A simple model of multiple equilibria and default. CEPS Working Document No. 366, 16 July 2012

This Working Document by Daniel Gros presents a simple model that incorporates two types of sovereign default cost: first, a lump-sum cost due to the fact that the country does not service its debt fully and is recognised as being in default status, by ratings agencies, for example. Second, a cost that increases with the size of the losses (or haircut) imposed on creditors whose resistance to a haircut increases with the proportional loss inflicted upon them. One immediate implication of the model is that under some circumstances the creditors have a (collective) interest to forgive some debt in order to induce the country not to default. The model exhibits a potential for multiple equilibria, given that a higher interest rate charged by investors increases the debt service burden and thus the temptation to default. Under very high debt levels credit rationing can set in as the feedback loop between higher interest rates and the higher incentive to default can become explosive. The introduction of uncertainty makes multiple equilibria less likely and reduces their range.

Exports and Capacity Constraints: A smooth transition regression model for six euro-area countries. CEPS Working Document No. 395/May 2014

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.

The Empirical Content of the Present Value Model: A survey of the instrumental uses of farmland prices. Factor Markets Working Document No. 53, June 2013

After reviewing the Present Value Model (PVM), in its basic form and with its major extensions, the authors carried out a literature review on the instrumental uses of farm land prices; namely what land prices may reveal in the framework of the PVM. Urban influence, non-market goods and climate change are topics where the PVM used with applied data may reveal farmers’ or landowners’ beliefs or subjective values, which are discussed in this paper. There is also extensive discussion of the topic of public regulations, and how they may affect land price directly, or through its present value.

Europe's continental regionalism. CEPS Working Document No. 375, February 2013

This paper reviews the multiple forms of European continental regionalism, which takes the overall shape of a complex set of concentric circles, with a substructure of a core group within the EU based on the euro and Schengen areas, and several rings of neighbours outside, including the European Economic Area, the regions of the EU’s neighbourhood policy and finally some pan-European organisations. While all world regions have their own unique features, the European case offers some important lessons that should be of interest to other world regions. The first is what appears to be a relatively robust model for single market integration. The second consists of the lessons currently being learned on the hazards on monetary integration without adequate fiscal and political integration. The third lesson is another warning, over the difficulties of anticipating the political dynamics of integration processes once set in motion, often described in Europe as a ‘journey to an unknown destination’. The fourth consists of the EU’s current efforts to develop a comprehensive neighbourhood policy, which is encountering difficult issues of matching ambitious objectives with incentives of adequate weight. Nevertheless, the policy sees a landscape of positive and constructive relations between the EU and its neighbours, in marked contrast to some ugly conflictual or coercive features seen in the cases of other continental hegemons – the three BRIC states of China, India and Russia, but not the fourth one, Brazil.

Emergent Brazil and the Curse of the ‘Hen’s Flight’. CEPS Working Document No. 379, 27 February 2013

The ‘Emergent Brazil’ growth model is reaching its limits. Its main engines have been slowing significantly since the beginning of the global financial and economic crisis. Even its much-praised predictable macroeconomic policy has been eroded by political interference. Inflationary pressures are growing and GDP performance is anaemic. As ominous, Brazil cannot compensate for its domestic deficiencies with an export drive. Commodity exports are suffering with the world economic slow-down and the manufacturing industries’ competitiveness is in sharp decline. Brazil has put all its trade negotiation eggs into the South American and WTO baskets, and now its export market share is threatened by the Doha Round paralysis, the Latin American Alianza del Pacífico, and the US-led initiatives for a Trans-Pacific Partnership and a trade and investment agreement with the EU. Paradoxically, this alarming situation opens a window of opportunity. There is a mounting national consensus on the need to tackle head-on the country’s and its industries’ lack of competitiveness. That means finding a solution to the much-decried ‘Brazil Cost’ and stimulating private-sector investment. It also entails an aggressive trade-negotiating stance in order to secure better access to foreign markets and to foster more competition in the domestic one. The most promising near-term goal would be the conclusion of the EU–Mercosur trade talks. A scenario to overcome the paralysis of these negotiations could trail two parallel paths: bilateral EU–Brazil agreements on ‘anything but trade’ combined with a sequencing of the EU–Mercosur talks where each member of the South American bloc could adopt faster or slower liberalisation commitments and schedules.