Exports and domestic demand pressure: a dynamic panel data model for the euro area countries

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The paper is released in order to make the research of CompNet generally available, in preliminary form, to encourage comments and suggestions prior to final publication. The views expressed in the paper are the ones of the author(s) and do not necessarily reflect those of the ECB, the ESCB, and of other organisations associated with the Network. Terms of use: Documents in AcknowledgementsThe authors would like to thank the participants in the Competitiveness Research Network meeting held at the European Central Bank in July 2014, where a preliminary version of the paper was presented, and an anonymous referee. Elena BobeicaEuropean Central Bank; e-mail: elena.bobeica@ecb.int Paulo Soares EstevesBanco de Portugal; e-mail: pmesteves@bportugal.pt António RuaBanco de Portugal, Universidade Nova de Lisboa; e-mail: antonio.rua@bportugal.pt Karsten StaehrTallinn University of Technology, Eesti Pank; e-mail: karsten.staehr@eestipank.ee Abstract The paper investigates the link between domestic demand pressure and exports by considering an error correction dynamic panel model for eleven euro area countries over the last two decades. The results suggest that there is a statistically significant substitution effect between domestic and foreign sales. Furthermore, this relationship appears to be asymmetric, as the link is much stronger when domestic demand falls than when it increases. Weakness in the domestic market translates into increased efforts to serve markets abroad, but, conversely, during times of boom, exports are not negatively affected by increasing domestic sales. This reorientation towards foreign markets was particularly important during the crisis period, and thus could represent a new adjustment channel to strong negative domestic shocks. The results have important policy implications, as this substitution effect between domestic and external markets might allow the euro area countries under stress to improve their trade outcomes with a relatively small downward pressure on domestic prices.

On Domestic Demand and Export Performance in the Euro Area Countries: Does Export Concentration Matter?

“…The results point to some inertia concerning the evolution of exports' market shares given the importance of its autoregressive term, and to a strong significance of the contemporary real exchange rate. In this initial exercise, the coefficient of domestic demand has the expected sign but is clearly less significant than the ones previously obtained [Bobeica et al (2015)].…”

“…Concerning a possible long-run relationship, it should be mentioned that it is not clear from a theoretical point of view what would be its expected sign or magnitude. Moreover, both Rua (2013, 2015) and Bobeica et al (2015) do not obtain a significant coefficient when including domestic demand in a long-run correction mechanism along real exchange rate for explaining the evolution of exports' market shares. In addition, the short sample availability when working with annual figures and the presence of some possible structural breaks would hinder the estimation of a long run relationship.…”

“…An annual panel data model is used to explore why the substitution between sales to domestic and foreign markets might differ across countries. In line with Rua (2013, 2015) and Bobeica et al (2015) the model assumes that exports' market shares for each country i at period t (the difference between exports (X t,i ) and external demand (D t,i )) is explained by its own evolution in the previous year, and the present and past developments of the real exchange rate (E t,i ) and domestic demand (DD t,i ).…”

“…Recent studies point to a negative relationship between exports' market shares and domestic demand pressure in the euro area countries, which represent an additional adjustment channel given the real exchange rate rigidity implied by the low inflation environment in a common currency area Rua (2013, 2015), Belke et al (2014Belke et al ( , 2015 and Bobeica et al (2015)]. This paper explores the role of the export structure in terms of product concentration in explaining the differentiated reaction to domestic developments.…”

“…Using a non-linear smooth transition regression model, they find different results across countries. 4 Bobeica et al (2015) explore this type of relationship using a quarterly panel dataset for 11 of the 12 former euro area countries (Greece is excluded given the lack of long-time span quarterly data), extending for the euro area the results presented for the Portuguese economy in Rua (2013, 2015), i.e. a negative and asymmetric relationship between sales for domestic and foreign markets.…”