FIW Research Reports 2010/2011 N° 6 / Modelling the Effects of Trade Policy and the Transmission Mechanisms of the Economic Crisis on the Austrian Economy
Joseph Francois, Mario Holzner, Olga Pindyuk

Abstract: Like most of the global economy, Austria suffered from recession in 2008-2009. In this paper we deconstruct the pattern of recession, and the transmission of the global recession to Austria’s economy. We provide a new a new breakdown of the value added in Austrian exports, tracing both upstream and downstream linkages and their role in the recession. We also employ a multi-region computable general equilibrium (CGE) model, focused on Austria and its major trading partners. We estimate the combined impacts of the crisis, as implemented through stylized shocks to investment and household demand across major trading partners. These are based on the actual global demand shocks that occurred in 2008-2009. As we are focused on recession, we work with a short-run version of the model, where labor markers are modeled with unemployment and sticky wages, and where industry structure (number of varieties and allocation of capital stock across industries) is fixed. We introduce demand shocks (changes) to global investment demand calibrated from actual investment demand changes during the recession. We also calibrate output shocks based on actual changes in GDP in this period. The focus on backward and forward linkages provides new insight into the transmission channels for focused demand shocks at the border into more diffuse shocks within the broader Austrian economy. While the drop in global demand during the recent recession was focused on sectors producing heavy investment goods, the actual pressure this placed on the Austrian economy also hinged on the linkages of these sectors to other elements of the Austrian economy.

Keywords: economic crisis, transmission mechanisms, Austria, Europe, CGE
JEL-codes: F14, F44, F47, C68

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FIW Research Reports 2010/2011 N° 5 / Modelling the Effects of Trade Policy and the Transmission Mechanisms of the Economic Crisis on the Austrian Economy
Joseph Francois, Olga Pindyuk

Abstract: In this paper, we examine possible medium-term changes in EU trade policy, including the negotiation and implementation of Free Trade Agreements (FTAs) with regional entities like ASEAN and the NAFTA countries. We also examine the possible conclusion of the Doha Round of multilateral trade negotiations. Such changes in policy at the regional and global level imply changes in trade policy and industrial structure that affect Austria as part of the network of European industry. To accomplish this, we work with a computable general equilibrium model (CGE) of the Austrian economy and its major global trading partners. This model is benchmarked to 2020 macroeconomic projections. The modeling scenarios are based on a mix of tariff reductions for goods and non-tariff barriers (NTB) reductions for services. The services liberalization scenario is based on protection with an “actionability” assumption. The results include estimated changes in GDP, welfare, as well as in the value added contained in Austrian exports. The focus on value added provides important insight to the overall impact on the Austrian economy. In all policy cases examined, the striking messages is the importance of high technology services (ICT and other business services) to the total growth in Austrian exports, on a value added basis. This reflects both the high value added content of trade in this sector, and the apparent comparative advantage of Austria in this sector in the 2020 baseline.

Keywords: trade agreements, ASEAN, NAFTA, Doha Round, Austria, CGE
JEL-codes: F15, F17, C68

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FIW Research Reports 2010/2011 N° 4 / Macroeconomic Aspects of European Integration
Jesús Crespo-Cuaresma, Michael Pfaffermayr, Octavio Fernández Amador, Catherine Keppel

Abstract: We analyze the role of fiscal policy and intra-European trade in business cycle synchronization in the EU for the period 1995-2008. There is a broad consensus that the relationship between fiscal policy and business cycle comovements and between trade integration and cyclical synchronization are subject to endogeneity problems. We instrument fiscal budget surplus by means of (exogenous) political determinants of fiscal policy acknowledged by the literature, while trade integration is instrumented using covariates which summarize the integration status of countries in the sample, GDP per capita differences with respect to the EU and trade specialization within the EU framework. Our results show that both fiscal policy and trade integration are important determinants of cyclical synchronization. We can conclude that once a high degree of trade integration is reached by countries involved in the European integration process, the role of fiscal policy is particularly relevant and differences in fiscal shocks should be analyzed in detail as a source of coherence in cyclical comovements in Europe. Furthermore, fiscal deficits are shown to be an important potential source of idiosyncratic macroeconomic fluctuations, especially in the eurozone. Our results confirm the rationale of monitoring fiscal developments to assess the adequacy of potential future EMU countries and the need for a broad agreement concerning fiscal policy at the EU level.

JEL classification: E32, E62, F15

Keywords: Monetary union, business cycles, synchronization, trade integration, fiscal policy

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FIW Research Reports 2010/2011 N° 3 / New Energy Policy and Security of Gas Supply
Edward Hunter Christie, Pavel K. BAEV, Volodymyr GOLOVKO

Abstract: This report contains three separate papers, each addressing selected issues concerning natural gas policy and security of gas supply in Europe. The over-arching themes are vulnerability (to supply disruptions, to supplier pricing power) and fragmentation; and measures designed to overcome them, namely interconnection and consolidation of bargaining power. The first paper contains a review of some of the economic effects of, and subsequent policy reactions to, the January 2009 cut of Russian gas supplies through the Ukraine Corridor, with a particular focus on Bulgaria and on EU policy. The second paper provides an analysis of the current state of gas relations between Ukraine and the Russian Federation, with a focus on the Ukrainian perspective and on recent political developments in that country. The third paper provides an analysis of the case for consolidating buyer power in line with the concept of an EU Gas Purchasing Agency.

JEL classification: C78, L11, Q34, Q48

Keywords: Natural gas, security of supply, supply disruption, interconnector, Russia, Ukraine, Bulgaria, European Union, energy policy, fragmentation, bargaining power, countervailing power, gas purchasing agency

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