The effects of macroeconomic stability on foreign trade. An analysis for Spain, 1986–2000

Abstract

Two main factors underlie the rebirth of interest in the study of the influence of the real exchange rate on trade, the reduction of its volatility and the current trend towards price stability. The objective of this study is to analyse the effects of the process of nominal convergence, required of the European member states for the fulfilment of monetary integration, on foreign trade flows. The case of Spain, which is especially interesting in this context, is studied for the period 1986 to 2000. The results of estimating the aggregate functions of the export and import of goods shows how macroeconomic stability has altered the behaviour of trade with respect to the two basic determinants – income and prices – how it has caused a significant structural change in the real exchange rate and, finally, how it has laid the explanatory bases for transactions in the twenty-first century with the single currency – the euro.

Acknowledgements

The authors wish to acknowledge the useful comments and suggestions of Marcela Sabaté, Antonio Montañés, José Luis Fernández, participants in the seminar of the European Economics and Finance Society (EEFS) Conference held between 13 and 16 May 2004 in Gdansk (Poland) and the editor of Applied Economics, Mark Taylor. This research has received the financial support of a CICYT (SEC 2003-06106) Project and the SEIM research group (SEC 269-62) Programme.

Notes

¹ See Bacchetta and van Wincoop (2000), Lane and Milesi-Ferretti (2002), Grier and Smallwood (2003) and Baum et al. (2004).

² Nachane and Ranade (1998) contrast different hypotheses about the effect of the real exchange rate on trade and find a very significant effect. Also In and Menon (1996) and Bahmani-Oskooe (2001) investigate how the exchange rate affects the trade balance and the terms of trade, respectively. Nevertheless, most empirical studies analyse the impact of the exchange rate on exports (see, among others, Hassan and Tufte, 1998; Morgenroth, 2000; Doyle, 2001; Aristotelous, 2002; Daraisami, 2004; Nabli and Véganzonès-Varoudakis, 2004; Nowak-Lehmann, 2004), but there are some analyses for imports (see, for example, Kenen and Rodrik, 1986; Koray and Lastrapes, 1989; Arize and Shwiff, 1998; Pattichis et al., 2004).

³ Heimonen (1999), Sosvilla-Rivero et al. (1999), Kempa (2000), Couharde and Mazier (2001), Gil-Alana (2004) and Hu et al. (2004), analyse the evolution of the real exchange rates and the volatility of the European currencies through the different phases of the EMS. Sosvilla-Rivero and Gil-Pareja (2004) study the price convergence of the EU countries. On the positive impact of the coordination of stability policies on Spain see Amuedo-Dorantes and Wheeler (2001).

⁴ There is also a widespread debate on this third consideration in recent literature. Carter and Li (2004) analyse the change in trade patterns in OECD countries. Gourlay and Seaton (2003, 2004) study, together with the influence of the exchange rate and its variation, the relevance of other non-price factors linked to the characteristics of enterprises. Mahdavi (2002) for US, Martínez-Zarzoso and Suárez-Burguet (2000) for Europe and Gil Pareja (2001) for the European automobile market, also introduce technological progress and productivity as key factors.

⁵ A complete overview on structural breaks can be consulted in Maddala and Kim (1998).

⁶ See Hylleberg et al. (1990). The results of these tests are not presented due to limitations of space.

⁷ Nevertheless, the present authors have also tried with model C (change of level), model C/T (change of level with trend) and model C/S/T (change of regime and trend). The results present slight variations to those finally presented.

⁸ An application of this technique can be found in Fernández and Sosvilla (2001).

⁹ The authors have carried out a thorough review of the literature on Spanish trade functions after the latest works of Escribano (1999) and Montañés and Sanso (2000, 2002).

¹⁰ For a more detailed analysis of the evolution of exchange rate and prices during this period, see Gadea Rivas (2000).

¹¹ Exports to the EMU represent more than 70% of the total exports and nearly 90% of those destined to the developed block. The exchange rate of the euro with respect to other strong currencies on the market –the dollar or the yen – it will continue to affect trade.

¹² Between 1985 and 2000 Machinery and Equipment experiences a 6% increase (from 10.74% to 16.75%). Martín (1999) and Myro (1999) also point out an increase in the branches of medium technology and the technology-intensive sectors. Furthermore, there has been a considerable effort to adapt product quality to that of the other Community countries. While in 1985 more than half of the intra-industry exports were of lower quality than the imports, in 1995 the proportion had been cut to a little over a third, the increase being especially strong in products of similar quality. See Gordo and Martín (1996).

¹³ However, the results obtained both for the domestic and the final demands were worse than those for the GDP. Nevertheless, one observes, along the lines of other works, an inferior income elasticity when demand is used. Furthermore, the disaggregation of the GDP into its components was opted for, because a better fit was achieved and to avoid capturing with the aggregated GDP more than just a strict income elasticity, for example a possible trend increase in the external openness of the Spanish economy during the period. García and Gordo (1998) also achieved a better fit when they disaggregated the GDP into its components, although instability problems in the 1993–1996 period led them finally to select the total GDP. Abbott and Seddighi (1996) for UK imports and Giovannetti (1989) for Italian imports also introduced the components of domestic demand with similar results.

¹⁴ The order of importance of the three components is the expected one and in consonance with other works. Consumption expenditure, apart from the weight of this type of goods in the total imports (24% in 2000), has the strongest participation in the GDP and its series faithfully follows the evolution of the global aggregated GDP. Investment, as well as being a smaller and more divergent part of income, is intimately related with the purchase of machinery and equipment (19% in 2000). Finally, exports, in spite of also having a reduced participation in the GDP, are linked to the purchase of intermediate products, most of them (57% in 2000), used as inputs in the production of goods that are later exported.

¹⁵Matsubayashi and Hamori (2003) find evidence of cointegration with structural change for French and German imports with break points in the early 1990s, for France at the beginning of 1993 and for Germany at the end of 1991. Nevertheless, there is no cointegration with structural change in the imports of the USA, Canada, Japan or the UK.

¹⁶ This would indicate that the change in the behaviour of prices should only be introduced in the short-term dynamic, where they are really significant.

¹⁷ Even higher than 3 if one were to include the aggregated GDP, a higher value than those derived from the other studies, except for that of García and Gordo (1998) who reached a coefficient of up to 3.6.

¹⁸ The analysis of the change in the integration order of the index of the real effective exchange rate, if it is extended until the second quarter of 2003, giving the same break point (1993(I)). Moreover, these results are confirmed using consumption prices, a measure of competitiveness less partial and so more unfavourable for the Spanish economy than production prices.

¹⁹Mañez, Rochina and Sanchis (2004) and Moreno (1997) find a significant relationship between some non-price factors and the decision to export. As well as their direct effect, an effect on price elasticity can be seen in which the bigger the product differentiation the smaller the response of exports to variations in relative price. Alonso (1999) notes the relevance of introducing a technological variable that expresses the increase of competitiveness from improvements in quality and, as Balaguer and Cantavella-Jordá (2004), the structural change in the composition of exports.