Introduction Model Results Conclusions Appendix

Financial Globalization andMonetary Transmission1

Simone Meier, Swiss National Bank

Conference onFinancial Frictions and Monetary Policy in an Open Economy

Federal Reserve Bank of Dallas, March 16, 2012

1The views in this presentation are those of the author and do notnecessarily represent those of the Swiss National Bank.

Introduction Model Results Conclusions Appendix

Introduction

Aim of the paper

Analysis of the e¤ects of international �nancial integration onthe impact of monetary policy in a standard theoretical openeconomy framework

Assessment of the concern that �nancial integrationundermines monetary policy e¤ectiveness

Addressing the limitations of existing contributions to capturethe e¤ects of �nancial integration (Erceg, Gust andLopez-Salido, 2007; Cwik, Müller and Wolters, 2010; andWoodford, 2007)

Introduction Model Results Conclusions Appendix

Introduction

Approach

Extension of a general New Keynesian model to a richerstructure in �nancial markets with international asset tradingin multiple assets and incomplete asset markets

Two crucial modeling choices which allow an analysis of twodi¤erent forms of �nancial integration

1 Inclusion of transaction costs for trading assets=)International �nancial integration in the form of a decreasein the costs of international asset trading

2 Linearization of the model around an exogenous steady stateasset portfolio =)International �nancial integration in theform of an increase of gross foreign asset positions

Introduction Model Results Conclusions Appendix

Introduction

Main result

None of the analyzed forms of international �nancialintegration undermines the impact of monetary policy onoutput and in�ation.

If anything, integration makes monetary policy more ratherthan less e¤ective as weakened interest rate channels arealways more than o¤set by strengthened wealth or exchangerate channels.

Introduction Model Results Conclusions Appendix

Model

Basic structure (cf. Gali, 2008)

Two countries: Home and Foreign

Households consume goods and supply labor services:U(j) = E0 ∑∞

t=0 βth

11�σ (Ct (j))

1�σ � κ1+ϕ (Nt (j))

1+ϕi

Firms use both labour and capital inputs:Yt (i) = At (Kt (i))

1�µ (Nt (i))µ

Monopolistic competition in labor and goods markets andboth sticky prices and wages

Capital accumulation subject to adjustment costs:

Kt+1 = (1� δ)Kt + It � ξ2(Kt+1(I )�Kt (I ))2

Kt (I )

Introduction Model Results Conclusions Appendix

Model

Basic structure (cont.)

Monetary authorities in both countries are assumed to followa Taylor rule, e.g. for the Home country modeled as :

1+ it = (1+ it�1)ρ

�PtPt�1

�φπ

(Yt )φy

!(1�ρ)

Rt

Introduction Model Results Conclusions Appendix

Model

Financial markets

International trade in four assets

Home and Foreign nominal bonds, BHt and BFt , denominatedin Home and Foreign currency respectively, with nominalreturns:

(1+ it ) and (1+ i�t )

Equity shares , QHt and QFt , which are claims on Home andForeign �rms�pro�ts, assumed to be a balanced portfolioacross all �rms in the respective country, with nominal returns:�

PQt +�VtQ

��and

�P�Qt +

�V �tQ�

��

Introduction Model Results Conclusions Appendix

Model

Financial transaction costs (cf. Ghironi, Lee and Rebucci,2007)

Convex �nancial transaction costs, γ, for changes in all assetholdings. E. g. for domestic equity holdings, QH , de�ned as:

γQH

2PQ (QHt+1(j)�QHt (j))2

Y| {z }de�ning di¤erent scenarios

andψQH2PQ (QHt (j)� QH (j))2

Y| {z }technical device

Introduction Model Results Conclusions Appendix

Model

Exogenous steady state portfolio (cf. Tille, 2008)

Linearization around exogenous steady state portfolioallocation ) Steady state can be chosen exogenously asparticular solution among set of feasible solutions

Alternative approach with endogenous solution (cf. Devereuxand Sutherland, 2006, and Tille and van Wincoop, 2009)

Exogenous approach allows choice of international portfoliothat is in line with empirical evidence, without need to�netune the model

Introduction Model Results Conclusions Appendix

Model

Additional �exible features (cf. Obstfeld and Rogo¤, 2005and Corsetti and Pesenti, 2005)

Standard CES consumption basket over traded and non-traded

goods baskets , Ct =hγ1ωC

ω�1ω

Tt + (1� γ)1ωC

ω�1ω

Nt

i ωω�1, with

tradables basket de�ned as:

CTt =�

α1φC

φ�1φ

HTt + (1� α)1φC

φ�1φ

FTt

� φφ�1

Flexible exchange rate pass-through elasticity, τ, which canvary between 0 and 1. E.g. foreign-currency price of a Hometraded goods brand, P�HT (i), is de�ned as:

P�HTt (i) =POpt�HTt

Sτt

Introduction Model Results Conclusions Appendix

Model

Solution method

1 Log-linearization around a stationary steady state (wherein�ation and NFA equal zero)

2 Calibration3 Numerical simulation and comparison of impulse responsefunctions to monetary policy shocks in di¤erent scenarios !monetary policy shock de�ned as a 25 basispoints one-o¤positive shock, rt , on the nominal interest rate in the Homecountry:

ıt � ρıt�1 + (1� ρ)�

φππt + φy yt�+ rt

Introduction Model Results Conclusions Appendix

Model

Baseline calibration

β 0.99 α 0.5 µ 0.6 ρr 0.6σ 2 φ 2 δ 0.026 ψ... 0.005κ 1 θ 6 θP 0.66 γBH ,γQH 1ϕ 1 θW 0.75 τ 0.5 γBF ,γQF 3

γ 0.25 η 21 φπ 1.5P �Q QFP �Y � ,

BFP �Y � 0.3

ω 2 ξ 8 φy 0.125

Introduction Model Results Conclusions Appendix

Model

Calibration of transaction costs: Excess returns implied byEuler equations

�dxretBF �t � γBF

�Et�bFt+1

� bFt

�� β

γBFEt�bFt+2 � bFt+1

�ψBF Et

�bFt+1

!

�"

γBH

�Et�bHt+1

� bHt

�� β

γBHEt�bHt+2 � bHt+1

�ψBHEt

�bHt+1

!#

[0.0015]| {z }Excess return (LHS of above equations)

��(1�0.1)� (0.99�((1 � 0.1)

�(0.005�0.1)))

�| {z }

RHS of above equations

Introduction Model Results Conclusions Appendix

Model

Calibration of transaction costs: IRF of excess returns

0 2 4 6 8 10 12 14 16 18­0.06

­0.05

­0.04

­0.03

­0.02

­0.01

0

xretbf

Introduction Model Results Conclusions Appendix

Model

Calibration of �nancial market integration

1 Increase of ratio of steady state gross foreign asset holdings toGDP from 0.3 to 1 ! cf. gross foreign asset positions ofindustrial economics between 1990 and 2004 (see Lane andMilesi-Ferretti, 2007)

2 Reduction of transaction costs on changes in foreign assetholdings from 3 to 1

Introduction Model Results Conclusions Appendix

Model

Calibration of trade integration and lower exchange ratepass-through

1 "Trade" integration in the form of a reduction of α from 0.5to 0.1

2 Reduction in exchange rate pass-through,τ , from 0.5 to 0.1

Introduction Model Results Conclusions Appendix

Results

Four di¤erent experiments

1 Decrease in �nancial transaction costs2 Increase in gross foreign asset holdings3 Interaction of both forms of �nancial integration4 Interaction of �nancial and "trade" integration

Introduction Model Results Conclusions Appendix

Results

Baseline

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­1

0

1inv

0 10 20­0.02

0

0.02nx

0 10 20­0.5

0

0.5exp

0 10 20­0.2

­0.1

0imp

0 10 20­0.04­0.02

0nai

0 10 20­0.15

­0.1nfa

0 10 20­0.03

­0.02

­0.01bh

0 10 20­0.03

­0.02

­0.01bf

0 10 20­0.03

­0.02

­0.01qh

0 10 20­0.03

­0.02

­0.01qf

0 10 20­0.2

­0.1

0∆nfa

0 10 20­0.1

­0.05

0ca

0 10 20­0.1

0

0.1∆lcap

0 10 20­0.2

0

0.2ev

Introduction Model Results Conclusions Appendix

Results

1) Decrease in transaction costs of trading foreign assets

0 10 20­0.02

­0.01

0i

0 10 20­0.02

0

0.02π

0 10 20­0.05

0

0.05∆s

0 10 20­0.02

0

0.02rer

0 10 20­5

0

5x 10­3 y

0 10 20­2

0

2x 10 ­3 c

0 10 20­0.01

0

0.01inv

0 10 20­0.01

0

0.01nx

0 10 20­0.05

0

0.05exp

0 10 20­0.05

0

0.05imp

0 10 20­2

0

2x 10­3 nai

0 10 20­0.02

­0.01

0nfa

0 10 20­2

­1.5

­1x 10­3 bh

0 10 20­2

­1.5

­1x 10 ­3 bf

0 10 20­2

­1.5

­1x 10­3 qh

0 10 20­2

­1.5

­1x 10­3 qf

0 10 20­0.02

0

0.02∆nfa

0 10 20­0.01

0

0.01ca

0 10 200

0.5

1x 10­3∆lcap

0 10 20­0.02

0

0.02ev

Introduction Model Results Conclusions Appendix

Results

1) Decrease in transaction costs of trading foreign assets

Weakens part of the interest rate channel due to an increasein consumption smoothing and a reduced reaction ofconsumer spending and investment

But more than o¤set by strengthened impact on net exportsas higher consumption smoothing also applies to importspending and as exchange rate channel is strengthened

Overall, slightly higher reduction in output (about 1% of theinitial response), as well as in�ation (about 4% of the initialresponse).

Introduction Model Results Conclusions Appendix

Results

1) Sensitivity to calibration of transaction costs

0 5 100.65

0.7

0.75

γ

i

0 5 10­0.5

­0.4

­0.3

γ

π

0 5 10­0.4

­0.3

­0.2

γ

∆s

0 5 10­0.2

­0.15

­0.1

γ

rer

0 5 10­0.36

­0.34

­0.32

γ

y

0 5 10­0.12

­0.115

­0.11

γ

c

0 5 10­1

­0.95

­0.9

γ

inv

0 5 10­0.04

­0.02

0

γ

nx

0 5 10­0.4

­0.3

­0.2

γ

exp

0 5 10­0.3

­0.2

­0.1

γ

imp

0 5 10­0.06

­0.05

­0.04

γna

i0 5 10

­0.15

­0.1

­0.05

γ

nfa

0 5 10­0.015

­0.01

­0.005

γ

bh

0 5 10­0.015

­0.01

­0.005

γ

bf

0 5 10­0.015

­0.01

­0.005

γ

qh

0 5 10­0.015

­0.01

­0.005

γ

qf

0 5 10­0.15

­0.1

­0.05

γ

∆nf

a

0 5 10­0.08

­0.06

­0.04

γ

ca

0 5 100.09

0.091

0.092

γ

∆lc

ap

0 5 10­0.15

­0.1

­0.05

γ

ev

Introduction Model Results Conclusions Appendix

Results

2) Increase in StSt gross foreign asset holdings

0 10 20­0.02

0

0.02i

0 10 20­0.05

0

0.05π

0 10 20­0.1

0

0.1∆s

0 10 200

0.05rer

0 10 20­0.01

0

0.01y

0 10 20­0.02

­0.01

0c

0 10 20­0.1

­0.05

0inv

0 10 200

0.02

0.04nx

0 10 200

0.1

0.2exp

0 10 20­0.1

­0.05

0imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.2

­0.15

­0.1nfa

0 10 20­0.04

­0.02

0bh

0 10 20­0.04

­0.02

0bf

0 10 20­0.04

­0.02

0qh

0 10 20­0.04

­0.02

0qf

0 10 20­0.2

0

0.2∆nfa

0 10 20­0.1

0

0.1ca

0 10 20­0.2

0

0.2∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

Results

2) Increase in StSt gross foreign asset holdings

Strengthens wealth channels, which lead to higher impact onconsumption and investment

More than o¤set a lower impact on net exports (a positiveinterest rate shock now leads to a slightly positive impactreaction of net exports), which is due to a strengthenedwealth channel and weakened exchange rate channel

Overall, higher impact on output (about 2.5% percent of theinitial response) and slightly lower impact on in�ation in �rstperiod, but more persistent (5% lower impact e¤ect)

Introduction Model Results Conclusions Appendix

Results

2) Sensitivity to calibration of StSt gross foreign assetholdings

0 2 40.65

0.7

0.75

gf a

i

0 2 4­0.5

­0.4

­0.3

gf aπ

0 2 4­0.4

­0.2

0

gf a

∆s

0 2 4­0.2

0

0.2

gf a

rer

0 2 4­0.4

­0.35

­0.3

gf a

y

0 2 4­0.2

­0.15

­0.1

gf a

c

0 2 4­2

­1

0

gf a

inv

0 2 4­0.2

0

0.2

gf a

nx

0 2 4­0.5

0

0.5

gf a

exp

0 2 4­1

­0.5

0

gf a

imp

0 2 4­1

­0.5

0

gf a

nai

0 2 4­1

0

1

gf a

nfa

0 2 4­0.2

­0.1

0

gf a

bh

0 2 4­0.2

­0.1

0

gf a

bf

0 2 4­0.2

­0.1

0

gf a

qh

0 2 4­0.2

­0.1

0

gf aqf

0 2 4­1

0

1

gf a

∆nf

a

0 2 4­1

­0.5

0

gf a

ca

0 2 40

0.5

1

gf a

∆lc

ap

0 2 4­0.5

0

0.5

gf a

ev

Introduction Model Results Conclusions Appendix

Results

3) Interaction of both forms of �nancial integration

0 10 20­0.02

­0.01

0i

0 10 20­0.02

­0.01

0π

0 10 20­0.02

0

0.02∆s

0 10 20­0.01

0

0.01rer

0 10 20­0.05

0

0.05y

0 10 20­0.02

­0.01

0c

0 10 20­0.1

­0.05

0inv

0 10 202

4

6x 10 ­3 nx

0 10 200.01

0.02

0.03exp

0 10 20­0.03

­0.02

­0.01imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.3

­0.2

­0.1nfa

0 10 20­0.04

­0.02

0bh

0 10 20­0.04

­0.02

0bf

0 10 20­0.04

­0.02

0qh

0 10 20­0.04

­0.02

0qf

0 10 20­0.5

0

0.5∆nfa

0 10 20­0.2

0

0.2ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

Results

3) Interaction of both forms of �nancial integration

Increases the impact of monetary policy on both output andin�ation as the positive e¤ects in the two individual scenariosreinforce each other

Higher impact appreciation of the Home currency interactswith higher negative exchange rate valuation e¤ect on Homehouseholds�wealth

Introduction Model Results Conclusions Appendix

Results

4) Interaction of �nancial and trade integration

0 10 20­0.02

­0.01

0i

0 10 20­0.02

­0.01

0π

0 10 20­0.05

0

0.05∆s

0 10 200.02

0.03

0.04rer

0 10 20­0.05

0

0.05y

0 10 20­0.04

­0.02

0c

0 10 20­0.4

­0.2

0inv

0 10 200.01

0.02

0.03nx

0 10 200

0.1

0.2exp

0 10 20­0.2

­0.1

0imp

0 10 20­1

­0.5

0nai

0 10 20­1

­0.8

­0.6nfa

0 10 20­0.1

­0.05bh

0 10 20­0.1

­0.05bf

0 10 20­0.1

­0.05qh

0 10 20­0.1

­0.05qf

0 10 20­1

0

1∆nfa

0 10 20­0.5

0

0.5ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­1

0

1ev

Introduction Model Results Conclusions Appendix

Results

4) Interaction of �nancial and trade integration

Highest positive impact on monetary policy e¤ectiveness

Combined e¤ect is not just the sum of all individual e¤ects,but the interaction of �nancial and trade integration actuallyleads to an ampli�cation of the e¤ects

Lower impact appreciation of the Home currency and a lowerreaction of the trade balance, but much larger negativeexchange rate valuation e¤ect

Overall, much larger reduction in consumption and investmentwhich in turn leads to a much larger reduction in output andin�ation (around 12% and 2% of the initial responses,respectively)

Introduction Model Results Conclusions Appendix

Conclusions

Main results

None of the scenarios undermine monetary policy e¤ectiveness(even if interact all potential integration scenarios)

Simulations show three di¤errent aspects:1 Two forms of �nancial integration have opposite e¤ects ondomestic spending

2 E¤ects of both forms of integration on domestic spending arecounteracted by their e¤ects on the trade balance

3 Weakened interest channels are always more than o¤set bystrengthened wealth or exchange rate channels

Interaction of �nancial and "trade integration" leads to anon-negligible positive e¤ect on the impact of monetary policy

Introduction Model Results Conclusions Appendix

Conclusions

Future steps

Di¤erent compositions of asset holdings across the twocategories and di¤erent currency denominations

Empirical analysis:1 Estimation of model2 Combination of calibration excercise and VAR estimationsalong the lines of Boivin and Giannoni (2002)?

Endogenous portfolio choice and non-neoclassical transmissionchannels (bank-based channels)

Introduction Model Results Conclusions Appendix

Sum of total gross foreign assets and liabilities as a ratio toGDP (Lane and Milesi-Ferretti, 2007)

Introduction Model Results Conclusions Appendix

Calibration of �nancial transaction costs: Data on thevolatility of cross-border asset �ows

Table 1: Volatility of cross-border asset �ows in the USStandard Deviation

1973-1993 1994-2010Equity out�ows* 0.07% 0.20%Equity in�ows* 0.06% 0.19%Debt out�ows* 0.07% 0.31%Debt in�ows* 0.17% 0.57%*(percent of GDP)

Table 2: Moments of simulated variables in modelStandard Deviation

Baseline Low transaction costsEquity out�ows* 0.08% 0.21%Equity in�ows* 0.08% 0.21%Debt out�ows* 0.08% 0.21%Debt in�ows* 0.08% 0.21%

Introduction Model Results Conclusions Appendix

Scenario with Lower Costs

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­1

0

1inv

0 10 20­0.05

0

0.05nx

0 10 20­0.5

0

0.5exp

0 10 20­0.2

­0.1

0imp

0 10 20­0.04­0.02

0nai

0 10 20­0.16

­0.14

­0.12nfa

0 10 20­0.03

­0.02

­0.01bh

0 10 20­0.03

­0.02

­0.01bf

0 10 20­0.03

­0.02

­0.01qh

0 10 20­0.03

­0.02

­0.01qf

0 10 20­0.2

0

0.2∆nfa

0 10 20­0.1

0

0.1ca

0 10 20­0.1

0

0.1∆lcap

0 10 20­0.2

0

0.2ev

Introduction Model Results Conclusions Appendix

Scenario with Higher GFA

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­2

0

2inv

0 10 205

6

7x 10­3 nx

0 10 20­0.2

0

0.2exp

0 10 20­0.4

­0.2

0imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.3

­0.25

­0.2nf a

0 10 20­0.06

­0.04

­0.02bh

0 10 20­0.06

­0.04

­0.02bf

0 10 20­0.06

­0.04

­0.02qh

0 10 20­0.06

­0.04

­0.02qf

0 10 20­0.5

0

0.5∆nf a

0 10 20­0.2

0

0.2ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

Scenario with Lower Costs and Higher GFA

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­2

0

2inv

0 10 20­0.02

0

0.02nx

0 10 20­0.5

0

0.5exp

0 10 20­0.2

­0.1

0imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.4

­0.3

­0.2nfa

0 10 20­0.06

­0.04

­0.02bh

0 10 20­0.06

­0.04

­0.02bf

0 10 20­0.06

­0.04

­0.02qh

0 10 20­0.06

­0.04

­0.02qf

0 10 20­0.5

0

0.5∆nfa

0 10 20­0.2

0

0.2ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

Scenario with Lower Costs and Higher GFA and "tradeintegration"

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­2

0

2inv

0 10 200.01

0.015

0.02nx

0 10 20­0.2

0

0.2exp

0 10 20­0.4

­0.2

0imp

0 10 20­1

­0.5

0nai

0 10 20­1.5

­1

­0.5nf a

0 10 20­0.15

­0.1

­0.05bh

0 10 20­0.15

­0.1

­0.05bf

0 10 20­0.15

­0.1

­0.05qh

0 10 20­0.15

­0.1

­0.05qf

0 10 20­2

0

2∆nf a

0 10 20­1

0

1ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­1

0

1ev

Introduction Model Results Conclusions Appendix

5) "Trade integration"

0 10 20­0.02

0

0.02i

0 10 20­0.02

0

0.02π

0 10 20­0.05

0

0.05∆s

0 10 200.005

0.01

0.015rer

0 10 20­0.01

0

0.01y

0 10 20­0.01

­0.005

0c

0 10 20­0.1

0

0.1inv

0 10 200

0.01

0.02nx

0 10 200

0.05

0.1exp

0 10 20­0.04­0.02

0imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.21

­0.2

­0.19nfa

0 10 20­0.015

­0.01

­0.005bh

0 10 20­0.015

­0.01

­0.005bf

0 10 20­0.015

­0.01

­0.005qh

0 10 20­0.015

­0.01

­0.005qf

0 10 20­0.5

0

0.5∆nfa

0 10 20­0.2

0

0.2ca

0 10 20­0.05

0

0.05∆lcap

0 10 20­0.2

0

0.2ev

Introduction Model Results Conclusions Appendix

Scenario with lower share in trade goods sector

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­2

0

2inv

0 10 20­0.01

0

0.01nx

0 10 20­0.5

0

0.5exp

0 10 20­0.4

­0.2

0imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.34

­0.32

­0.3nfa

0 10 20­0.04

­0.03

­0.02bh

0 10 20­0.04

­0.03

­0.02bf

0 10 20­0.04

­0.03

­0.02qh

0 10 20­0.04

­0.03

­0.02qf

0 10 20­0.5

0

0.5∆nfa

0 10 20­0.2

0

0.2ca

0 10 20­0.2

0

0.2∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

6) Decrease in ERPT

0 10 200

2

4x 10 ­3 i

0 10 200

5x 10 ­3 π

0 10 20­5

0

5x 10 ­3 ∆s

0 10 20­0.01

­0.005

0rer

0 10 20­2

­1

0x 10 ­3 y

0 10 20­2

­1

0x 10 ­3 c

0 10 20­0.01

­0.005

0inv

0 10 20­2

0

2x 10 ­3 nx

0 10 20­5

0

5x 10 ­3 exp

0 10 20­0.01

­0.005

0imp

0 10 20­1

­0.5

0x 10 ­3 nai

0 10 20­5

0

5x 10 ­3 nfa

0 10 200

0.5

1x 10

­3 bh

0 10 200

0.5

1x 10

­3 bf

0 10 200

0.5

1x 10

­3 qh

0 10 200

0.5

1x 10

­3 qf

0 10 20­1

0

1x 10 ­3∆nfa

0 10 20­1

0

1x 10 ­3 ca

0 10 20­2

0

2x 10 ­3∆lcap

0 10 20­5

0

5x 10 ­3 ev

Introduction Model Results Conclusions Appendix

Scenario with lower ERPT

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

­0.1

0rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­1

0

1inv

0 10 20­0.02

0

0.02nx

0 10 20­0.5

0

0.5exp

0 10 20­0.2

­0.1

0imp

0 10 20­0.04­0.02

0nai

0 10 20­0.15

­0.1nf a

0 10 20­0.03

­0.02

­0.01bh

0 10 20­0.03

­0.02

­0.01bf

0 10 20­0.03

­0.02

­0.01qh

0 10 20­0.03

­0.02

­0.01qf

0 10 20­0.2

­0.1

0∆nf a

0 10 20­0.1

­0.05

0ca

0 10 20­0.1

0

0.1∆lcap

0 10 20­0.2

0

0.2ev

Introduction Model Results Conclusions Appendix

7) Decrease in ERPT plus Decrease in Costs plus Increasein GFA

0 10 20­0.02

0

0.02i

0 10 20­0.02

0

0.02π

0 10 20­0.02

0

0.02∆s

0 10 20­0.01

0

0.01rer

0 10 20­0.05

0

0.05y

0 10 20­0.02

­0.01

0c

0 10 20­0.1

­0.05

0inv

0 10 200

0.005

0.01nx

0 10 200.01

0.02

0.03exp

0 10 20­0.03

­0.02

­0.01imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.3

­0.2

­0.1nfa

0 10 20­0.04

­0.02

0bh

0 10 20­0.04

­0.02

0bf

0 10 20­0.04

­0.02

0qh

0 10 20­0.04

­0.02

0qf

0 10 20­0.5

0

0.5∆nfa

0 10 20­0.2

0

0.2ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

Scenario with lower ERPT plus Lower Costs plus HigherGFA

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­2

0

2inv

0 10 20­0.02

0

0.02nx

0 10 20­0.5

0

0.5exp

0 10 20­0.2

­0.1

0imp

0 10 20­0.2

­0.1

0nai

0 10 20­0.4

­0.3

­0.2nf a

0 10 20­0.06

­0.04

­0.02bh

0 10 20­0.06

­0.04

­0.02bf

0 10 20­0.06

­0.04

­0.02qh

0 10 20­0.06

­0.04

­0.02qf

0 10 20­0.5

0

0.5∆nf a

0 10 20­0.2

0

0.2ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­0.5

0

0.5ev

Introduction Model Results Conclusions Appendix

8) Decrease in ERPT plus "trade integration" plusDecrease in Costs plus Increase in GFA

0 10 20­0.02

­0.01

0i

0 10 20­0.01

­0.005

0π

0 10 20­0.05

0

0.05∆s

0 10 200

0.02

0.04rer

0 10 20­0.1

0

0.1y

0 10 20­0.04

­0.02

0c

0 10 20­0.4

­0.2

0inv

0 10 200

0.02

0.04nx

0 10 200

0.1

0.2exp

0 10 20­0.2

­0.1

0imp

0 10 20­1

­0.5

0nai

0 10 20­1

­0.8

­0.6nf a

0 10 20­0.1

­0.05bh

0 10 20­0.1

­0.05bf

0 10 20­0.1

­0.05qh

0 10 20­0.1

­0.05qf

0 10 20­1

0

1∆nf a

0 10 20­0.5

0

0.5ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­1

0

1ev

Introduction Model Results Conclusions Appendix

Scenario with lower ERPT plus lower share in traded goodssector plus Lower Costs plus Higher GFA

0 10 200

0.5

1i

0 10 20­0.5

0

0.5π

0 10 20­0.5

0

0.5∆s

0 10 20­0.2

0

0.2rer

0 10 20­0.4

­0.2

0y

0 10 20­0.2

­0.1

0c

0 10 20­2

0

2inv

0 10 200.01

0.015

0.02nx

0 10 20­0.2

0

0.2exp

0 10 20­0.4

­0.2

0imp

0 10 20­1

­0.5

0nai

0 10 20­1.5

­1

­0.5nf a

0 10 20­0.15

­0.1

­0.05bh

0 10 20­0.15

­0.1

­0.05bf

0 10 20­0.15

­0.1

­0.05qh

0 10 20­0.15

­0.1

­0.05qf

0 10 20­2

0

2∆nf a

0 10 20­1

0

1ca

0 10 20­0.5

0

0.5∆lcap

0 10 20­1

0

1ev