Canada's beef exports: Border effects and prospects for market access

This paper examines the magnitudes of border effects on Canada's beef exports, and assesses the prospects for market access. The empirical analysis relies on a gravity model derived from a supply-based framework, and implements different econometric methodologies. It covers the conventional measurement of border effects that is determined relative to the intranational trade baseline. Also, it sets alternative baselines to estimate the wedge between the border effects on beef exports of Canada and those of other countries. The estimated parameters are used to carry out different scenarios to examine the tariff-related and nontariff border effects, and to evaluate the impacts of trade preferences for Canada's bilateral beef exports. The results reveal significant trade impediments facing Canada's bilateral beef exports to many large markets (e.g., EU-15, Japan, Republic of Korea, China, and Russia), and they often indicate that the effects of tariff reductions become considerably larger when coupled with reductions in nontariff impediments. Also, they underscore the significance of North American Free Trade Agreement (NAFTA)’s preferential market access for Canada's beef exports. The export opportunities for the Canadian beef industry that are generated through lower trade barriers would, however, decrease when trade barriers facing other beef-exporting countries are reduced.     

How will financial liberalization change the Chinese economy? Lessons from middle-income countries

This study projects the impact of financial liberalization in China by drawing on the experiences of 60 middle-income economies over a period of four decades. Our results suggest that comprehensive financial reform could increase GDP growth per capita by up to 1.4% points and raise the real bank lending rate by up to 5.1% points. Perhaps the most unexpected result is a massive increase in net capital inflows by up to 20.1% of GDP, which could plant seeds for financial risks later. The probability of a currency crisis could increase by up to 21.7% points, but the probability of a banking crisis may rise or fall, depending on the quality of bank supervision. We also find different policy impacts of different financial reform measures. Bank ownership reform and regulatory reform are critical in supporting economic growth and financial stability. These findings offer important policy implications on how to derive maximum benefit from financial reforms while effectively mitigating potential risks.     

Asymmetric volatility connectedness on the forex market

We show how bad and good volatility propagate through the forex market, i.e., we provide evidence for asymmetric volatility connectedness on the forex market. Using high-frequency, intra-day data of the most actively traded currencies over 2007–2015 we document the dominating asymmetries in spillovers that are due to bad, rather than good, volatility. We also show that negative spillovers are chiefly tied to the dragging sovereign debt crisis in Europe while positive spillovers are correlated with the subprime crisis, different monetary policies among key world central banks, and developments on commodities markets. It seems that a combination of monetary and real-economy events is behind the positive asymmetries in volatility spillovers, while fiscal factors are linked with negative spillovers.     

Economic policy uncertainty and sovereign credit rating decisions: Panel quantile evidence for the Eurozone

We employ a panel quantile framework that quantifies the relative importance of quantitative and qualitative factors across the conditional distribution of sovereign credit ratings in the Eurozone area. We find that regulatory quality and competitiveness have a stronger impact for low rated countries whereas GDP per capita is a major driver of high rated countries. A reduction in the current account deficit leads to a rating or outlook upgrade for low rated countries. Economic policy uncertainty impacts negatively on credit ratings across the conditional distribution; however, the impact is stronger for the lower rated countries. In other words, the creditworthiness of low rated countries takes a much bigger ‘hit’ than that of high rated countries when European policy uncertainty is on the rise.     

Tradable and non-tradable expenditure and aggregate demand for imports in an emerging market economy

Using an assumption of non-separability of non-tradable expenditure from imports, this paper examines the impact of the structural transformation undertaken after 2001 on imports and, in turn, the current account stance of Turkey. In this regard, an import demand function is derived under the assumption of non-separability, and is estimated using quarterly time series data from Turkey. The empirical results show that the assumption of non-separability cannot be rejected in the case of Turkey and the relative prices of non-tradable and tradable goods must be among the determinants of import demand in addition to the relative price of imports and real GDP. This result accordingly implies that recent increases in import expenditure are, to some extent, due to changes in the relative price structure in favour of non-tradable goods.     

How important is the term structure in implied volatility surface modeling? Evidence from foreign exchange options

We claim that previously proposed parametric specifications that linearly approximate the term structure of the implied volatility surface (IVS) in option prices fail to capture important information regarding the expectations of market participants. This paper proposes a parametric specification for describing the IVS that allows flexible modeling of the term structure through a Nelson and Siegel (1987) factorization, recently proposed by Diebold and Li (2006) in the context of yield curve modeling. The specification is tested on implied volatilities from the over-the-counter foreign exchange options market, where contracts with long expiries are actively traded and thus the term structure dimension of the surface should be very important. We first show that the proposed volatility specification can consistently and remarkably improve our ability to describe the surface on any given day. We then establish the economic relevance of the incremental information captured by our proposed specification by showing that it can produce more accurate forecasts of implied volatility that can support long-term profitable trading strategies in the absence of transaction costs.     

Current account imbalances and financial integration in the euro area

While the current account of the euro area as a whole has remained almost balanced in the past two decades, several member countries have sizeable deficits or surpluses. In this paper, we interpret these imbalances as indicators of net capital flows among the euro-area countries. We distinguish between balances against the euro zone and the rest of the world and examine these for the EU-15 countries. We find that for euro members the net flows follow differences in per-capita incomes, even before the introduction of the euro. Our results show further that with the introduction of the common currency the elasticity with respect to per-capita incomes of net capital flows within the euro area has increased for the members of the euro zone. This increase can neither be observed for the flows between the euro members and the rest of the world nor for the flows between the countries that stayed outside the monetary union and the euro zone. We interpret this as evidence for increasing financial integration in the euro area. There is also some evidence suggesting that the introduction of the euro has led to some financial diversion.     

The convergence dynamics of a transition economy: The case of the Czech Republic

In this paper we develop a two-country dynamic general equilibrium model by means of which we seek to explain the long-run path of a transition economy. The model's novel feature is the inclusion of quality investment in the standard framework of applied general equilibrium two-country models. This feature is necessary to explain the trend in the real exchange rate. We present an application to the Czech economy.     

Pro‐competitive Effect of Trade and Non‐decreasing Price‐Cost Margins*

This study surveys the empirical evidence on the pro‐competitive effect of international trade and analyses the determinants of price‐cost margins for OECD countries between 1970 and 2003. The main objective was to focus on the quantification of the impact of imports on margins, and understand why, despite trade liberalization, price‐cost margins have not fallen overall. On average, imports would have contributed to a large decrease of five percentage points in the price‐cost margins. However, these effects seem to have been partially counterbalanced by the impacts of financial deepening and disinflation.     

Export Market Dynamics and Plant‐Level Productivity: Impact of Tariff Reductions and Exchange‐Rate Cycles*

In this paper, we examine how changes in tariff rates and industry‐specific real exchange rates affect the entry/exit process to export markets and productivity growth. Using the experience of the Canadian manufacturing sector over three decades, we find that firms in export markets enjoy faster productivity growth than non‐participants. The size of the growth advantage depends on whether real exchange rates are increasing or decreasing. The increase in the value of the Canadian dollar during the post‐2000 period almost completely offset the productivity growth advantages enjoyed by new exporters during this period.