How reasonable are assumptions used in theoretical models? Computational evidence on the likelihood of trade pattern changes

Abstract .  In theoretical literature it is common to make the assumption that in a multi-country, multi-good world, the direction of trade (import and export by commodity) is predetermined and fixed for each good for each country. We consider a simple three-country, three-good, pure-exchange model with CES preferences. We compute free trade competitive equilibria, three-country non-cooperative Nash equilibria, and customs union equilibria for randomised parameterizations, and find that trade pattern changes between free trade and customs union equilibria in around 35% of cases.     

A new estimator for trade costs and its small sample properties

This paper discusses the estimation of parameters of a traditional transportation model, as it is typically present in so-called Takayama–Judge type spatial price equilibrium models. In contrast to previously used estimation methods, observations of regional prices as well as of trade costs are used in a direct estimation of the first order conditions. The proposed method uses bi-level programming techniques to minimize a weighted least squares criterion under the restriction that the estimated parameters satisfy the Kuhn–Tucker conditions for an optimal solution of the transport model. A penalty function and a smooth reformulation are used to iteratively approximate the complementary slackness conditions. Monte-Carlo simulations are used to trace out some properties of the estimator and compare it with a traditional calibration method. The analysis shows that the proposed technique estimates prices as well as trade costs more precisely than the traditional calibration method. It is suggested to apply the same method to a range of linear and quadratic models.     

Evaluating the Relative Efficacy of the Marketing Function in the Construction Complex of Ukraine

The break up of the USSR pushed 15 constituent states into a transition phase from a regulated economy to a free market style one. Partially, this involved the wholesale importation of a variety of theories, strategies, and operational plans. This paper seeks to examine the efficiency of the use of the marketing communications mix in medium and large firms in the Ukraine’s construction complex during the transition period to a market oriented economy. In order to do so, a survey of the most significant, privately owned firms in the industry was conducted. A variety of quantitative measures were employed, including econometric estimates and certain elasticity coefficients that allowed us to asses existing tendencies in the industry, identify problems, and to make tentative recommendations.     

The role of importers and exporters in the determination of the U.S. tariff preferences granted to Latin America

This paper investigates the role played by domestic importers and foreign exporters in improving preferential access to the domestic market. To this end, the framework used in this paper extends the protection for sale analysis to explicitly model the role of domestic importers and foreign exporters in the determination of preferential trade treatment. The predictions of the model are tested using data on preferential trade between the United States and Latin American countries. The results suggest that Latin American exporters and US importers' lobbying efforts have a significant and important role in determining the extent of preferential access granted by the United States. More interestingly, these findings also show that U.S. importers capture a very substantial share of the rents generated by tariff preferences. These results therefore shed a pessimistic view on preferential trade schemes as a reliable source of gains for developing countries.     

On the emergence of an MFN club: equal treatment in an unequal world

Abstract .  Motivated by GATT, we endogenize the formation of a club whose members have to abide by the MFN principle of non-discrimination. The underlying model is that of oligopolistic intraindustry trade. While an MFN club does not alter average tariff levels across countries, it increases aggregate world welfare; makes non-members worse off; and can immiserize its high cost members. These results imply that (i) core WTO rules such as MFN are valuable even if multilateral negotiations deliver limited trade liberalization and (ii) the distributional effects of MFN maybe one reason why developing countries have been granted Special and Differential treatment at the WTO.     

Long-run purchasing power parity with asymmetric adjustment: Further evidence from nine transition countries

In this study, we applied a threshold cointegration test to investigate the properties of asymmetric adjustment on long-run purchasing power parity (PPP) in nine transition countries between January 1995 and December 2008. Although there was strong evidence of long-run PPP for these nine transition countries (i.e., Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, and Russia), the adjustment mechanism was asymmetric. These results have important policy implications for the nine transition countries included in the study.     

The MFN clause,welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.     

The impact of trade costs on exports: An empirical modeling

Studies, which have discussed some of the important issues concerning the measurement of trade costs, have conceded that the literature is still in the early stages of understanding and measuring what the real costs are. It is in this context, decomposing trade costs into ‘natural’ costs, ‘behind the border’ costs, ‘explicit beyond the border’ costs, and ‘implicit beyond the border’ costs, this paper suggests a method to measure the impacts of these components on changes in exports between countries in the absence of complete information on all the components of trade costs in home and partner countries. Empirical measurement has been demonstrated using 1999 and 2004 trade data from Pakistan. The results show that Pakistan's export growth between 1999 and 2004 came mainly from the reduction in both ‘explicit and implicit beyond the border’ trade costs in partner countries.     

Strategic competition and optimal parallel import policy

Abstract In a two‐country Hotelling type duopoly model of price competition, we show that parallel import (PI) policy can act as an instrument of strategic trade policy. The home firm’s profit is higher when it cannot price discriminate internationally if and only if the foreign market is sufficiently bigger than the domestic one. The key mechanism in the model is that the home firm’s incentive to keep its domestic price close to the optimal monopoly price affects its behavior during price competition abroad. We also analyze the welfare implications of PI policies and show that our key insights extend to quantity competition.     

Neckties in the tropics: a model of international trade and cultural diversity

Abstract .  Some cultural goods are consumed socially and are characterized by the same consumption network externalities as languages. Also, producers of new cultural goods in any one country draw on the stock of ideas generated by previous cultural production in all countries. For such goods, costless trade and communication tend to lead to the dominance of one cultural style, increasing utility in the short run but reducing quality and welfare in the long run. Increasing protection while keeping communication costs low may stimulate production of cultural goods that are 'compatible' with the dominant style, adding little to the stock of usable ideas.     

How do transport costs affect firms’ exports? Evidence from a vanishing bridge

In this paper we provide estimates of the effects of international transport costs on firms’ exports and disentangle the channels of these effects. In so doing, we use a unique dataset consisting of highly disaggregated transaction-level trade and transport cost data and, in order to account for endogeneity, we exploit the exogenous variation in these costs associated with the non-trade related closure of the main bridge connecting two countries.     

Welfare effects of competitive lobbying efforts in international oligopoly markets

Conventionally, rent-seeking activities have been considered to deteriorate social welfare and to distort resource allocation. This paper examines whether rent-seeking behavior can improve social welfare by focusing on the welfare effects of firms’ competitive lobbying efforts when governments can impose market entry regulation against foreign firms. We demonstrate that competitive lobbying efforts can improve social welfare when such lobbying efforts are directed to reduce market entry barriers. In addition, social welfare can be maximized when the government shows the maximum sensitivity to the foreign firm's political contributions while maintaining competitive market structure. Moreover, it is shown that the dominant strategy for a domestic firm is to allocate more resources to R&D sectors while it is optimal for foreign firms is to exert more efforts in lobbying to reduce the market entry barriers when a government makes political economic approach in market entry regulations.     

Hub‐and‐spoke free trade areas: theory and evidence from Israel

Abstract We study how the sequential formation of free trade areas affects trade flows between member countries. In a three‐country, three‐good model of comparative advantage if two countries have an FTA, and both sign a similar agreement with the third, trade between the two decreases. However, if only one of them signs an additional FTA, a hub‐ and‐spoke pattern arises, and trade between the initial members increases. Israel’s experience lends strong support to our model: trade between Israel and the EU, subject to an FTA since 1975, increased by an additional 29% after the introduction of the US‐Israel FTA in 1985.     

Maximum likelihood estimation of search costs

In a recent paper Hong and Shum [2006. Using price distributions to estimate search costs. Rand Journal of Economics 37, 257-275] present a structural method to estimate search cost distributions. We extend their approach to the case of oligopoly and present a new maximum likelihood method to estimate search costs. We apply our method to a data set of online prices for different computer memory chips. The estimates suggest that the consumer population can be roughly split into two groups which either have quite high or quite low search costs. Search frictions confer a significant amount of market power to the firms: Despite more than 20 firms operating in each of the markets, we estimate price-cost margins to be around 25%. The paper also illustrates how the structural method can be employed to simulate the effects of the introduction of a sales tax.     

Dynamic effects of trade openness on financial development

This paper employs the Pooled Mean Group (PMG) approach of Pesaran et al. (1999) to study the dynamic effects of trade openness on financial development. The advantage of the PMG estimator over other dynamic panel econometric techniques is that it allows short-run coefficients, speeds of adjustment and error variances to vary across countries, with cross-country homogeneity restrictions only on long-run parameters. Our results spanning 88 countries over 1960–2005 show that a positive long-run relationship between trade openness and financial development coexists with a negative short-run relationship. But when splitting the data into different income or inflation groups, this finding is observed only in relatively low-income countries or high-inflation economies.     

Basic, applied and experimental knowledge and productivity: Further evidence

Analyzing a novel dataset we find significantly positive effects of basic, and applied and experimental knowledge stocks on domestic output and productivity for a panel of 10 OECD countries. This letter updates the work of, among others, Mansfield (1980), Griliches (1986) and Adams (1990), at an international setting.     

The coordination channel of foreign exchange intervention: A nonlinear microstructural analysis

Taylor (1994, 1995) [Taylor, M.P., 1994. Exchange rate behaviour under alternative exchange rate regimes. In: Kenen, P. (Ed.), Understanding Interdependence: The Macroeconomics of the Open Economy. Princeton University Press, Princeton; Taylor, M.P., 1995. The economics of exchange rates. Journal of Economic Literature 33, 13-47] has proposed the coordination channel as a means by which foreign exchange market intervention may be effective, in addition to the traditional portfolio balance and signalling channels. If strong and persistent misalignments of the exchange rate are caused by nonfundamental influences, such that a return to equilibrium is hampered by a coordination failure among fundamentals-based traders, then official intervention may act as a coordinating signal, encouraging stabilising speculators to re-enter the market at the same time. We develop this idea in the framework of a simple microstructural model of exchange rate movements, which we then estimate using daily data on the dollar-mark exchange rate and on Federal Reserve and Bundesbank intervention operations. The results are supportive of the existence of a coordination channel of intervention effectiveness.