Philip U. Sauré

Transmission of Sovereign Risk in the Euro Crisis

We assess the role of financial linkages for the transmission of sovereign risk in the Euro crisis. Building on the narrative approach by Romer and Romer (1989, 2010) and augmented by Mertens and Ravn (2013), we use financial news to identify structural shocks in a vector autoregressive model of daily sovereign CDS premia for eleven European countries. To estimate how these shocks transmit across borders, we use data on cross-country bank exposures to sovereign debt. Our results indicate that cross-border financial exposures constitute important transmission channels: a reduction of exposure to overall Greek debt by one standard deviation is associated with a reduction in the response of the sovereign CDS to a shock to Greek sovereign risk by about three quarter in the average country. Decomposing these effects, we find that exposures to sovereign debt constitute significant transmission channels, while we find no robust support for transmission through bank-to-bank lending.

Effects of Trade on Female Labor Force Participation

This paper uncovers a counter-intuitive effect of international trade on female labor shares: whenever trade expands, sectors intensive in female labor, female labor shares drop and vice versa. According to our key assumption a rising capital labor ratio closes the gender wage gap. The paper’s mechanism operates as follows. Expansions of sectors intensive in female labor come along with contractions of sectors intensive in male labor. These contractions imply that male labor reallocates to sectors intensive in female labor. The capital labor ratio in the latter sectors drops, which widens the gender wage gap and causes a decrease in aggregate female labor shares. Based on instrumented U.S.-Mexican trade flows, we provide empirical evidence in support of our theory.

CHF strength and Swiss export performance -- evidence and outlook from a disaggregate analysis

Why has Swiss export performance been so strong during the past quarters despite the marked appreciation of the Swiss Franc (CHF)? What is the outlook for Swiss exports given the still elevated CHF? In this article, we shed light on these questions by analysing a panel of Swiss exports disaggregated along both the regional and the industry dimension. To explain the export performance of the recent past, we estimate how the exchange rate and demand growth in each export market affect trade flows and also, how this varies across different industries. The appreciation of the CHF has considerably dampened Swiss export performance. As a counterfactual, we ask how Swiss exports would have developed had the CHF stayed flat against other currencies during the 5 years leading up to October 2010. Compared to this scenario, the Swiss export industry has already lost a cumulative of CHF 35 billion in revenues due to the CHF appreciation. At the current juncture, monthly exports are reduced by CHF 2.7 billion (around 17%). We show that the key reason for the strong export performance despite the CHF strength was the rebound in global demand in the aftermath of the financial crisis. Moreover, we also document that the timing of global demand growth has completely masked the effect of the CHF strength: during the last quarters, periods of pronounced CHF appreciation always coincided with strong recovery of global demand. Failure to account for this coincidence could lead to the wrong assumption that the exchange rate matters very little for Swiss export performance. Last, to gauge the likely evolution of Swiss exports and their regional composition in the years to come, we combine our estimation results with the regional Gross Domestic Product (GDP) and exchange rate forecasts provided by the Swiss National Bank (SNB). Following this approach, we predict that over the next 3 years, Swiss exports will rise a combined 16%, with little less than half of this increase going to Emerging Asia and 30% to the euro zone. We also document the key industries that will drive Swiss export growth in the near future.

Domestic Policies in Self-Enforcing Trade Agreements

If all cross-country externalities travel through the terms of trade, efficient trade agreements may simply target the terms of trade and ignore domestic policies. This argument has been advanced by several prominent studies. Simply put, it reads: terms-of-trade agreements are efficient. I show that this result breaks down if the following two standard conditions are met. First, a self-enforcement requirement constrains the agreement and, second, production possibilities are intertemporally linked. These conditions imply that a country׳s current policy mix affects future production possibilities and thus impacts payoffs under potential defection. Since a terms-of-trade agreement does not specify a country׳s policy mix, it effectively invites countries to manipulate their own defection temptation. To be self-enforcing, terms-of-trade agreement must ensure that no country, while optimizing its policies on the iso-terms-of-trade schedule, will abandon its zone of voluntary cooperation. This requirement implies that terms-of-trade agreements are inefficient and can be improved upon by agreements that target policies directly.

Dynamic Entry in Vertically Differentiated Markets

We develop a model of vertical innovation in which firms incur a market entry cost and choose a unique level of quality. Once established, firms compete for market shares, selling to consumers with heterogeneous tastes for quality. The equilibrium of the pricing game exists and is unique within our setup. Exogenous productivity growth induces firms to enter the market sequentially at the top end of the quality spectrum. A central feature of the model is that optimization problems of consecutive entrants are self-similar so that new firms enter in constant time-intervals and choose qualities that are a constant fraction higher than incumbent qualities. The asymmetries of quality choice, which inevitably arise because the quality spectrum has top and a bottom, is thus overcome by sequential entry. Our main contribution lies in handling these asymmetries.

When Stolper-Samuelson Does Not Apply: International Trade and Female Labor

Whenever a country specializes on industries that use female labor intensively, its female labor force participation should increase. This intuition, which bases on the Stolper-Samuleson Theorem, may fail in a three-factor, two-good model. We develop a model where capital, male and female work are distinct factors of production. We follow an established assumption and postulate that capital accumulation closes the gender wage gap. In this setup, the Stolper-Samuleson based intuition fails necessarily: the gender wage gap widens in countries that specialize on sectors intensive in female labor, and vice versa.

On Subsidies in Trade Agreements

The role of production subsidies in trade agreements has long been neglected by trade economists. To fill this gap, Bagwell and Staiger (2006) analyze this issue and show that, quite universally, market access is the sole variable that efficient trade agreements need to address and that, consequently, the prevailing WTO legislation is inefficient. The present paper shows that this argument fails when trade agreements are required to be self-enforceable. Through their effect on output, subsidies impact the trade-off between defecting from trade agreements and respecting them. Hence, welfare-maximizing trade agreements must include subsidy rules. In the most realistic scenario production subsidies are prohibited and any trade agreement that addresses market access only is necessarily inefficient. In this sense, the paper makes a strong case for the WTO subsidy rules.

Trade Liberalization, Female Labor Force Participation and Economic Growth

This research argues that the interaction between international trade and female labor force participation has played a significant role in the process of development. The main concern of our study is to show how differences in per household capital stocks, via international specialization, affect household choice of female labor force participation and fertility, and how these decisions, in turn, feed back and affect the accumulation of capital. Interestingly, and in contrast to conventional wisdom, our theory suggests that specialization in females comparative advantage sectors expands these sectors but hinders female labor force participation, while specialization in males comparative advantage sectors generates the mirror image. The reason is that men are assumed to have an advantage in the labor market and therefore are always formally employed. As a result, specialization of the economy in the females comparative advantage sector drives men into this sector and female out of formal employment.