Exports and Capacity Constraints: A Smooth Transition Regression Model for Six Euro-Area Countries

CEPS Working Documents No. 395

34 Pages Posted: 8 May 2014

See all articles by Ansgar Hubertus Belke

Ansgar Hubertus Belke

University of Duisburg-Essen - Department of Economics and Business Administration; IZA Institute of Labor Economics; Centre for European Policy Studies

Anne Oeking

International Monetary Fund (IMF)

Ralph Setzer

European Central Bank (ECB)

Multiple version iconThere are 3 versions of this paper

Date Written: May 6, 2014

Abstract

The significant gains in export market shares made in a number of vulnerable euro-area crisis countries have not been accompanied by an appropriate improvement in price competitiveness. This paper argues that, under certain conditions, firms consider export activity as a substitute for serving domestic demand. The strength of the link between domestic demand and exports is dependent on capacity constraints. Our econometric model for six euro-area countries suggests domestic demand pressure and capacity-constraint restrictions as additional variables of a properly specified export equation. As an innovation to the literature, we assess the empirical significance through the logistic and the exponential variant of the non-linear smooth transition regression model. We find that domestic demand developments are relevant for the short-run dynamics of exports in particular during more extreme stages of the business cycle. A strong substitutive relationship between domestic and foreign sales can most clearly be found for Spain, Portugal and Italy, providing evidence of the importance of sunk costs and hysteresis in international trade.

Keywords: export, euro-area, crisis, EU, price competitiveness, capacity constraints

Suggested Citation

Belke, Ansgar Hubertus and Oeking, Anne and Setzer, Ralph, Exports and Capacity Constraints: A Smooth Transition Regression Model for Six Euro-Area Countries (May 6, 2014). CEPS Working Documents No. 395, Available at SSRN: https://ssrn.com/abstract=2433926

Ansgar Hubertus Belke (Contact Author)

University of Duisburg-Essen - Department of Economics and Business Administration ( email )

Universitätsstr. 9
Essen, 45141
Germany

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Centre for European Policy Studies ( email )

1 Place du Congres, 1000
Brussels, 1000
Belgium

Anne Oeking

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Ralph Setzer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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