Against overall sluggish activity in the euro area in recent years, the external sector has performed markedly differently among member countries. As background for the 2005 Article IV consultations with France, Germany, and Italy, and for the 2006 Article IV consultation with Spain, this chapter analyzes developments in the external sector during 2001–04 in these four countries on a comparable basis. It does not cover all possible factors underlying the differences in external sector performance and thus may need to be complemented with country-specific analysis as warranted.
Cyclical and structural factors jointly determine developments in prices and volumes of trade. In economic and monetary union, without independent monetary policy, adjustment to different cyclical positions in demand (or output gaps) is expected to be associated with changes in relative competitiveness. Countries facing a comparatively weak cyclical position will experience relatively low price and wage inflation and enjoy an improvement in competitiveness, which will curb imports and boost exports. Among structural factors, different degrees of labor and product market flexibility will affect the responsiveness of individual economies to shocks, and different paces of structural reform will impart countryspecific dynamics to their international competitiveness and trade. Pricing behavior also plays a role (Faruqee, 2004). Importers tend to fully pass changes in exchange rates through into their prices. Conversely, export margins move to a different extent across countries in response to developments in the exchange rate or productivity, with obvious implications for export volumes.
This chapter describes the evolution of the traditional determinants of exports and imports and econometrically assesses their contributions to trade. The second section reviews developments in price and cost competitiveness, demand addressed to each individual country, the geographical orientation of exports, and domestic demand. The third section quantifies the dynamic contributions of the main determinants of trade to observed export and import volume behavior, using univariate error correction models. This approach is statistical and has the drawback of not taking into account the endogeneity of trade volumes and their determinants and not identifying structural parameters. Nonetheless, it is often used in large-scale macroeconometric models in which statistical properties—in this case cointegration and adequate short-term dynamics—are important to allow the models to track and forecast the data fairly well. The behavior of the residuals over the sample subperiod 2001–04 is analyzed to assess how well the typical determinants explain trade and to shed some light on the influence of factors that are unobservable or omitted. Obviously, this requires caution, as residuals also reflect statistical and data problems.1
As discussed in the chapter’s fourth section, traditional determinants of imports and exports go a long way in accounting for differences in external sector performance, but a significant part remains unexplained, and developments in competitiveness are of concern for some countries. For imports, the relative import content of domestic and foreign demand explains most of trade, and price and cost competitiveness play a secondary role. For exports, differences in foreign demand facing each of the countries and differences in cost competitiveness are key, but residuals are important as well.2 Germany’s relatively vibrant recent export performance is consistent with its comparative strength in price and cost competitiveness and global demand for its products and is helped by an econometrically unexplained buoyancy of exports. France is only slightly weaker on cost competitiveness but suffers from relatively lower global demand and some lack of export resilience, which cannot be attributed to the traditional determinants of trade. Although a steady appreciation of Italy’s real effective exchange rate has contributed to the stagnation of its exports, despite the positive effect of global demand, factors not captured by the model have played an important role as well, warranting further analysis beyond the scope of this chapter. Spain’s exports expanded at a healthy pace, though they were held back by the sharp appreciation of its real effective exchange rate and some unexplained negative factors.
Developments in Key Determinants of Trade
The external sector’s contribution to growth differed markedly among the largest euro area countries during 2001–04. For the euro area as a whole, the contribution of the external sector to output growth, which was positive in 2001–02, turned into a mild drag in 2003 and 2004, reflecting the appreciation of the euro and a modest rebound in domestic demand (Table 6.1). This average behavior nonetheless masks important differences across countries. In Germany, where domestic demand was very weak, the external sector contributed positively to growth throughout the period, even exceeding the cumulative increase in GDP during 2001–04. In contrast, in Spain, which had the highest GDP and domestic demand growth rates among the countries considered, the external sector’s contribution was continuously negative across the period. France’s pattern followed the euro area average, with the external sector contribution switching from marginally positive in 2001–02 to appreciably negative in 2003–04. In Italy, the weakness of domestic demand, especially of investment, could not prevent the external sector from detracting from growth in every year between 2002 and 2004.
The impact on the resource balance (that is, the value of the current account minus net transfers) of these economies was tempered by terms-of-trade developments (Table 6.2). All four countries benefited from euro appreciation, which reduced their import bill (in euros), though they were all adversely affected by the significant oil price hike that took place in 2004. On balance, in France, Italy, and Spain, the non-oil resource account deteriorated less in percent of GDP during 2001–05 than it would have on the basis of volume developments only. For Germany, the opposite held, with the resource balance improving by less than the positive contribution of net export volumes. Although terms-of-trade shocks could be exogenous, reflecting, for example, shifts in preferences or global supply and demand conditions, there is evidence that Italian exporters maintained higher export price growth in euros, especially to the rest of the euro area, as they passed on a higher-than-average proportion of the increase in their unit labor costs (see also Bugamelli and Tedeschi, 2005) (Figure 6.1). Spain benefited less than Italy from export price increases (in euros), and Germany’s and France’s price indices moved broadly sideways.
Contributions of Net Exports to GDP Growth
(In cumulative percent)
Contributions of Net Exports to GDP Growth
(In cumulative percent)
| 2001–02 | 2003–04 | 2005 (projected) | 2001–05 | Memo item: Real GDP 2001–05 | |
|---|---|---|---|---|---|
| Euro area | 1.5 | –0.3 | 0.0 | 1.1 | 6.9 |
| France | 0.1 | –2.0 | –0.9 | –2.9 | 8.3 |
| Germany | 3.7 | 0.3 | 1.2 | 5.3 | 3.9 |
| Italy | –0.5 | –0.7 | –0.6 | –1.9 | 3.4 |
| Spain | –0.9 | –3.0 | –1.8 | –6.1 | 16.4 |
Contributions of Net Exports to GDP Growth
(In cumulative percent)
| 2001–02 | 2003–04 | 2005 (projected) | 2001–05 | Memo item: Real GDP 2001–05 | |
|---|---|---|---|---|---|
| Euro area | 1.5 | –0.3 | 0.0 | 1.1 | 6.9 |
| France | 0.1 | –2.0 | –0.9 | –2.9 | 8.3 |
| Germany | 3.7 | 0.3 | 1.2 | 5.3 | 3.9 |
| Italy | –0.5 | –0.7 | –0.6 | –1.9 | 3.4 |
| Spain | –0.9 | –3.0 | –1.8 | –6.1 | 16.4 |
Balance on Non-oil Goods and Services
(In percent of GDP)
Balance on Non-oil Goods and Services
(In percent of GDP)
| 2001 | 2002 | 2003 | 2004 | 2005 | Difference between 2001 and 2005 | |
|---|---|---|---|---|---|---|
| France | 2.9 | 3.0 | 2.5 | 2.1 | 1.6 | –1.3 |
| Germany | 3.6 | 5.9 | 5.8 | 6.9 | 8.5 | 4.9 |
| Italy | 2.5 | 1.9 | 1.5 | 1.5 | 1.2 | –1.3 |
| Spain | –0.2 | 0.1 | –0.2 | –1.8 | –2.9 | –2.7 |
Balance on Non-oil Goods and Services
(In percent of GDP)
| 2001 | 2002 | 2003 | 2004 | 2005 | Difference between 2001 and 2005 | |
|---|---|---|---|---|---|---|
| France | 2.9 | 3.0 | 2.5 | 2.1 | 1.6 | –1.3 |
| Germany | 3.6 | 5.9 | 5.8 | 6.9 | 8.5 | 4.9 |
| Italy | 2.5 | 1.9 | 1.5 | 1.5 | 1.2 | –1.3 |
| Spain | –0.2 | 0.1 | –0.2 | –1.8 | –2.9 | –2.7 |
The evolution of price and cost competitiveness is key to explaining the large disparity in export performance between Germany and France on the one hand and Italy and Spain on the other. Even though the euro area countries share a common currency, in effective terms, their unit labor cost—based real exchange rates behaved differently, depending on the direction of their trade and relative cost and productivity developments (Figure 6.2). The appreciation of the euro had only a limited impact on Germany’s real effective exchange rate over the period in question, owing to favorable productivity developments and cost retrenchment. France saw only a modest real exchange rate appreciation, whereas Italy experienced a very substantial appreciation, owing to falling labor productivity and, to a lesser extent, increases in production costs. Spain incurred an even larger appreciation of its real effective exchange, as a result of labor cost increases in excess of productivity gains. However, real effective exchange rate–based indicators do not capture all facets of competitiveness. Other factors, broadly grouped in “nonprice competitiveness,” such as brand and quality image and service after sale, could play a nontrivial role. Unfortunately, consistent time series of these indicators are not generally available.
Uneven developments in foreign absorption across euro area members have weighed on relative export performance (Figure 6.3). Since 2001, France and Spain have faced consistently lower foreign demand addressed to their economies than Germany and Italy. Part of this divergence, in particular for 2004, is explained directly by intra-euro-area trade, where Italy and Germany contributed to dampening the foreign demand addressed to France and Spain, whereas the latter countries’ dynamic imports boosted exports of their European trade partners. Another part of the divergence is due to the different geographical orientation of exports in the four countries (Table 6.3). Germany, for instance, is structurally more geared toward fast-growing areas than the other countries. The share of its exports to Asia (excluding Japan), the United Kingdom, and the United States was about 24 percent in 2004, compared with about 21 percent for France and Italy and about 16 percent for Spain. In addition, Germany’s trade is much more geared toward the new EU accession countries than that of the other four countries.
Real Effective Exchange Rates, Productivity, and Wages
Sources: IMF, World Economic Outlook and International Financial Statistics.Real Effective Exchange Rates, Productivity, and Wages
Sources: IMF, World Economic Outlook and International Financial Statistics.Real Effective Exchange Rates, Productivity, and Wages
Sources: IMF, World Economic Outlook and International Financial Statistics.
Growth Rate of World Demand
(In percent)
Sources: IMF, World Economic Outlook and International Financial Statistics; and IMF staff calculations.Growth Rate of World Demand
(In percent)
Sources: IMF, World Economic Outlook and International Financial Statistics; and IMF staff calculations.Growth Rate of World Demand
(In percent)
Sources: IMF, World Economic Outlook and International Financial Statistics; and IMF staff calculations.Geographic Orientation of Exports, 2004
Geographic Orientation of Exports, 2004
| France | Germany | Italy | Spain | |
|---|---|---|---|---|
| Exports to new EU members | 3.3 | 8.5 | 5.4 | 2.8 |
| Exports to the United Kingdom | 9.3 | 8.2 | 6.9 | 9.0 |
| Exports to the United States | 6.7 | 8.8 | 8.0 | 4.0 |
| Exports to Asia, excluding Japan | 4.9 | 7.1 | 5.7 | 2.5 |
Geographic Orientation of Exports, 2004
| France | Germany | Italy | Spain | |
|---|---|---|---|---|
| Exports to new EU members | 3.3 | 8.5 | 5.4 | 2.8 |
| Exports to the United Kingdom | 9.3 | 8.2 | 6.9 | 9.0 |
| Exports to the United States | 6.7 | 8.8 | 8.0 | 4.0 |
| Exports to Asia, excluding Japan | 4.9 | 7.1 | 5.7 | 2.5 |
Global trade trends and the sectoral composition of exports also contribute to disparities in export performance. In general, emerging economies that are integrating in world trade undergo a catch-up process leading to a secular increase in their share of global trade, to the detriment of more-advanced economies. With all countries in the sample being relatively mature, it is not surprising that they have been experiencing an underlying trend decline in their share of global trade. Within the sample, Spain is likely to have been somewhat less affected by this phenomenon, as its per capita GDP in 2004 still had to “catch up” to the other three by more than 15 percent. At the sectoral level, Germany has traditionally specialized in manufactured capital goods, which benefited from the cyclical upswing in global investment in 2001–04. In contrast, France (L’Angevin and Serravalle, 2005; MINEFI, 2005) and Italy (Amighini and Chiarlone, 2003; ISAE, 2005) have been somewhat hampered by their concentration on consumer goods, which have been more vulnerable to competitive pressures from emerging markets. Spain’s exports are heavily concentrated in manufactured goods, for which trade partner demand played the key role.
Asymmetrical developments in domestic demand across euro area economies have had an impact on import performance. Between 2001 and 2004, Spain had the most buoyant domestic demand among the main euro area countries, with an average annual growth of 3¾ percent (Figure 6.4). Over the same period, the pace of growth of domestic demand in France exceeded that in Germany, on average, by 2½ percent per year. Like that of Germany, Italian domestic demand was weak over the 2001–04 period, with an average annual growth rate in consumption of about 1 percent, despite employment growth and budgetary stimulus. Moreover, Italian business investment contracted in 2003. From this angle, the resilience of Italian imports appears to be striking, with volumes growing by 5 percent between 2001 and 2004.
Econometric Analysis
To quantify the respective roles of their determinants, reduced-form equations were estimated for the volumes of exports and imports, with separate equations for goods and services, for each of the four countries. Data were quarterly, going as far back as availability permitted, usually to the late 1970s or early 1980s, except in the case of Germany, for which the sample period starts only after reunification (see Appendix 6.1 for a description of the data sources). In a first step, each of the four equations in each country was estimated univariately in levels and tested for the existence of cointegrating relationships. As a second step, to capture the complete dynamics, full error correction models were estimated. The choice of the lag structure was determined using Hendry’s strategy: sequentially, nonsignificant lags were eliminated, starting with the least-significant one, until only significant variables were left. Detailed results of the individual estimates and cointegration tests are reported in Appendix 6.2. In a final step, dynamic contributions were computed to assess the role of the various explanatory variables in the evolution of trade over 1999–2004. Rather than just providing elasticities, this method combines elasticities with the actual evolution of the explanatory variables to quantify their impact in any given period, taking into account the entire lag structure of the models (see Appendix 6.3 for an exposition of the methodology).3
Aside from the core variables of cost and price competitiveness and domestic and foreign demand, some plausible additional variables were needed in some equations to achieve a satisfactory fit. Cost competitiveness was represented by the unit labor cost—based real effective exchange rate. In addition, a relative price variable was included to capture the influence of factors other than labor costs, such as shifts in preferences and the margin behavior of market participants.4 Importers appear to consider each of the countries a “small” market and apply home currency pricing, but not exporters. Trade-weighted foreign demand and domestic demand represented the usual scale variables for exports and imports, respectively. In addition, for Germany, Italy, and Spain, the high import content of exports led to the incorporation of exports as an explanatory variable in the import equations in addition to domestic demand, but this variable was not found to be significant in the case of France. For France and Spain, capacity utilization was determined to help explain imports, as bottlenecks in domestic production were revealed as entailing larger recourse to imported goods. Trends were also retained where they were found to be significant.
The behavior of the traditional determinants of trade was found to explain a significant portion of the differences in external sector performance across large euro area countries during 2001–04 (Figure 6.5):
The real effective exchange rate appreciation during 2001–04 had only a marginal impact on imports but adversely affected exports of goods and services in all countries, broadly in proportion to the degree of appreciation. However, there were some notable variations. Germany seems to have been relatively less affected by real effective exchange rate appreciation, especially for goods, whereas Italy was comparatively more affected for both goods and services. This reflects lower estimated exchange rate elasticities for goods for Germany (0.3) than for Italy (0.7), compounded by the lesser degree of appreciation in Germany.
Global demand contributed positively to exports in all cases, with the strongest impact in Spain and the weakest in France, and in the case of Germany, there was a larger impact on goods than on services, again reflecting different estimated elasticities. For France, a unit elasticity with respect to global demand could not be rejected on the basis of the data, whereas Italy, Germany, and Spain posted much higher elasticities, with those for goods reaching 1.9, 2.2, and 3.6, respectively. In the case of Spain, the (perhaps surprisingly) high elasticity more than compensated for the relative sluggishness of global demand addressed to that country.5
Domestic demand played a key role on the import side, as anticipated, and comparatively more so in Spain, where it was much more energetic. In Germany and Spain, imports were also driven by foreign demand, reflecting the high import content of exports. This factor was also significant in the equations for Italy, but export growth was too weak to make it a driver of imports.
Other variables included in the regressions also contributed, though to a lesser extent, and their role is more difficult to interpret (Table 6.4):
Price competitiveness (as defined earlier by the relative price variable) contributed in an intuitive manner on the import side, though it was not of major importance except in the case of Spanish goods imports. Global competition and euro appreciation over 2001–04 likely allowed importers to reduce their prices in euros, thus helping to boost imports. On the export side, relative prices were insignificant, except for those for French goods, which is somewhat puzzling, as it points to the ability of French exporters to move up the demand curve by lowering relative prices. The method used here does not allow us to distinguish whether this is due to supply or demand factors.
Lower capacity utilization owing to slack in the French and Spanish economies dampened imports, but this variable did not come into play in Germany and Italy.6
Trends were significant only in some sectors in France and Germany. Notable were a strong positive contribution of trends to imports of goods in France, a sharp trend-driven increase in German services exports (though this covers only 15 percent of total trade), and a trend decline in German goods imports.
Accounting for Country Differences in Trade Growth
(In percent, cumulated growth rate, 2001–04)
Sources: IMF, International Financial Statistics; and IMF staff calculations.Note: For France, “goods” refers to the manufacturing sector and “services” to the rest of the economy.Accounting for Country Differences in Trade Growth
(In percent, cumulated growth rate, 2001–04)
Sources: IMF, International Financial Statistics; and IMF staff calculations.Note: For France, “goods” refers to the manufacturing sector and “services” to the rest of the economy.Accounting for Country Differences in Trade Growth
(In percent, cumulated growth rate, 2001–04)
Sources: IMF, International Financial Statistics; and IMF staff calculations.Note: For France, “goods” refers to the manufacturing sector and “services” to the rest of the economy.Cumulative Growth and Contribution of Trade Determinants, 2001–04
(In percentage points)
Cumulative Growth and Contribution of Trade Determinants, 2001–04
(In percentage points)
| Exports | Imports | ||||||
|---|---|---|---|---|---|---|---|
| Manufactured goods | Non-manufactured goods and services | Manufactured goods | Non-manufactured goods and services (excluding oil) | ||||
| France | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | 7.1 | –2.4 | over 2001–04 | 12.9 | 9.1 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 7.4 | 10.0 | Domestic demand | 5.0 | 9.1 | ||
| Relative prices | 13.3 | –0.4 | Relative prices | 1.1 | 0.8 | ||
| REER | –3.2 | –2.9 | Capacity utilization | –1.4 | |||
| Trend | –2.5 | Trend | 11.9 | 2.7 | |||
| Unexplained | –7.7 | –9.1 | Unexplained | –3.8 | –3.5 | ||
| Goods | Services | Goods | Services | ||||
| Germany | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | 18.9 | 12.5 | over 2001–04 | 11.8 | –0.9 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 20.4 | 9.3 | Domestic demand | –2.0 | –4.9 | ||
| Relative prices | –1.2 | Relative prices | 2.6 | 2.3 | |||
| REER | –1.7 | –6.7 | Exports | 19.3 | 1.1 | ||
| Trend | 14.7 | Trend | –9.3 | 0.7 | |||
| Unexplained | 2.1 | –3.0 | Unexplained | 1.0 | –0.1 | ||
| Italy | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | –0.3 | –1.4 | over 2001–04 | 3.0 | 6.4 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 15.5 | 16.1 | Domestic demand | 6.3 | 6.5 | ||
| Relative prices | Relative prices | 7.1 | |||||
| REER | –10.6 | –13.0 | Exports | 0.0 | –1.0 | ||
| Unexplained | –5.2 | –4.5 | Unexplained | –3.2 | –6.3 | ||
| Spain | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | 15.8 | 3.4 | over 2001–04 | 23.1 | 14.8 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 29.3 | 21.8 | Domestic demand | 17.4 | 14.3 | ||
| Relative prices | Relative prices | 10.9 | |||||
| REER | –7.0 | –6.4 | Exports | 5.1 | –2.0 | ||
| Trend | –1.2 | Capacity utilization | –2.3 | ||||
| Unexplained | –6.5 | –10.9 | Trend | 7.7 | |||
| Unexplained | –8.0 | –5.1 | |||||
Cumulative Growth and Contribution of Trade Determinants, 2001–04
(In percentage points)
| Exports | Imports | ||||||
|---|---|---|---|---|---|---|---|
| Manufactured goods | Non-manufactured goods and services | Manufactured goods | Non-manufactured goods and services (excluding oil) | ||||
| France | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | 7.1 | –2.4 | over 2001–04 | 12.9 | 9.1 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 7.4 | 10.0 | Domestic demand | 5.0 | 9.1 | ||
| Relative prices | 13.3 | –0.4 | Relative prices | 1.1 | 0.8 | ||
| REER | –3.2 | –2.9 | Capacity utilization | –1.4 | |||
| Trend | –2.5 | Trend | 11.9 | 2.7 | |||
| Unexplained | –7.7 | –9.1 | Unexplained | –3.8 | –3.5 | ||
| Goods | Services | Goods | Services | ||||
| Germany | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | 18.9 | 12.5 | over 2001–04 | 11.8 | –0.9 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 20.4 | 9.3 | Domestic demand | –2.0 | –4.9 | ||
| Relative prices | –1.2 | Relative prices | 2.6 | 2.3 | |||
| REER | –1.7 | –6.7 | Exports | 19.3 | 1.1 | ||
| Trend | 14.7 | Trend | –9.3 | 0.7 | |||
| Unexplained | 2.1 | –3.0 | Unexplained | 1.0 | –0.1 | ||
| Italy | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | –0.3 | –1.4 | over 2001–04 | 3.0 | 6.4 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 15.5 | 16.1 | Domestic demand | 6.3 | 6.5 | ||
| Relative prices | Relative prices | 7.1 | |||||
| REER | –10.6 | –13.0 | Exports | 0.0 | –1.0 | ||
| Unexplained | –5.2 | –4.5 | Unexplained | –3.2 | –6.3 | ||
| Spain | |||||||
| Cumulative growth | Cumulative growth | ||||||
| over 2001–04 | 15.8 | 3.4 | over 2001–04 | 23.1 | 14.8 | ||
| Contributions | Contributions | ||||||
| Foreign demand | 29.3 | 21.8 | Domestic demand | 17.4 | 14.3 | ||
| Relative prices | Relative prices | 10.9 | |||||
| REER | –7.0 | –6.4 | Exports | 5.1 | –2.0 | ||
| Trend | –1.2 | Capacity utilization | –2.3 | ||||
| Unexplained | –6.5 | –10.9 | Trend | 7.7 | |||
| Unexplained | –8.0 | –5.1 | |||||
The contribution of the residuals during 2001–04 deserves a careful reading. Although statistically these residuals average zero over the entire sample period, their behavior in any given subperiod may reflect, apart from data issues, the influence of factors that were not explicitly considered in the exercise, such as nonprice competitiveness or the sectoral orientation of trade. In this context, it is striking that for both exports and imports, the residuals contributed negatively during 2001–04 for France, Italy, and Spain. On balance, France fared the worst, losing almost 8 percentage points of goods exports for reasons not captured by the variables included in the equation, but only 4 percentage points of goods imports. Italy lost about 2 percentage points in the balance between exports and imports for both goods and services. In contrast, Germany’s exports gained more than imports, particularly in the important goods category, though by only 1 percentage point. In Spain, both exports and imports were weaker than predicted, but for goods, the residual was larger on the import side.
An analysis of the time series of dynamic contributions sheds some light on the timing of the impact and the nature of the various forces shaping trade developments (Figures 6.6–6.9). The movement of the euro is clearly discernible in the data. In France and Germany, its depreciated level initially contributed positively to export growth or was neutral. Its subsequent appreciation, at about the same time as global demand was slowing, added in all countries to the fall in export growth or the decline in the level of exports. However, for Italy, deteriorating competitiveness already exerted a drag on exports before the recent euro appreciation. In Spain, the continuous real appreciation of a similar magnitude as that in Italy was associated with a steady negative contribution to export growth throughout 2001–04. However, the impact was considerably less negative than for Italy, suggesting that part of the appreciation could constitute an equilibrium phenomenon due to convergence. For the countries with unexplained weakness in exports, residuals became smaller in 2003–04 and even turned positive in some cases in 2004. Imports closely followed the time profile of domestic demand and/or of exports, where the latter had high import content.
France: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
France: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
France: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Germany: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Note: 2004 data are through Q3.Germany: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Note: 2004 data are through Q3.Germany: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Note: 2004 data are through Q3.Concluding Remarks and Implications
Global demand lifted the external sector’s contribution to growth in all large euro area countries during 2001–04, though to different degrees, and it was in some cases overwhelmed by the evolution of domestic demand. Owing to a different geographic orientation and different demand elasticities, external demand contributed less in France than elsewhere and particularly strongly in the case of Spain. In both of these countries, buoyant domestic demand sharply boosted imports. Germany experienced weak domestic demand, but the increasing import content of its exports stimulated import growth.
Italy: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Italy: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Italy: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Divergences in price and cost competitiveness are key to explaining the differences in the performance of the external sector in the larger euro area economies in the period under study. Adjustment to cyclical differences in monetary union is consistent with the direction of developments observed in Germany and France and to a lesser extent in Spain, but at odds with those in Italy. In addition, the magnitude of changes in the real effective exchange rate points to the crucial importance of underlying structural factors. Thus, were domestic demand to settle at a pace that closes the output gap in all countries over a similar time horizon, there would be only a partial reversal of the recent worsening of the external accounts of France and Spain and the improvement in Germany. For Italy, however, the closure of the output gap would likely further deteriorate its external accounts.
Spain: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Spain: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Spain: Dynamic Contributions of Various Factors to Exports and Imports, 1999–2004
(Annual growth rates, in percent)
Exporters’ margin behavior and the sectoral composition of exports appear at least partially responsible for Italy’s idiosyncratic behavior. Italy’s exporters seem to have responded to the appreciation of the euro by passing on to export prices a higher-than-average percentage of the increase in unit labor costs. Consequently, there may be scope for margin retrenchment to prevent further erosion of market shares in volume. Nonetheless, Italian exports appear to be concentrated in relatively slow-growing sectors of world demand and areas where competition from emerging markets is likely to continue to intensify. Resolving this “dynamic inefficiency” is likely to require structural reforms that facilitate industrial restructuring and technology adoption.
The fact that a significant part of trade behavior during 2001–04 cannot be attributed to the traditional explanatory variables considered in the econometric analysis calls for prudence. For Germany, this residual was positive, and estimated trends were also favorable, thus pointing to possible improvements in competitiveness not measured by standard price and cost indicators. For France, Italy, and Spain, trade performed more weakly than predicted, and estimated trends, where significant, tended to be negative for exports and positive for imports. These developments, which are likely to have broadly persisted since then, signal a need to improve underlying external performance in each of the three countries.
Appendix 6.1 Data Sources
French Data
From the National Institute for Statistics and Economic Studies (Institut National de la Statistique et des Études Économiques, INSEE; www.insee.fr) quarterly data (in base 1995), for 1978:Q1–2004:Q4, all seasonally adjusted and corrected for working days:
Exports and imports in volume for the manufacturing sector (TD_P6/P7_DIM1);
Exports in volume for the nonmanufacturing sector and services (TD_ P6 for sectors S1, EA1, EB1, and EG1);
Imports in volume for the nonmanufacturing sector and services excluding oil (TD_P6 for sectors S1, EA1, and EB1);
Domestic demand in volume for the manufacturing sector: sum of consumption in intermediary manufacturing goods, household consumption, government consumption, investment and change in inventories (sum of TD_P2_DIM1, TD_P3M_DIM1, TD_P3G_DIM1, TD_P51_ DIM1, TD_P52_DIM1);
Domestic demand in volume for the nonmanufacturing sector and services excluding oil: same components of demand as for domestic demand in the manufacturing sector, but for the sectors S1, EA1, and EB1; and
Export, import, and domestic demand prices for the same breakdown.
German Data
From the German Institute for Economic Research (Deutsches Institut fur Wirtschaftsforschung, DIW; www.diw.de/deutsch) quarterly data (in base 1995), for 1991:Q1–2004:Q3:
Exports and imports in volume for, respectively, goods and services, seasonally adjusted and corrected for working days (P61RFB, P62RFB, P71RFB, and P72RFB);
Total domestic demand in volume (for all goods, as no breakdown was available), seasonally adjusted (P3R + P5RB); and
Export, import, and domestic demand prices for the same breakdown.
Italian Data
From National Institute of Statistics (Istituto Nazionale di Statistica, ISTAT; www.istat.it/comest) quarterly data over 1980:Q1–2004:Q4:
Exports and imports in volume for goods and services, respectively, seasonally adjusted and corrected for working days and expressed in 1995 euros;
Total domestic demand in volume (for all goods, as no breakdown was available); and
Export, import, and domestic demand deflators for the same breakdown.
Spanish Data
From National Institute of Statistics (Instituto Nacional de Estadística, INE; www.ine.es) quarterly data over 1980:Q1–2004:Q4:
Exports and imports in volume for goods and services, respectively, seasonally adjusted and corrected for working days and expressed in 1995 euros;
Total domestic demand in volume; and
Export, import, and domestic demand deflators for the same breakdown.
External Environment Data
From the IMF’s World Economic Outlook database:
Foreign demand faced by France, Germany, Italy, and Spain: weighted GDP at constant prices of trade partners, with, for each of the four countries, weights defined as the share of exports to trade partners whose share is greater than 1 percent of total exports. Detailed export data are derived from the IMF Direction of Trade Statistics. Foreign demand is available only on an annual basis, and for the sake of the econometric analysis, the quarterly series for foreign demand is derived by applying the quarterly pattern of G-7 GDP to distribute global demand on a quarterly basis. This simplifying assumption may affect the accuracy of the short-term dynamics.
Foreign competitors’ prices (for all goods) for France, Germany, Italy, and Spain: weighted GDP deflators converted in euros, with weights similar to the ones used for foreign demand. As with foreign demand, the data are available only on an annual basis.
Export relative prices (for export equations) are defined as the ratio of foreign competitors’ prices, expressed in euros, to domestic exporters’ prices. Import relative prices (for import equations) are defined as the ratio of importers’ prices to overall domestic demand prices (as a proxy for the ratio of importers’ prices to the prices of domestic production sold nationally). Hence in both cases, an increase in the ratio signals an increase in price competitiveness.
Other Data
From the IMF’s International Financial Statistics (IFS):
Real effective exchange rate: For the equation on the manufacturing sector or the goods sector, based on unit labor costs. In the case of France and Germany, for the rest of the economy, the indicator used is the REER based on the CPI for the whole economy.
From the WEFA database:
Capacity utilization rate in the manufacturing sector.
Appendix 6.2 Error Correction Model for Trade Equations and Cointegration Tests
Figures in parentheses below the estimated coefficients are t-statistics. Significance at the 5 percent level is reached for t-statistics greater than 1.96.
France
Exports in the Manufacturing Sector
where
ECM = log(Ex_Manuf)–log(World_Demand)–1.22 log(Relative_Price_ Manuf) + 0.80 log(Reer_ULC)–9.48 + 0.0016 Trend 82.
Estimation: 1979:Q2–2004:Q4, Durbin-Watson statistic = 1.93, SEEstimate = 0.018.
Exports in the Nonmanufacturing and Services Sectors
where
ECM = log(Ex_NonManuf)–log(World_Demand)–0.59 log(Relative_ Price_NonManuf) + 0.46 log(Reer_CPI)–6.54.
Estimation: 1981:Q3–2004:Q4, Durbin-Watson statistic = 2.08, SEEstimate = 0.016.
Imports in the Manufacturing Sector
where
ECM = log(Im_Manuf)–log(Domestic_Demand_Manuf) + 0.24 log(Relative_Price_Manuf)–0.89 (Capacity_Util_Rate) + 2.59–0.011 Trend + 0.0039 Trend83.
Estimation: 1979:Q1–2004:Q4, Durbin-Watson statistic = 2.06, SEEstimate = 0.012.
Imports in the Nonmanufacturing and Services Sectors, Excluding Oil
where
ECM = log(Im_NonManuf)–log(Domestic_Demand_NonManuf) + 0.31 log(Price_Compet_NonManuf) + 3.40–0.0054 Trend + 0.0037 Trend86.
Estimation: 1979:Q3–2004:Q4, Durbin-Watson statistic = 1.99, SEEstimate = 0.011.
Germany
Exports of Goods
Testing for Cointegration Relationship and Estimation of the Long-Term Trade Equations
The relative prices variable for exports is the ratio of foreign GDP prices (expressed in euros) to exporter prices, and for imports, it is the ratio of import prices to domestic demand prices.
The coefficient for the period after the break in trend is the sum of this coefficient and the one for the trend starting at the beginning of the sampling period.
Phillips-Ouliaris-Hansen tests; critical values derived from Hamilton (1994).
cointegration relationship significant at 1 percent level;
at 5 percent level;
at 10 percent level.
Testing for Cointegration Relationship and Estimation of the Long-Term Trade Equations
| France (estimated over 1978–2004) | Germany (estimated over 1991–2004:Q3) | Italy (estimated over 1980–2004) | Spain (estimated over 1980–2004) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exports | Imports | Exports | Imports | Exports | Imports | Exports | Imports | |||||||||||
| Manufactured goods | Non-manufactured goods and services | Manufactured goods | Non-manufactured goods and services (excluding oil) | Goods | Services | Goods | Services | Goods | Services | Goods | Services | Goods | Services | Goods | Services | |||
| Foreign demand | 1.00 (c) |
1.00 (c) |
2.24 | 1.00 (c) |
1.93 (75.07) |
1.58 (52.38) |
3.55 (87.08) |
2.36 (68.04) |
||||||||||
| Domestic demand | 1.00 (c) |
1.00 (c) |
(76.18) | 1.00 (c) |
2.55 (10.04) |
1.63 (20.63) |
1.19 (13.11) |
1.17 (15.4) |
1.14 (12.3) |
|||||||||
| Exports | ||||||||||||||||||
| Relative prices1 | 1.22 (7.90) | 0.59 (21.50) | –0.24 (–4.12) | –0.32 (–2.45) | 0.30 (1.58) | 1.00 (c) |
0.46 (4.93) |
0.41 (13.90) |
0.73 (13.66) |
0.38 (19.3) |
0. 21 (6.09) |
|||||||
| Real effective exchange rate | ||||||||||||||||||
| Based on unit labor cost in the manufacturing sector | –0.8 (–3.68) |
–0.32 (–10.18) |
–0.32 (–5.02) |
–0.75 (–2.06) |
–0.75 (–7.43) |
–0.61 (–17.2) |
||||||||||||
| Based on CPI in the whole economy | –0.46 (–4.69) |
–0.86 (–4.21) |
–0.7 (–9.51) |
–0.91 (–11.44) |
–1.5 (–15.79) |
–1.38 (–17.71) |
||||||||||||
| Capacity utilization rate | 0.88 (10.03) |
1.48 (9.42) |
||||||||||||||||
| Trend starting in | 1982:1 –0.0016 (–1.93) |
1978:1 0.011 (18.67) |
1978:1 0.0054 (11.00) |
1991:1 0.0028 (5.55) |
1991:1 –0.0068 (–14.75) |
1991:1 0.0023 (1.50) |
1989:1 0.0048 (9.27) |
|||||||||||
| Break in trend2 | 1983:1 –0.0039 (–8.11) |
1986:1 –0.0037 (–6.56) |
2001:3 0.0022 (6.78) |
1998:1 0.00086 (3.16) |
1995:1 –0.0019 (–1.83) |
|||||||||||||
| Dummy over the period of | 1993:2– 1993:3 –0.06 (–3.90) |
1988:1– 1989:4 –0.19 (–8.83) |
1986:1– 1989:4 –0.19 (–11.23) |
1993:1– 1995:2 –0.15 (–10.29) |
||||||||||||||
| Statistical tests for cointegration relationship3 | ||||||||||||||||||
| Z(rho) | –23.28* | –24.58* | –35.97*** | –20.85* | –23.21* | –26.13* | –24.97** | –46.75*** | –52.55*** | –33.40** | –28.78** | –32.13** | –59.53*** | –28.30** | –45.55** | –27.11** | ||
| Z(t) | –3.52* | –3.68* | –4.95*** | –3.54** | –3.81** | –4.40*** | –4.02*** | –5.55*** | –5.77*** | –4.54*** | –4.56*** | –4.32*** | –6.31*** | –4.02*** | –5.25*** | –3.91*** | ||
The relative prices variable for exports is the ratio of foreign GDP prices (expressed in euros) to exporter prices, and for imports, it is the ratio of import prices to domestic demand prices.
The coefficient for the period after the break in trend is the sum of this coefficient and the one for the trend starting at the beginning of the sampling period.
Phillips-Ouliaris-Hansen tests; critical values derived from Hamilton (1994).
cointegration relationship significant at 1 percent level;
at 5 percent level;
at 10 percent level.
Testing for Cointegration Relationship and Estimation of the Long-Term Trade Equations
| France (estimated over 1978–2004) | Germany (estimated over 1991–2004:Q3) | Italy (estimated over 1980–2004) | Spain (estimated over 1980–2004) | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Exports | Imports | Exports | Imports | Exports | Imports | Exports | Imports | |||||||||||
| Manufactured goods | Non-manufactured goods and services | Manufactured goods | Non-manufactured goods and services (excluding oil) | Goods | Services | Goods | Services | Goods | Services | Goods | Services | Goods | Services | Goods | Services | |||
| Foreign demand | 1.00 (c) |
1.00 (c) |
2.24 | 1.00 (c) |
1.93 (75.07) |
1.58 (52.38) |
3.55 (87.08) |
2.36 (68.04) |
||||||||||
| Domestic demand | 1.00 (c) |
1.00 (c) |
(76.18) | 1.00 (c) |
2.55 (10.04) |
1.63 (20.63) |
1.19 (13.11) |
1.17 (15.4) |
1.14 (12.3) |
|||||||||
| Exports | ||||||||||||||||||
| Relative prices1 | 1.22 (7.90) | 0.59 (21.50) | –0.24 (–4.12) | –0.32 (–2.45) | 0.30 (1.58) | 1.00 (c) |
0.46 (4.93) |
0.41 (13.90) |
0.73 (13.66) |
0.38 (19.3) |
0. 21 (6.09) |
|||||||
| Real effective exchange rate | ||||||||||||||||||
| Based on unit labor cost in the manufacturing sector | –0.8 (–3.68) |
–0.32 (–10.18) |
–0.32 (–5.02) |
–0.75 (–2.06) |
–0.75 (–7.43) |
–0.61 (–17.2) |
||||||||||||
| Based on CPI in the whole economy | –0.46 (–4.69) |
–0.86 (–4.21) |
–0.7 (–9.51) |
–0.91 (–11.44) |
–1.5 (–15.79) |
–1.38 (–17.71) |
||||||||||||
| Capacity utilization rate | 0.88 (10.03) |
1.48 (9.42) |
||||||||||||||||
| Trend starting in | 1982:1 –0.0016 (–1.93) |
1978:1 0.011 (18.67) |
1978:1 0.0054 (11.00) |
1991:1 0.0028 (5.55) |
1991:1 –0.0068 (–14.75) |
1991:1 0.0023 (1.50) |
1989:1 0.0048 (9.27) |
|||||||||||
| Break in trend2 | 1983:1 –0.0039 (–8.11) |
1986:1 –0.0037 (–6.56) |
2001:3 0.0022 (6.78) |
1998:1 0.00086 (3.16) |
1995:1 –0.0019 (–1.83) |
|||||||||||||
| Dummy over the period of | 1993:2– 1993:3 –0.06 (–3.90) |
1988:1– 1989:4 –0.19 (–8.83) |
1986:1– 1989:4 –0.19 (–11.23) |
1993:1– 1995:2 –0.15 (–10.29) |
||||||||||||||
| Statistical tests for cointegration relationship3 | ||||||||||||||||||
| Z(rho) | –23.28* | –24.58* | –35.97*** | –20.85* | –23.21* | –26.13* | –24.97** | –46.75*** | –52.55*** | –33.40** | –28.78** | –32.13** | –59.53*** | –28.30** | –45.55** | –27.11** | ||
| Z(t) | –3.52* | –3.68* | –4.95*** | –3.54** | –3.81** | –4.40*** | –4.02*** | –5.55*** | –5.77*** | –4.54*** | –4.56*** | –4.32*** | –6.31*** | –4.02*** | –5.25*** | –3.91*** | ||
The relative prices variable for exports is the ratio of foreign GDP prices (expressed in euros) to exporter prices, and for imports, it is the ratio of import prices to domestic demand prices.
The coefficient for the period after the break in trend is the sum of this coefficient and the one for the trend starting at the beginning of the sampling period.
Phillips-Ouliaris-Hansen tests; critical values derived from Hamilton (1994).
cointegration relationship significant at 1 percent level;
at 5 percent level;
at 10 percent level.
where
ECM = log(Ex_Goods)–2.24 log(Worid_Demand) + 0.32 log(Reer_ULC) + 0.058 Dum93 + 6.60.
Estimation: 1992:Q3–2004:Q3, Durbin-Watson statistic = 1.68, SEEstimate = 0.013.
Exports of Services
where
ECM = log(Ex_Services)–log(Worid_Demand)–0.30 log(Relative_Price_ Services) + 0.86 log(Reer_CPI)–1.26–0.003 Trend–0.002 Trend2001:3.
Estimation: 1992:Q1–2004:Q3, Durbin-Watson statistic = 1.62, SEEstimate = 0.022.
where
ECM = log(Im_Goods)–log(Domestic_Demand)–log(Ex_Goods) + 0.32 log(Relative_Price_Goods) + 6.10 + 0.007 Trend—0.0009 Trend98.
Estimation: 1992:Q2–2004:Q3, Durbin-Watson statistic = 1.71, SEEstimate = 0.0087.
Imports of Services
where
ECM = log(Im_Services)–2.55 log(Domestic_Demand) + 0.75 log(Relative_Price_Services)–0.46 log(Ex_Services) + 13.64–0.0023 Trend + 0.0019 Trend95.
Estimation: 1992:Q1–2004:Q3, Durbin-Watson statistic = 1.80, SEEstimate = 0.011.
Italy
Exports of Goods
where
ECM = log(Ex_Goods)–1.93 log(World_Demand) + 0.70 log(Reer_ULC) + 2.36.
Estimation: 1980:Q2–2004:Q4, Durbin-Watson statistic = 2.01, SEEstimate = 0.040.
Exports of Services
where
ECM = log(Ex_Services)–1.58 log(World_Demand) + 0.91 log(Reer_ULC)–4.14—0.19 Dum88:1–89:4.
Estimation: 1981:Q3–2004:Q4, Durbin-Watson statistic = 1.77, SEEstimate = 0.037.
Imports of Goods
where
ECM = log(Im_Goods)–1.63 log(Domestic_Demand)–0.41 log(Ex_Goods) + 13.9.
Estimation: 1980:Q3–2004:Q4, Durbin-Watson statistic = 2.01, SEEstimate = 0.020.
Imports of Services
where
ECM = log(Im_NonManuf)–1.19 log(Domestic_Demand)–0.73 log(Ex_Services) + 0.75 log(Relative_Price_NonManuf) + 12.2.
Estimation: 1980:Q2–2004:Q4, Durbin-Watson statistic = 2.16, SEEstimate = 0.034.
Spain
Exports of Goods
where
ECM = log(Ex_Goods)–3.55 log(Worid_Demand) + 1.50 log(Reer_ULC)–12.30 + 0.19 Dum86:1–89:4.
Estimation: 1981:Q3–2004:Q4, Durbin-Watson statistic = 1.81, SEEstimate = 0.039.
Exports of Services
where
ECM = log(Ex_Services)–2.36 log(World_Demand) + 1.38 log(Reer_ULC)–10.2 + 0.15 Dum 93:1–95:2.
Estimation: 1981:Q2–2004:Q4, Durbin-Watson statistic = 1.74, SEEstimate = 0.014.
Imports of Goods
where
ECM = log(Im_Goods)–1.17 log(Domestic_Demand)–0.38 log(Ex_Goods) + 0.61 log(Relative_Price_Goods)–1.48 (Capacity_Util_Rate) + 2.22.
Estimation: 1981:Q3–2004:Q4, Durbin-Watson statistic = 2.17, SEEstimate = 0.019.
Imports of Services
where
ECM = log(Im_Services)–1.14 log(Domestic_Demand)–0.21 log(Ex_Services) + 4.65–0.0048 Trend89.
Estimation: 1981:Q3–2004:Q4, Durbin-Watson statistic = 2.17, SEEstimate = 0.018.
Appendix 6.3 Principle of Dynamic Contributions
The computation of dynamic contributions allows visualization, for each period, of the role of each explanatory variable estimated in a uni-variate mode. Because these contributions are derived directly from the econometric relationship, they explicitly take into account the structure and delays with which the explanatory variables influence the variable, as opposed to breakdowns on an accounting basis.
Let Yt be the endogenous variable, Xi the explanatory variables, and et the econometric residual. The error correction mechanism can be written as
where
is determined by the cointegration relationship. The estimated full dynamic can be summarized as
where L is the lag operator, and A(L) and Bi(L) are polynomials of this lag operator. From (6.A.1),
and
By inverting A(L), one obtains
The dynamic contributions of variables X to the growth rate of variable Y are then derived (additively) from the differentiation of (6.A.1):
This breakdown also allows visualization of what remains unexplained in the econometric relationship, through the contribution of the residuals.
References
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Bugamelli, M., and R. Tedeschi, 2005, “Le strategie di prezzo delle imprese esportatrici italiane,” Discussion Paper No. 563 (Milan: Bank of Italy).
Buisán, A., and E. Gordo, 1997, “El sector exterior en España,” Economic Study No. 60 (Madrid: Bank of Spain).
Deruennes, A., 2005, “Quelle lecture faire de [evolution recente des exportations francaises?” Diagnostics Previsions et Analyses Économiques No. 70 (Paris: Ministry of Finance, April). Available via the Internet: http://www.finances.gouv.fr/directions_services/dgtpe/dpae/pdf/2005-049-70.pdf
Estrada A., J.L. Fernandez, E. Moral, and A.V. Regil, 2004, “A Quarterly Macroeconometric Model of the Spanish Economy,” Working Paper No. 0413 (Madrid: Bank of Spain).
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Faruqee, H., 2004, “Exchange Rate Pass-Through in the Euro Area: The Role of Asymmetric Pricing Behavior,” IMF Working Paper 04/14 (Washington: International Monetary Fund).
Girard, E., 2004, “Comment Expliquer l’Evolution Recente du Compte Courant en France?” Diagnostics Previsions et Analyses Économiques No. 56 (Paris: Ministry of Finance, December). Available via the Internet: http://www.finances.gouv.fr/fonds_documentaire/Prevision/dpae/pdf/2004-092-56.pdf
Hamilton, J., 1994, Time Series Analysis (Princeton, New Jersey: Princeton University Press).
Istituto di Studi e Analisi Economica (ISAE), 2005, “Le Previsioni per l’Economia Italiana: Crescita et Struttura Produttiva,” ISAE Report (Rome). Available via the Internet: http://www.isae.it/Rapporti_trimestrali/rapporto_isae_febbraio_2005.pdf
LAngevin, C., and S. Serravalle, 2005, “Performances à l’exportation de la France et de l’Allemagne: une analyse par secteur et destination géographique,” INSEE Working Paper No. 2005/5 (Paris: Institut National de la Statistique et des Études Économiques).
Ministère de l’Économie, des Finances et de l’Industrie (MINEFI), 2005, “Peut-on mieux comprendre l’evolution récente de nos exportations? Une analyse écono-mométrique,” DGTPE (unpublished; Paris: Ministry of Finance, June).
Econometrically, the residuals are well behaved over the entire sample period, that is, they have zero mean and no significant autocorrelation. However, these properties of the entire sample period may not hold for any given subperiod, as is the case during 2001–04, suggesting that the model needs to be augmented with other unobservable or omitted explanatory factors.
The European Central Bank (2005) also finds that price competitiveness and foreign demand can explain export developments to a considerable extent for the euro area, though not always for individual countries.
A similar approach was used in national studies in France (Girard, 2004; Deruennes, 2005).
For exports, the relative price variable is the trade-weighted GDP deflator of trading partners over the export price of the relevant country. For imports, it is the ratio of each country’s import prices to its domestic demand price. This definition, particularly on the export side, is not entirely satisfactory owing to data limitations. It would have been preferable to have a price index of tradable goods. Because the GDP deflator is used instead, the variable may be contaminated by Balassa-Samuelson effects. If so, it would exhibit a declining trend, which could simply capture increasing trade openness of the trade partners of the four euro area countries examined here.
The estimated elasticity for Spain is higher than suggested by other studies (Buisan and Gordo, 1997; Estrada and others, 2004). However, these studies use partners’ imports rather than partners’ GDP as a proxy for world demand. With imports growing at a much faster pace than GDP over the sample period, it is not surprising that our estimate is much higher. Nonetheless, recent research suggests that it has decreased between the end of the 1990s and the middle of the 2000s.
In both France and Spain, higher capacity utilization drives up imports (positive elasticities in the estimated equations in Appendix 6.2), but the rate of capacity utilization fell on average during the period considered.
