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Exports and Capacity Constraints: A smooth transition regression model for six euro-area countries

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  • Belke, Ansgar
  • Oeking, Anne
  • Setzer, Ralph
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    Abstract

    The significant gains in export market shares made in a number of vulnerable euro-area crisis countries have not been accompanied by an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute for serving domestic demand. The strength of the link between domestic demand and exports is dependent on capacity constraints. Our econometric model for six euro-area countries suggests domestic demand pressure and capacity-constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the non-linear smooth transition regression model. We find that domestic demand developments are relevant for the short-run dynamics of exports in particular during more extreme stages of the business cycle. A strong substitutive relationship between domestic and foreign sales can most clearly be found for Spain, Portugal and Italy, providing evidence of the importance of sunk costs and hysteresis in international trade.

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    Bibliographic Info

    Paper provided by Centre for European Policy Studies in its series CEPS Papers with number 9228.

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    Length: 34 pages
    Date of creation: May 2014
    Date of revision:
    Handle: RePEc:eps:cepswp:9228

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    1. Pekka Ilmakunnas & Satu Nurmi, 2010. "Dynamics of Export Market Entry and Exit," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(1), pages 101-126, 03.
    2. Allan w. Gregory & Bruce E. Hansen, 1992. "residual-Based Tests for Cointegration in Models with Regime Shifts," Working Papers 862, Queen's University, Department of Economics.
    3. Ansgar Belke & Matthias Göcke & Martin Guenther, 2012. "Exchange Rate Bands of Inaction and Play-Hysteresis in German Exports – Sectoral Evidence for Some OECD Destinations," Ruhr Economic Papers 0327, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
    4. Campa, Jose Manuel, 2004. "Exchange rates and trade: How important is hysteresis in trade?," European Economic Review, Elsevier, vol. 48(3), pages 527-548, June.
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    7. Juan A. Máñez & Juan A. Sanchis Llopis & María E. Rochina, 2004. "Sunk Costs Hysteresis In Spanish Manufacturing Exports," Working Papers. Serie EC 2004-17, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
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    12. Soares Esteves, Paulo & Rua, António, 2013. "Is there a role for domestic demand pressure on export performance?," Working Paper Series 1594, European Central Bank.
    13. Richard Baldwin & Paul R. Krugman, 1986. "Persistent Trade Effects of Large Exchage Rate Shocks," NBER Working Papers 2017, National Bureau of Economic Research, Inc.
    14. JaeBin Ahn & Alexander McQuoid, 2013. "Capacity Constrained Exporters: Micro Evidence and Macro Implications," Working Papers 1301, Florida International University, Department of Economics.
    15. Andrew Bernard & Joachim Wagner, 2001. "Export entry and exit by German firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 137(1), pages 105-123, March.
    16. Paulo Soares Esteves & António Rua, 2013. "Is there a role for domestic demand pressure on export performance?," Working Papers w201303, Banco de Portugal, Economics and Research Department.
    17. Vannoorenberghe, G., 2012. "Firm-level volatility and exports," Journal of International Economics, Elsevier, vol. 86(1), pages 57-67.
    18. Sharma, Kishor, 2003. "Factors determining India's export performance," Journal of Asian Economics, Elsevier, vol. 14(3), pages 435-446, June.
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