Vahagn Galstyan's Homepage

Terms of Trade in the Medium-run, October 2011.
- Abstract: This paper contributes to empirical research on the dynamics of the terms of trade. We start by proposing a method for constructing different measures of the terms of trade. This is achieved by estimating a range of substitution elasticities using a panel data approach and highly disaggregated data on trade flows. Next, various measures of the terms of trade and trade margins are related to productivity and demand proxies. We find that domestic demand side movements are positively related to the terms of trade, while domestic productivity gains result in a deterioration of the terms of trade. Our results suggest that higher relative productivity raises the real component of exports relative to imports along the intensive margin inducing a weakening of the terms of trade.
  [download pdf]

Bilateral Portfolio Dynamics During the Global Financial Crisis, (with Philip Lane), August 2011.
- Abstract: There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries.
  [download pdf]

Productivities, Trade, and Relative Prices in a Ricardian World, February 2011.
- Abstract: In an extended Ricardian model of trade, we study the effects of improving trade deficits on relative prices, and the relation between growth rates and real exchange rates. An improvement in the trade balance induces relative wages to overshoot their long-run value, placing downward pressure on the terms of trade of the same order of magnitude found in Armington type models. Once the pattern of specialization changes, some of the decline is reversed with a smaller value of long-run depreciation. We find that divergent growth rates do not cause distinct trends in the terms of trade. The result depends on the size of the non-tradable sector and the variability of industry-specific efficiencies. We also find that self-selection into export markets causes the relative price of non-traded goods to respond to demand re-balancing, giving birth to an endogenous Balassa-Samuelson effect. The model also suggests that in the long-run the stochastic variation of the real exchange rate is dominated by the volatility of the terms of trade.
  [download pdf]

Country Size and the Transfer Effect, August 2010.
- Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a standard two-country neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a deteriorating terms of trade and a declining relative price of non-traded goods, feeding into a depreciation of the real exchange rate. Estimation for G3 and non-G3 sub-samples reveals a systematic pattern in the sensitivity of relative prices to external imbalances, with the transfer effect appearing stronger in larger countries.
  [download pdf]

The Dynamics of Portfolio Holdings in Emerging Europe, (with Philip Lane), European Economy 75, February 2011, pp.66-81.
- Abstract: In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio equity liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions.
  [download pdf]

The Composition of Government Spending and the Real Exchange Rate, (with Philip Lane), Journal of Money, Credit and Banking 41, September 2009, pp.1233–1249.
- Abstract: We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables.
  [download pdf]

Fiscal Policy and International Competitiveness: Evidence from Ireland, (with Philip Lane), Economic and Social Review 40, September 2009, pp.299-315.
- Abstract: Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness.
  [download pdf]

External Imbalances and the Extensive Margin of Trade, (with Philip Lane), Economic Notes 37, November 2008, pp.241–257.
- Abstract: We quantify the role of the extensive margin in the recent trade dynamics of selected countries that are running large and persistent trade imbalances. We find that the role of the extensive margin is quite substantial, although it varies in significance across the countries in the sample. Finally, we highlight differences in behaviour between the fixed-varieties and varieties-adjusted terms of trade.
  [download pdf]

Vahagn Galstyan
	Department of Economics, Trinity College Dublin and Institute for International Integration Studies Dublin 2, Ireland Tel: (353 1) 896 3485 Fax: (353 1) 677 2503 E-mail: v.galstyan (at) tcd (dot) ie
Home Research Teaching Academia CV	Research Interests: International Macroeconomics Working Papers: Terms of Trade in the Medium-run, October 2011. Abstract: This paper contributes to empirical research on the dynamics of the terms of trade. We start by proposing a method for constructing different measures of the terms of trade. This is achieved by estimating a range of substitution elasticities using a panel data approach and highly disaggregated data on trade flows. Next, various measures of the terms of trade and trade margins are related to productivity and demand proxies. We find that domestic demand side movements are positively related to the terms of trade, while domestic productivity gains result in a deterioration of the terms of trade. Our results suggest that higher relative productivity raises the real component of exports relative to imports along the intensive margin inducing a weakening of the terms of trade. [download pdf] Bilateral Portfolio Dynamics During the Global Financial Crisis, (with Philip Lane), August 2011. Abstract: There has been considerable bilateral variation in the pattern of portfolio capital flows during the global financial crisis: for a given destination, investors from different countries adjusted their holdings to different degrees. We show that the size of the initial bilateral holding, geographical distance, common language, the level of trade and common institutional linkages help to explain the pattern of adjustment. These bilateral factors are more important for equities than for bonds and for investors from developing countries than for investors from advanced countries. [download pdf] Productivities, Trade, and Relative Prices in a Ricardian World, February 2011. Abstract: In an extended Ricardian model of trade, we study the effects of improving trade deficits on relative prices, and the relation between growth rates and real exchange rates. An improvement in the trade balance induces relative wages to overshoot their long-run value, placing downward pressure on the terms of trade of the same order of magnitude found in Armington type models. Once the pattern of specialization changes, some of the decline is reversed with a smaller value of long-run depreciation. We find that divergent growth rates do not cause distinct trends in the terms of trade. The result depends on the size of the non-tradable sector and the variability of industry-specific efficiencies. We also find that self-selection into export markets causes the relative price of non-traded goods to respond to demand re-balancing, giving birth to an endogenous Balassa-Samuelson effect. The model also suggests that in the long-run the stochastic variation of the real exchange rate is dominated by the volatility of the terms of trade. [download pdf] Country Size and the Transfer Effect, August 2010. Abstract: This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a standard two-country neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a deteriorating terms of trade and a declining relative price of non-traded goods, feeding into a depreciation of the real exchange rate. Estimation for G3 and non-G3 sub-samples reveals a systematic pattern in the sensitivity of relative prices to external imbalances, with the transfer effect appearing stronger in larger countries. [download pdf] Publications: The Dynamics of Portfolio Holdings in Emerging Europe, (with Philip Lane), European Economy 75, February 2011, pp.66-81. Abstract: In this paper we examine shifts in the bilateral patterns in international portfolio holdings in emerging Europe during the 2001-2008 period. In relation to the 2001-2007 pre-crisis period, we find some evidence that shifts in the geographical composition of portfolio equity liabilities reflect shifts in bilateral trade patterns. In addition, we find that the new member states disproportionately attracted portfolio equity investment from other members of the European Union after 2004. During the crisis period, we find that the bilateral composition of the shift in portfolio positions is affected by the scale of pre-crisis holdings and the geographical proximity of creditors. We also find that countries in the euro area are more likely to maintain portfolio positions in emerging Europe than were investors from other regions. [download pdf] The Composition of Government Spending and the Real Exchange Rate, (with Philip Lane), Journal of Money, Credit and Banking 41, September 2009, pp.1233–1249. Abstract: We show that the composition of government spending influences the long-run behaviour of the real exchange rate. We develop a two-sector small open economy model in which an increase in government consumption is associated with real appreciation, while an increase in government investment may generate real depreciation. Our empirical work confirms that government consumption and government investment have differential effects on the real exchange rate and the relative price of nontradables. [download pdf] Fiscal Policy and International Competitiveness: Evidence from Ireland, (with Philip Lane), Economic and Social Review 40, September 2009, pp.299-315. Abstract: Our goal in this paper is to investigate the relation between government spending and the long-run behaviour of the Irish real exchange rate. We postulate that an increase in government consumption should be associated with real appreciation, while the impact of government investment is ambiguous. Empirically, we find that an increase in government consumption indeed appreciates the real exchange rate while an increase in government investment is associated with real depreciation. Accordingly, the level and composition of government spending matters for Irish external competitiveness. [download pdf] External Imbalances and the Extensive Margin of Trade, (with Philip Lane), Economic Notes 37, November 2008, pp.241–257. Abstract: We quantify the role of the extensive margin in the recent trade dynamics of selected countries that are running large and persistent trade imbalances. We find that the role of the extensive margin is quite substantial, although it varies in significance across the countries in the sample. Finally, we highlight differences in behaviour between the fixed-varieties and varieties-adjusted terms of trade. [download pdf]