Review of International Economics

Publisher:: Wiley
Publication date:: 2021-02-01

ISBN:: 0965-7576

Issue Number

No. 31-5, November 2023

Latest documents

Shifts in the portfolio holdings of euro area investors in the midst of COVID‐19: Looking‐through investment funds
We study the impact of the COVID‐19 shock on the portfolio exposures of euro area investors. The analysis “looks‐through” holdings of investment fund shares to first gauge euro area investors' full exposures to global debt securities and listed shares by sector at end‐2019 and to subsequently analyse the portfolio shifts in the first and second quarters of 2020. We show heterogeneous patterns across asset classes and sectors, but also across less and more vulnerable euro area countries. In particular, we find a broad‐based rebalancing towards domestic sovereign debt at the expense of extra‐euro area sovereigns in the first quarter of 2020, consistent with heightened home bias, which however levelled off in the second quarter. On the contrary, for listed shares we find that euro area investors rebalanced away from domestic towards extra‐euro area securities in both the first and the second quarter, which may be associated with better relative foreign stock market performance. Many of these shifts were only due to indirect holdings, corroborating the importance of investment funds in assessing investors' exposures—especially for households, insurance companies and pension funds—in particular in times of large shocks. We also confirm the important intermediation role played by investment funds in an analysis focusing on the large‐scale portfolio rebalancing observed between 2015 and 2017 during the ECB's Asset Purchase Programme.
The geography of payment activity on PayPal
We use data from PayPal to study the geography of online payment activity. An empirical gravity model finds a distance elasticity of −0.58 for payment value, a result that is 40% lower than typically observed in conventional trade data. The firm‐extensive margin is approximately half as sensitive to distance. The link between the scale of merchants' exports and transaction distance is considerably weaker than observed in conventional international trade data. Zipf's Law holds for PayPal merchants in some countries, but fails in smaller PayPal markets. Merchants' account ages only marginally affect the scale and average distance of their export sales.
Understanding the globalization‐crisis linkage: A “differenced” approach
The recent string of adverse global shocks (financial crisis, trade war, COVID‐19, Ukraine war) poses a potential challenge to the well‐known welfare enhancing effects of globalization, necessitating a better understanding of the longer run globalization‐crisis linkage as opposed to its shorter run effects. Focusing on the Great Recession, we discover an evolving role of trade and financial openness from one that propagates and deepens the negative effects of crises to one that confirms its well‐established contributions. Key to this is generating counterfactual output for open countries as if they were closed and examining the comparative impact of the crisis.
Monetary union, asymmetric recession, and exit
We propose a model of the Eurozone and analyze an asymmetric recession in a vulnerable member state with high public debt, weak banks, and low growth. We compare macroeconomic adjustment under continued membership with two exit scenarios that introduce flexible exchange rates and autonomous monetary policy. An exit with stable investor expectations could significantly dampen the short‐run impact. Stabilization is achieved by a targeted monetary expansion combined with depreciation. However, investor panic may lead to escalation, aggravate the recession and delay the recovery.
Issue Information
Trade liberalization along the firm size distribution: The case of the EU‐South Korea FTA
Leading theories suggest that amongst continuing exporters, lower variable trade costs should boost exports of smaller firms by the same or greater percentage rate than larger firms. However, investigating the impact of the deep EU‐South Korea FTA with French customs data, we find robust evidence to the contrary. Applying a triple‐difference framework, we report that the FTA increased sales in the top quartile of continuous exporters by 71.5% points more than in the bottom quartile. More than 90% of that growth premium is driven by reductions in NTBs. These findings suggest an additional channel driving the distributional effects of FTAs.
Magnification of the ‘China shock’ through the U.S. housing market
The ‘China shock’ operated in part through the housing market, which is one reason why its impact was so large on the U.S. labor market. We add housing to a multi‐region multi‐sector model, with individuals choosing whether and where to work. Controlling for housing reduces the negative direct impact of import exposure on manufacturing employment by 26%–31%, with a significant magnification through the housing market. A variance decomposition analysis shows that the indirect effect of the China shock through the housing market contributes an added 11% to the variance in manufacturing employment as compared to the direct effect of import exposure. For manufacturing and construction employment combined, the indirect effect even outweighs the direct effect.
Weather shocks and exchange rate flexibility
This paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy's adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium‐term adverse growth impact of a 1°C increase in temperature under a pegged regime is about −1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (−0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. Importantly, there is evidence of nonlinear effects, whereby greater exchange rate flexibility can be more beneficial for EMDCs with hotter climates. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.
Preferential trade agreements, externalities, and domestic policy
As multilateral trade barriers fall, there are increasing concerns that domestic policies will be used to undermine tariff cooperation. We examine how the ability to use domestic instruments affects the formation of trade agreements, and the resulting implications for the pursuit of free trade. We examine how optimal tariffs relate to domestic policy choices, and how negotiated restrictions on trade policy affect both domestic policies and the incentives to enter different trade agreements. We show that unrestricted domestic policy can lead to very different equilibrium trade agreements than with exogenous domestic policy.
Trade policy uncertainty and pollution emissions of export enterprises—The case of China‐ASEAN free trade area
We propose a theoretical framework to illustrate the impact of trade policy uncertainty on pollution emissions of export enterprises and the underlying mechanism. The magnitudes of the effect and the proposed channels are empirically estimated using the case of the formal establishment of China‐ASEAN free trade area and sulfur dioxide (SO2) emission intensity as a measure of pollution emission intensity. Our analysis relies on high‐precision micro enterprise‐level data and the difference‐in‐difference methodology. The results show that China‐ASEAN free trade area effectively reduced the trade policy uncertainty and the SO2 emission intensity of Chinese enterprises exporting to ASEAN. The study also shows that the export enterprises of different trade modes, ownership types, regions, factor intensity, and pollution intensity industries show significant heterogeneity in the extent of the reduction in the SO2 emission intensity. The mechanism test reveals that the trade policy uncertainty decline mainly reduces the emission intensity of SO2 by raising the competitive and learning effects. The contribution of the learning effect is higher and accounts for 32.54% of the total effect. In addition, through dynamic decomposition at the industry level, we found that the contribution rate of resource allocation effect among enterprises in reducing the total emission intensity of SO2 of enterprises exporting to ASEAN at the industry level is 52.22%. This effect is perhaps the most significant way trade policy uncertainty impacts the SO2 pollution emission intensity.