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.

Macroeconomic Scenarios for the Euro-Mediterranean Area Quantification based on the GEM-E3 Model. MEDPRO Report No. 7, July 2013

Four alternative macroeconomic scenarios for southern Mediterranean countries are quantified in this study with the use of GEM-E3, a general equilibrium model. These are i) the continuation of current policies (business-as-usual scenario), ii) southern Mediterranean–EU cooperation (Euro-Mediterranean Union scenario), iii) a global opening of the southern Mediterranean countries and cooperation with the rest of the Middle East and other developing countries like China (Euro-Mediterranean alliance scenario), and iv) a deterioration in the regional political climate and a failure of cooperation (Euro-Mediterranean under threat scenario). Explicit assumptions on trade integration, infrastructure upgrade, population and governance developments are adopted in each scenario. The simulation results indicate that an infrastructure upgrade and governance improvements in the context of southern Mediterranean–EU cooperation could benefit most of the countries under consideration. The analysis remains important in light of ongoing regional developments and the need to design the best policies to pursue in the aftermath of the Arab spring.

Labour Supply Curves for EU Member and Candidate States: An applied general equilibrium analysis. Factor Markets Working Paper No. 26, June 2012

This paper introduces a more sophisticated modelling of the labour market functioning of the European member and candidate states through the introduction of labour supply curves in an applied general equilibrium model. A labour supply curve offers a middle way in labour supply modelling, sitting between the two commonly adopted extremes of spare capacity and full employment. The first part of the paper outlines the theoretical foundation of the labour supply curve. Real world data is then used to derive labour supply curves for each member state, along with Croatia and Turkey. Finally, the impact of the newly specified labour markets on the results of an illustrative scenario involving reform of the common agricultural policy is explored. The results of computable general equilibrium analysis with the labour supply curve confirm the theoretical expectation that modelling the labour supply through an upwards-sloping curve produces results that lie between the extremes of spare capacity of the labour factor and fully employed labour. This specification captures a greater degree of heterogeneity in the labour markets of the member and candidate states, allowing for a more nuanced modelling of the effects of policy reform, including welfare effects.