks regarding their policy framework to promote financial stability for 110 countries from 2000 to 2011 and examine the determinants and effects of this transparency. We find that the degree of transparency increased in the 2000s, though it still varied greatly across the countries in our study. Our regression results suggest that more developed countries exhibit greater transparency, that episodes of high financial stress have a negative effect on transparency and that the legal origin matters, too. Importantly, we find that transparency regarding the level of financial stability is strongly affected by monetary policy transparency. The central banks that have a transparent monetary policy are more likely to show increased transparency in their framework for financial stability. Our results also suggest a non-linear effect of central bank financial stability transparency on financial stress. Unless the financial sector experiences severe distress, greater transparency is beneficial for financial stability.

FIW Working Paper N° 112

Jérôme Héricourt and Sandra Poncet - March 2013

Abstract: This paper studies how firm-level export performance is affected by Real Exchange Rate (RER) volatility and investigates whether this effect depends on existing financial constraints. Our empirical analysis relies on export data for more than 100,000 Chinese exporters over the period 2000-2006. We confirm a trade-deterring effect of RER volatility. We find that the value exported by firms, as well as their probability of entering new export markets, decrease for destinations with higher exchange rate volatility and that this effect is magnified for financially vulnerable firms. As expected, financial development does seem to dampen this negative impact, especially on the intensive margin of export. These results provide microfounded evidence that financial constraints may play a key role in determining the macro impact of RER volatility on real outcomes.

FIW Working Paper N° 111

Gianluca Orefice - March 2013

Abstract: This paper investigates empirically the role of Preferential Trade Agreements (PTAs) as determinants of migration inflows for 29 OECD countries in the period 1998-2008. By increasing information about signatory countries, PTAs are expected to drive migration flows towards member countries. Building on the empirical literature on the determinants of migration, I estimate a modified gravity model on migration flows providing evidence of a strong positive effect of PTAs on bilateral migration flows. I also consider the content of PTAs as a further determinant of migration, finding that visa-and-asylum and labour market related provisions, when included in PTAs, stimulate bilateral migration flows. Finally, by comparing the average effects of PTAs on migration flows and on trade, I show that PTAs stimulate bilateral migration flows more than trade in final goods. PTAs might be used by government to increase inflows of immigrant workers in the case of labour shortages or population ageing.

FIW Working Paper N° 110

Tsvetomira Tsenova - March 2013

Abstract: This paper compares the effectiveness, efficiency and robustness of standard and non-standard monetary policy tools, such as the banks’ refinancing interest rate, penalty interest rate on deposit facility holdings and minimum reserve requirements on attracted deposits. The assessment is performed on the basis of a numerically evaluated open economy general equilibrium model for macro-prudential analysis where optimal decisions by internationally linked banks are key determinants of international financial flows and wider economic outcomes. Banks differ in terms of balance sheet endowments and risk preferences, and take decisions rationally and competitively. Default risk, borrowing and lending are endogenous results of individual decisions of private agents (banks and households), as well as systemic outcomes of market interaction.

FIW Working Paper N° 109

Nadine Behncke - March 2013

Abstract: The present paper contributes to the existing literature analyzing the relationship between intra EU trade in services and European Integration by taking into consideration a potential endogeneity bias of the EU dummy and a correct specification of multilateral resistance terms in a panel data set covering the years 2000-2010. Our results offer evidence for a high positive impact of European integration on aggregate services trade between member states while we find a negative effect of monetary integration. However, there exist notable differences at the sector level. According to our results, European integration has positive effects especially for business services, travel and EDV services. Analyzing the evolvement of the sectoral EU-effects over time shows that exports of EDV and OBS have steadily increased due to European integration.

FIW Working Paper N° 108

Demian Calin-Vlad - March 2013

Abstract: In this paper I quantify the welfare gains of the 2004 EU enlargement as a result of the abolition of border controls, both for incumbents and for new members. I build a multi-sector Ricardian model, allowing for linkages across sectors, similar to the one in Caliendro and Parro (2011). As with a large number of quantitative trade models, the gains crucially depend on one key parameter, the dispersion of productivity. I extend the estimation methodology of Costinot et al. (2012) to a richer modeling setting and compute the dispersion in a way consistent with the underlying theoretical model. Within the model, I compare the welfare changes for 23 countries between 2003 and 2006. I find that new entrants gained significantly more than old members from enlargement. However, the overall changes in real income are rather small, measured in single digits for new entrants and fractions of a percent for old members. I also break down total gains by source and find that allowing for interconnectedness across sectors amplifies the changes in welfare.

FIW Working Paper N° 107

Julia Püschel - March 2013

Abstract: In this paper, I estimate the impact of service offshoring on the real wages of U.S. workers by controlling for workers’ skill levels and the offshoring susceptibility of different tasks. Matching individual-level wage data with input-output tables over the period from 2006 to 2009, I am further able to account for unobservable individual-level heterogeneity. The results from a Mincerian wage regression indicate that within skill groups, the impact of service offshoring on real wages depends on the task content of the respective occupation. The real wages of medium- and high-skilled workers employed in the least offshorable occupations were positively affected by service offshoring. However, within the groups of medium- and high-skilled workers, service offshoring negatively affected the real wage of the most tradable occupations.

FIW Working Paper N° 106

Branimir Jovanovic - March 2013

Abstract: This paper evaluates the bias which may occur when trade elasticities are estimated using data on aggregate trade, instead of using data on bilateral trade. The exercise is done on the case of Macedonia. Elasticities obtained from aggregate-trade data, using the Autoregressive Distributed Lag approach, are compared with the elasticities obtained from bilateral-trade data, using dynamic heterogenous panels techniques. Results point out that the aggregation bias is sizeable and that relying on aggregate data can lead to wrong conclusions about the trade elasticities.

FIW Working Paper N° 105

Agnieszka Gehringer - March 2013

Abstract: In a dynamic panel framework, I investigate the qualitative aspects of factors determining current account imbalances in (country groupings within) the European Union. I consider the standard determinants of current account positions discussed in the past literature, but additionally, I include a series of explanatory variables that refer to the sectoral composition of the European economies and that could have significantly contributed to the current account developments in the past decades. Independently of the econometric method used, the main finding suggests that the economic predominance of the construction sector might have played an important role in aggravating current account positions in the European economies. In parallel, some negative influence could be found for some other service sectors, but this shouldn’t be of much concern due to their role played in the growth process.

FIW Working Paper N° 104

Attila JAMBOR - March 2013

Abstract: The article analyses patterns and country-specific determinants of Visegrad Countries’ (VC) agri-food trade with the European Union. Literature focusing on the country-specific determinants of vertical and horizontal intra-industry trade is rather limited and those analysing agricultural (or agri-food) trade are extremely rare. Therefore, the paper seeks to contribute to the literature by covering latest theory and data available on the topic to provide up to date results and suggestions. Moreover, it seeks to identify the determinants of horizontal and vertical intra-industry trade of the Visegrad Countries after EU accession. Results suggest that agri-food trade of the Visegrad Countries is mainly inter-industry in nature but intra-industry trade is dominated by vertical elements. Results verify that determinants of horizontal and vertical IIT differ and suggest that economic size is positively, while distance is negatively related to both sides of IIT. However, the relationship between vertical IIT and differences in factor endowments as well as FDI is ambiguous.

FIW Working Paper N° 103

Miriam Frey and Zoryana Olekseyuk - February 2013

Abstract: The establishment of the currently negotiated Free Trade Agreement (FTA) between EU and Ukraine is the next significant step towards Ukraine’s deeper integration into the world economy, widely expected to result in additional welfare gains. As developing countries face some costs associated with trade liberalization, this paper contributes to the literature by analyzing the effects of the EU-Ukraine FTA taking into account the loss of tariff revenues as well as the changed economic conditions after Ukraine’s accession to the WTO in 2008. In particular, we calculate the effects of a unilateral tariff elimination in a Computable General Equilibrium (CGE) model for Ukraine simulating three scenarios reflecting different means to compensate for the loss in tariff revenues. It turns out to be important to take these costs into consideration while modeling trade liberalization, as the results vary significantly across the scenarios. In general, we find that tariff elimination has only a small impact on the country’s welfare because of the already strongly reduced tariff rates after Ukraine’s WTO accession. The effects can even be negative if the country tries to refinance the trade liberalization costs by means of tax policy. According to our simulations the most welfare enhancing option would be the provision of financial support by the EU, which is in fact suggested in the latest European Parliament resolution.