Exports and Domestic Demand Pressure: A Dynamic Panel Data Model for the Euro Area Countries

22 Pages Posted: 7 Apr 2015

See all articles by Elena Bobeica

Elena Bobeica

European Central Bank (ECB)

Paulo Soares Esteves

Bank of Portugal - Economic Research Department

Antonio Rua

Bank of Portugal - Economic Research Department

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics; Bank of Estonia

Date Written: April 7, 2015

Abstract

The paper investigates the link between domestic demand pressure and exports by considering an error correction dynamic panel model for eleven euro area countries over the last two decades. The results suggest that there is a statistically significant substitution effect between domestic and foreign sales. Furthermore, this relationship appears to be asymmetric, as the link is much stronger when domestic demand falls than when it increases. Weakness in the domestic market translates into increased efforts to serve markets abroad, but, conversely, during times of boom, exports are not negatively affected by increasing domestic sales. This reorientation towards foreign markets was particularly important during the crisis period, and thus could represent a new adjustment channel to strong negative domestic shocks. The results have important policy implications, as this substitution effect between domestic and external markets might allow the euro area countries under stress to improve their trade outcomes with a relatively small downward pressure on domestic prices.

Keywords: exports, domestic demand pressure, asymmetry

JEL Classification: C22, C50, F10

Suggested Citation

Bobeica, Elena and Soares Esteves, Paulo and Rua, Antonio and Staehr, Karsten, Exports and Domestic Demand Pressure: A Dynamic Panel Data Model for the Euro Area Countries (April 7, 2015). ECB Working Paper No. 1777. Available at SSRN: https://ssrn.com/abstract=2591293

Elena Bobeica (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paulo Soares Esteves

Bank of Portugal - Economic Research Department ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

Antonio Rua

Bank of Portugal - Economic Research Department ( email )

R. do Ouro, 27
Lisboa, 1100-150
Portugal

Karsten Staehr

Tallinn University of Technology (TUT) - Department of Finance and Economics ( email )

Akadeemia tee 3-486
Tallinn, 12618
Estonia

HOME PAGE: http://www.ttu.ee/karsten-staehr

Bank of Estonia ( email )

Estonia Building 13
Tallinn, 15095
Estonia

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