Evolution of Intra-industry trade and OCA theory are closely linked via the correlation of Business Cycles and Kenen’s diversification criteria. Adapting a methodology from Fontagné and Freudenberg, I decompose trade patterns within the Euro zone for the period 1999-2011. The methodology allows for disentangling vertically and horizontally differentiated Intra-industry trade accounting for the different determinants of those two types of trade.
An increased specialization of countries in certain product categories cannot be confirmed,neither can an increase in Business cycle correlation as shares of the different trade types remain stable during the whole period of analysis.
Table of Contents
1 Introduction
2 Optimum Currency Area criteria
2.1 The “classic” OCA theory
2.2 Are OCA criteria endogenous?
3 Intra-industry trade
3.1 An interplay between theory and empirics
3.2 Trade in vertically differentiated products - an ambiguous phenomenon
4 Optimum Currency Areas and Intra-industry trade
4.1 Trade pattern evolution endogeneity of OCA criteria - the ex ante view
4.2 The ex post view
5 Methodology
5.1 The Data Source: COMEXT Database on european trade
5.2 Decomposing trade flows
6 Results
7 Conclusion
Research Objectives and Themes
The primary objective of this thesis is to empirically investigate the evolution of trade patterns within the Euro Zone between 1999 and 2011 to determine whether the region exhibits trends towards endogenous business cycle synchronization or industrial agglomeration as predicted by competing economic theories.
- Analysis of intra-industry trade (IIT) dynamics within the Euro Zone.
- Distinction between horizontal and vertical intra-industry trade based on unit values.
- Evaluation of Optimum Currency Area (OCA) criteria endogeneity.
- Comparative assessment of the "Frankel & Rose" versus "Krugman" trade scenarios.
- Replication and extension of the Fontagné and Freudenberg (1997) methodology.
Excerpt from the Book
3.2 Trade in vertically differentiated products - an ambiguous phenomenon
However, this integrated equilibrium model of international trade was still missing some important points. First, Finger (1975), analyzing US trade data observed higher variations in factor content within product groups than among the groups. This means that even if high shares of IIT are observed this trade flows can reflect differences in factor content and production patterns (Fontagne and Freudenberg, 2002). Torstensson (1996) identified human capital to be of particular importance. This challenges the assumption of IIT being directly related to the scale economy model which assumes a net factor content of close to zero. Differences in factor content are positively related to differences in the quality of the exchanged products.
For the purpose of interpretation it is therefore necessary to distinguish between two types of Intra-industry trade: trade in products that differ in terms of quality (vertically differentiated) and trade in products differentiated by variety (horizontally differentiated). The determinants of these two types are not the same. Horizontally differentiated (similar) products are sold at the same price and are perfect substitutes. They can therefore be associated with the scale economy model of international trade. In contrast, vertically differentiation reflects a specialization along the quality range (Fontagne and Freudenberg, 1997).
As already mentioned, this specialization is based on differences in factor endowments, fixed costs in R&D or qualification of the labor force resulting in a net factor content different from zero. In other words, of two countries specializing on different stages of the quality range produce with different production functions. According to empirical findings by Cabral et al. (2006) vertical IIT involves indeed similar net exchanges of labor of different skill levels to that of inter-industry trade. Consequently, adjustment process similar to those of inter-industry specialization are likely to set in. This is in contrast to the assumptions of the IIT smooth adjustment hypothesis which has assumed adjustment costs of European economic integration to be low.
Summary of Chapters
1 Introduction: Introduces the optimality of the Euro Zone and outlines the research objective of analyzing trade pattern evolution using Fontagné and Freudenberg’s methodology.
2 Optimum Currency Area criteria: Reviews classic OCA theory foundations and discusses whether OCA criteria, such as business cycle correlation, are endogenous to monetary union.
3 Intra-industry trade: Provides a literature overview and justifies the importance of distinguishing between horizontally and vertically differentiated intra-industry trade.
4 Optimum Currency Areas and Intra-industry trade: Links trade pattern evolution to OCA criteria, comparing the ex ante and ex post views regarding shock symmetry.
5 Methodology: Describes the use of the COMEXT database and the decomposition of trade flows into One-way trade, HIIT, and VIIT using unit values.
6 Results: Presents the empirical findings on trade volumes and shares within the EA-15, showing stable trade patterns and lack of clear endogeneity.
7 Conclusion: Summarizes the findings, noting that the data does not confirm either the Frankel & Rose or the Krugman scenarios, while acknowledging study limitations.
Keywords
Intra-industry trade, Optimum Currency Area, Euro Zone, Shock Asymmetry, Business Cycle, Trade Integration, COMEXT, Horizontal Differentiation, Vertical Differentiation, Economic Integration, Trade Patterns, Monetary Union, Agglomeration, Specialization, Endogeneity.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the evolution of trade patterns within the Euro Zone (EA-15) from 1999 to 2011 to evaluate the optimality of the currency union.
What are the primary theoretical themes covered?
The work centers on Optimum Currency Area (OCA) theory, the impact of intra-industry trade on business cycle synchronization, and the competing "Frankel & Rose" vs. "Krugman" hypotheses regarding economic integration.
What is the primary research goal?
To identify if economic and monetary integration in the Euro Zone has led to an endogenous increase in shock symmetry or, conversely, to increased industrial specialization and shock asymmetry.
Which scientific methodology is employed?
The author adopts the methodology of Fontagné and Freudenberg (1997) to decompose bilateral trade flows into one-way trade, horizontally differentiated intra-industry trade (HIIT), and vertically differentiated intra-industry trade (VIIT) using COMEXT data.
What topics are discussed in the main body?
The main body covers the development of OCA theory, the distinction between product varieties and quality-based trade, the empirical decomposition of trade flows, and an analysis of specific country-level data.
Which keywords best characterize the research?
Key terms include Intra-industry trade, Optimum Currency Area, Euro Zone, Shock Asymmetry, Business Cycle, and Economic Integration.
How does the author define horizontal versus vertical trade?
Products are defined as horizontally differentiated if their unit values differ by less than 15 percent; otherwise, they are classified as vertically differentiated, reflecting quality-based specialization.
What is the significance of the "Krugman Scenario"?
The Krugman Scenario predicts that increased economic integration promotes industrial agglomeration and specialization, which would reinforce shock asymmetries rather than reduce them.
What did the empirical results conclude?
The results show that trade shares remained largely stable over the analysis period, providing no evidence for the endogeneity of OCA criteria or a definitive shift toward either the Krugman or Frankel & Rose scenarios.
- Citation du texte
- Johannes Ebert (Auteur), 2012, Intra Industry Trade and shock asymmetry in a monetary union - A study of trade evolution in the Euro Zone, Munich, GRIN Verlag, https://www.grin.com/document/263926
