Roberto A. De Santis

Crude oil price fluctuations and Saudi Arabia's behaviour

This study seeks to explain why crude oil prices fluctuate, the main cause being the quota regime, which characterises the OPEC agreements. Given that the Saudi oil supply is inelastic in the short term, a shock in the oil market is accommodated by an immediate price change. In contrast, a dominant firm behaviour in the long term causes an output change, which is accompanied by a smaller price change. This explains why oil prices overshoot. The results of a general equilibrium model applied to Saudi Arabia support this analysis. They also indicate that Saudi Arabia does not have any incentive in altering the crude oil market equilibrium with either positive or negative supply shocks; and that its behaviour is asymmetric in the presence of world demand shocks, having an incentive (disincentive) in intervening if a negative (positive) demand shock hits the crude oil market. A second set of simulations is designed to understand what might be a correct OECD policy to lower prices. A tax cut would worsen the situation, whereas policies which can increase the price elasticity of demand seem to be very effective.

Foreign direct investment and environmental taxes

Abstract This paper studies the effect of foreign direct investment (FDI) on environmental policy stringency in a two-country model with trade costs, where FDI could be unilateral and bilateral and both governments address local pollution through environmental taxes. We show that FDI does not give rise to ecological dumping because the host country has an incentive to shift rents away from the source country toward the host country. Environmental policy strategies and welfare effects are studied under the assumption that parameter values support FDI to be profitable.

Endogenous market structures and the gains from foreign direct investment

This paper discusses the gains from liberalizing foreign direct investment (FDI) in a two country setting with endogenous market structures. Two different scenarios are investigated. In the first scenario, headquarters are run in the domestic country only and the FDI regime is compared to the intersectoral trade case. If multinational and national firms coexist, market concentration occurs and FDI is welfare improving for the foreign country, but welfare declining for the domestic country. In the second scenario, headquarters are run in both countries and the FDI regime is compared to the intraindustry trade case. This regime switch leads to mutual welfare gains, irrespective of market structure effects.

Wage Inequality in the United Kingdom: Trade and/or Technology?

I employ two alternative intra-industry trade Applied General Equilibrium (AGE) models to explain some stylised facts of the British economy. The model with skill-biased technical change can explain the rise in wage inequality between skilled and unskilled workers, the decline in manufacturing and the expansion of modern services. However, the model where technical change is trade-induced performs better, because it can also explain the exponential rise of imported intermediate capital goods and developments in the wage rate of unskilled workers.

Does Business Cycle Risk Account for Systematic Returns from Currency Positioning? The International Perspective

Low-yielding currencies (relative to dollar interest rate and based on annual data) represent a strong hedging tool for a US investor in the event of a slowdown of the US economy, as shown in Lustig and Verdelhan (2007). In this paper we show that such a conclusion is far more general, holding jointly for representative agents in a number of countries (Australia, Canada, France, United Kingdom and United States) and for quarterly holding period returns, which are closer to the frequency at which portfolios are re-balanced. The prices of risk for nondurable and durable consumption growth explain the cross-sectional variation of average currency portfolio returns, as confirmed by high Rý coefficients. However, statistical significance of the coefficients, checked both individually and joint, does not exceed 10%. Overall, taking an economic standpoint, holding currencies that pay out low interest rates provides some means of insurance against economic slowdown in the domestic economy.

The Minimum Economic Dividend for Joining a Currency Union

Abstract A two-country model is developed to show how the optimality of a currency union depends on whether it brings an economic dividend in terms of potential growth and the Balassa-Samuelson (BS) effect (the steady appreciation of the real exchange rate due to cross-country differences in intersectoral productivity gaps). The model shows that such dividend needs to be larger, the higher the BS effect, the smaller the size of the economy, the larger the cross-country difference in the standard deviation of the supply shocks, the smaller their correlation and the larger the standard deviation of real exchange rate shocks. We calibrate the model to quantify such dividend as a function of plausible ranges of the parameter values. The results suggest that both the BS effect and the size of real exchange rate shocks play a key role in evaluating the optimality of accessing the currency union.

Why exporting countries agree to voluntary export restraints: the oligopolistic power of the foreign supplier

This study analytically shows that a VER serves as an institution to protect incumbent firms of an exporting country. A VER is an entry barrier in the export market. It favours the concentration of industry, and allows established firms to better exploit economies of scale by producing output at lower average cost. Since the break-even price for potential firms is the average cost, entry in the domestic market is also inhibited, regardless of the form of competition. A VER also allows the raising of the price cost margin in the export market. However, the smaller the country, the greater the possibility also of a larger monopoly power in the domestic market. The impact on firm size is ambiguous. From the social point of view, three conventional effects from the elimination of a VER are usually considered: the rent loss effect, the efficiency effect and the export producer price effect. In this study, two further effects on welfare are examined: the increased intermediate inputs cost effect and the variety effect. The global effect on welfare on an exporting country is analytically indeterminate. A general equilibrium model applied to Turkey supports the conjecture that with the elimination of a VER, under Bertrand or Cournot conjectures, the loss in social welfare, the higher average cost, the fall of the concentration of the industry, and the fall of monopoly power of incumbent firms, are the key elements in understanding the rationale beyond VERs.

Trade Policies for Exporting Industries under Free Entry

Abstract This paper computes optimal export taxes and domestic production subsidies for exporting industries under free entry.We show that domestic welfare is not at maximum, as is typically believed, when the export price is a monopoly price, and the domestic price is a competitive price, because a market structure effect has to be taken into account. Furthermore, we show that the optimal tax/subsidy formulas for an oligopoly coincide with those under perfect competition, if foreign and domestic demand functions are both linear. We also discuss optimal trade policies when only one instrument is available, and we run numerical simulations to determine and compare optimal trade taxes under endogenous and exogenous market structures.

Spillovers among sovereign debt markets: identification by absolute magnitude restrictions

This paper studies spillovers among US and European sovereign yields. We provide a new method based on absolute magnitude restrictions of the impact matrix to identify the countries that were the main sources of spillovers. Despite the large size of shocks from euro area stressed countries, connectedness among sovereign yields declined between 2008 and 2012 due to financial fragmentation, particularly between countries with more divergent business and fiscal cycles. We show that none of the sovereign yields are insulated from foreign shocks and that shocks to the Greek bond market in 2010 explained 20-30% of the variance of sovereign yields in stressed countries, while in 2011-2012 Italy (not Spain) was the source of systemic risk.