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Appendix A. Variable Descriptions
Appendix B. Econometric analysis
The authors are grateful to Ercument Tulun and Toh Kuan for assistance in accessing the IMF WEO database. The paper has benefited from discussions with Bob Traa, Hans W Sinn, Martin Werding, and comments by seminar participants of the IMF’s EUR seminar series and the IFO seminar in Munich.
Import growth has been strong despite weak domestic demand and low consumption growth.
By 2005, Germany became the official world goods export champion if measured in nominal $US values. German Statistical Office (2006).
E.g. trade activities within the euro area could have also been spurred by tax fraud (VAT carousel trade).
Improved price competitiveness could have also been helped by cuts in profit margins, which is however unlikely given the large increase in profit shares in the corporate sector since the early 2000s.
This variable was computed from data of the IMF’s World Economic Outlook database.
Another reason why exports of investment goods may have picked up are growing incentives to further specialize in capital intensive activities. This argument has been put forward by Sinn (2006) and is based on a standard trade model with labor market rigidities (Davies 1998). In this model the existence of a binding wage floor (e.g. through high welfare benefits) can drive a wedge between domestic and international relative factor prices. As a result, the economy adjusts through further specialization in the capital intensive sector which creates unemployment in equilibrium. This process leads to more international trade, but also an inefficient allocation of factors. Sinn argues that this development could have taken place in Germany. European economic integration and a global labor supply shock have both decreased the price for unskilled labor and driven a wedge between German relative factor prices and international prices. Germany’s increased exports of capital intensive goods could therefore be interpreted as a response to a global labor supply shock. Thus, a slowdown in global trade could have a relatively strong negative growth impact on the German economy.
An increase in REERulc denotes a real appreciation and means a loss of competitiveness. Between 1992 and 1996 cost competitiveness decreased by roughly 30 percent followed by a 25 percent real depreciation thereafter. The real effective exchange rate stabilized in 2001 despite a significant appreciation of the Euro vis a vis the US dollar indicating further decreases in relative unit labor costs.
A value of 1 indicates a constant market share or that exports from Germany to its trading partners increase in line with world trade volume. A value smaller than one indicates a loss in global export market share.
The number of linearly independent rows in a matrix is called the rank.
Data for export demand for industrial countries comes from the IMF WEO database and reflected trade weighted import demand for these countries. Since Germany is part of this group and its export demand could not be removed from the group average, the estimated of the common component has been biased upwards. As a result the country specific export demand component is biased downwards which underplays its role in explaining the increase in export market share.
The number of linearly independent rows in a matrix is called the rank.
This puzzle of the output investment ratio is borne out in the coefficients in the second part of Table 6.C. When we initially specified this model our hypothesis was that LGdem and LGinv would both have the same sign. However, they have opposite signs and have approximately the same magnitudes. This is consistent with the idea of a stable share of investment to GDP overtime and across trading partners. There are three reasons for this puzzle. First, the result becomes clearer when we disaggregate this ratio by different regions. Increases in export demand from other European countries are negatively correlated with investment activity, and that investment growth in the US is not correlated with export demand from the US. Since these two regions have a large weight in the aggregate index, they may account for the opposite signs. Second, further analysis highlights another potential problem with the investment measure. Implicitly the investment index assumes the fraction of capital goods imported per investment unit is constant across countries. This assumption is too restrictive and unlikely to hold. In particular, the import demand for capital goods from fast growing emerging markets may have been underestimated. The net effect of the countervailing influences cannot be assessed with the current data. The exchange rate elasticity is negative and perhaps significant.