Cultural Proximity and Trade

Cultural proximity is an important determinant of bilateral trade volumes. However, empirical quantification and testing are difficult due to the elusiveness of the concept and lack of observability. This paper draws on bilateral score data from the Eurovision Song Contest, a very popular pan-European television show, to construct a measure of cultural proximity which varies over time and within country pairs, and that correlates strongly with conventional indicators. Within the framework of a theory-grounded gravity model, we show that our measure positively affects trade volumes even if controlling for standard measures of cultural proximity and bilateral fixed effects.International trade Gravity equation Cultural proximity Eurovision song contest

The underestimated virtues of the two-sector AK model

We show that the two-sector version of the AK model proposed by Rebelo (1991) can be read as an endogenous growth extension of Greenwood, Hercowitz and Krusell (1997). By confining constant returns to capital to the investment goods sector, the model generates endogenously the secular downward trend of the relative price of equipment investment and the rising real investment rate observed in US NIPA data. Whereas Jones (1995) criticizes that the one-sector model fails to reconcile the empirical facts of trending real investment rates and stationary output growth, this incompatibility vanishes in the two-sector version. Finally, a simple technological shock can reproduce the ‘1974’ break in post World War II US data. Thus, AK-type endogenous growth models comply much better with empirical evidence, once they are augmented with a strictly concave consumption sector.AK model; embodiment; endogenous growth; obsolescence; ‘1974’

Kyoto and the Carbon Footprint of Nations

A country’s carbon footprint refers to the CO 2 emissions caused by domestic absorptionactivities. Trade in goods drives a wedge between the footprint and local emissions. Weprovide a panel database on carbon footprints and carbon net trade. Using a differencesin-differences IV estimation strategy, we evaluate the Kyoto Protocol’s effects on carbonfootprints and emissions. Instrumenting countries’ Kyoto commitment by their participationin the International Criminal Court, we show that Kyoto reduced domestic emissionsin committed countries by 7%, has not lowered footprints, but increased the share ofimported over domestic emissions by 17 percentage points. This indicates carbon leakage.Carbon content of trade, carbon footprint, carbon leakage, evaluation model, instrumental variables

Hidden Protectionism Non-Tariff Barriers and Implications for International Trade. Study of the Ifo Institute on behalf of the Bertelsmann Foundation Final Report (GED Study) on November 17, 2017

Over the past months there has been a steady increase in international anti-trade rhetoric around the world. In fact, already after the dramatic collapse of international trade in the wake of the financial crisis in 2007/08, there was a common fear that governments may respond to domestic economic challenges by increasing tariffs and other trade barriers to protect their economies. Such an uncoordinated trade policy would have possibly satisfied domestic interests in the short run as a symbolic reaction but at the same time it would have resulted in an even stronger slow-down in economic growth. One big difference in how countries reacted to the recent global financial crisis of the 21st century

Kyoto and the carbon content of trade

A unilateral tax on CO2 emissions may drive up indirect carbon imports from non-committed countries, leading to carbon leakage. Using a gravity model of carbon trade, we analyze the effect of the Kyoto Protocol on the carbon content of bilateral trade. We construct a novel data set of CO2 emissions embodied in bilateral trade flows. Its panel structure allows dealing with endogenous selection of countries into the Protocol. We find strong statistical evidence for Kyoto commitments to affect carbon trade. On average, the Kyoto protocol led to substantial carbon leakage but its total effect on carbon trade was only minor. --Carbon leakage,gravity model,international trade,climate change,embodied emission,input-output analysis

Can International Migration Ever Be Made a Pareto Improvement?

We argue that compensating losers is more difficult for immigration than for trade and capital movements. While a tax-cum-subsidy mechanism allows the government to turn the gains from trade into a Pareto improvement, the same is not true for the so-called immigration surplus, if the redistributive mechanism is not allowed to discriminate against migrants. We discuss policy conclusions to be drawn from this fundamental asymmetry between migration and other forms of globalization.Migration Surplus, Redistribution, Pareto Improvement

Specialization on a technologically atagnant aector need not be bad for growth

This paper presents a simple North-South model of endogenous growth, based on learning by doing, which is consistent with the following empirical observations: (i) the price of investment goods relative to consumption goods has been falling for the last 40 years in most industrialized countries, (ii) poor countries are net importers of investment equipment and (iii) after a period of initial convergence, the sample of open economies exhibits remarkable stability of the per capita income distribution. In contrast to the research tradition started by Lucas (1988), in the proposed model, specialization on the technologically stagnant consumption sector does not entail a growth penalty.endogenous growth; AK model; international trade; embodied technical change

Cultural proximity and trade

Cultural proximity increases bilateral trade flows through a trade-cost and a bilateral-affinity (preferences) channel. Conventional measures of cultural proximity, such as common language, common religion, etc., do not allow to separately quantify those channels empirically. We argue that quality-adjusted Eurovision Song Contest (ESC) scores can be used as dyadic, time-variant information on European countries' cultural proximity. Assuming that the tradecost related component of cultural proximity is time-invariant, in a gravity model of bilateral trade, the time dimension of the ESC data allows to identify the preferences effect. The validity of our identification strategy can be tested by exploiting the lack of systematic reciprocity in ESC scores. While we find robust evidence for a sizable preferences effect, the impact of cultural proximity on trade runs largely through the cost effect. --international trade,gravity equation,cultural prox imity,identification

Home Market Effects and the Single-Sector Melitz Model

Increasing-returns-to-scale imperfect competition trade models predict a more than proportionate relationship between the larger country’s share in world endowments and its share in producing firms: the so called home market effect (HME). While this result plays a key role in empirical testing, its theoretical foundation typically posits a linear, friction-free and perfectly competitive outside sector. Replacing this assumption with firm heterogeneity and Melitz (2003) type selection-into-exporting, we demonstrate the existence of a weak and a strong HME. The HMEs are generally non-linear; they are magnified by lower trade costs or more pronounced productivity dispersion. The weak version of the HME continues to hold for general sampling distributions and if the conventional sorting condition fails. In terms of demand shares, a HME holds if demand shocks are due to endowment shocks but reverses in the case of productivity shocks. Finally and in contrast to the model with an outside sector, trade liberalization leads to convergence of real per capita income.home market effect, monopolistic competition, heterogeneous firms, economic geography

Export Credit Guarantees and Export Performance:An Empirical Analysis for Germany

Recent literature finds that exporters are particularly vulnerable to financial market frictions.As a consequence, exports may be lower than their efficient levels. For this reason,many countries support exporters by underwriting export credit guarantees. The empiricalevidence on the effects of those policies is, however, very limited. In this paper, we usesectoral data on export credit guarantees issued by the German government. We investigatewhether those guarantees indeed do increase exports, and whether they remedy the exportrestrictingeffect of credit market imperfections both on the sectoral and on the exportmarket levels. Exploiting the sectoral structure of a rich three-ways panel data set ofGerman exports, we control for unobserved heterogeneity on the country-year, sectoryear,and country-sector dimensions. We document a robust export-increasing effect ofguarantees. There is some evidence that the effect is larger for export markets with poorfinancial institutions and in sectors that rely more on external finance.Financial development, credit constraints, gravity equation, financial crisis.