## _cr05401 — References (excerpt)

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---

### I. Introduction — scope and approach
- Purpose: Analyze external sector developments during 2001–04 for France, Germany, Italy, and Spain on a comparable basis as background for Article IV consultations.
- Scope limitations: Does not cover all possible factors; may require country-specific follow-up analysis.
- Methodological note:
  - Uses traditional determinants of exports and imports and univariate error-correction models.
  - Acknowledged limitations: endogeneity of trade volumes not accounted for; structural parameters not identified.
  - Residuals analyzed over 2001–04 to assess unexplained influences, recognizing residuals may reflect unobservable or omitted factors, and statistical/data problems.
- Key conceptual points:
  - Cyclical and structural factors jointly determine trade price and volume developments.
  - In a monetary union, differing cyclical positions affect relative competitiveness via price and wage inflation.
  - Structural differences (labor/product market flexibility, pace of reform) and pricing behavior (import pass-through vs. export margin adjustment) matter.

### II. Developments in key determinants of trade (2001–04)
- External sector contributions to growth (summary):
  - Euro area: contribution positive in 2001–02; mild drag in 2003 and 2004.
  - Germany: external sector contributed positively throughout 2001–04 and exceeded cumulative GDP increase 2001–04.
  - Spain: external sector contribution continuously negative.
  - France: switched from marginally positive in 2001–02 to appreciably negative in 2003–04.
  - Italy: external sector detracted from growth in every year since 2002.
- Memo item (Proj.Real GDP, 2001-05 from WEO) — preserve exact sequence:
  - Euro area: 1.5 -0.3 0.0 1.1 6.9
  - France: 0.1 -2.0 -0.9 -2.9 8.3
  - Germany: 3.7 0.3 1.2 5.3 3.9
  - Italy: -0.5 -0.7 -0.6 -1.9 3.4
  - Spain: -0.9 -3.0 -1.8 -6.1 16.4
- Terms-of-trade and resource balance:
  - All four benefited from euro appreciation reducing import bill in euros; all adversely affected by recent oil price hike.
  - Non-oil resource account developments 2001–05 (percent of GDP):
    - France: 2.9 3.0 2.5 2.1 1.6 -1.3
    - Germany: 3.6 5.9 5.8 6.9 8.5 4.9
    - Italy: 2.5 1.9 1.5 1.5 1.2 -1.3
    - Spain: -0.2 0.1 -0.2 -1.8 -2.9 -2.7
  - Note: Italian exporters passed on a higher-than-average proportion of unit labor cost increases into export prices in euros.
- Price and cost competitiveness:
  - Unit labor cost-based REERs diverged across countries despite common currency:
    - Germany: limited impact from euro appreciation due to favorable productivity and cost retrenchment.
    - France: modest real exchange rate appreciation.
    - Italy: substantial appreciation due to falling labor productivity and production cost increases.
    - Spain: larger appreciation due to labor cost increases in excess of productivity gains.
- Geographic orientation and sectoral composition:
  - Germany structurally more geared toward fast-growing areas and new EU accession countries.
  - Exports to new EU members (2004): France 3.3, Germany 8.5, Italy 5.4, Spain 2.8 (percent of exports).
  - Sectoral specialization:
    - Germany: manufactured capital goods (benefited from global investment upswing).
    - France and Italy: more concentrated on consumer goods (vulnerable to emerging markets).
    - Spain: concentrated in manufactured goods; trade partner demand key.
- Domestic demand and imports:
  - Spain: most buoyant domestic demand since 2001, average annual growth of 3¾ percent.
  - France: exceeded German domestic demand growth by about 2½ percent per year on average since 2001.
  - Italy: weak domestic demand since 2000; average annual growth rate in consumption about 1 percent; business investment contracted in 2003.
  - Despite weak domestic demand, Italian import volumes grew by 5 percent between 2000 and 2004.

### III. Econometric analysis — models, variables, and dynamics
- Data and estimation:
  - Quarterly data (late 1970s/early 1980s onward; Germany sample starts after reunification).
  - Separate reduced-form ECMs for export and import volumes; separate equations for goods and services for each country.
  - Steps: test for cointegration; estimate full ECMs; choose lag structure using Hendry’s strategy.
  - Annex II: detailed estimates and cointegration tests; Annex III: methodology for dynamic contributions.
- Core variables and caveats:
  - Cost competitiveness: unit labor cost-based REER.
  - Relative price variables:
    - Exports: trade-weighted GDP deflator of trading partners over the export price of the country (may be contaminated by Balassa-Samuelson effects).
    - Imports: ratio of country import prices over domestic demand price.
  - Trade-weighted foreign demand and domestic demand as scale variables.
  - Exports included as an explanatory variable in import equations for Germany, Italy, and Spain (reflecting high import content of exports); not significant for France.
  - Capacity utilization significant for imports in France and Spain.
  - Trends retained where significant.
- Dynamic contributions methodology:
  - Combines estimated elasticities and actual evolution of explanatory variables, accounting for full lag structure.
  - Used to decompose observed export and import volume behavior over 2001–04.

### IV. Main quantitative findings (dynamic contributions, 2001–04)
- Overall explanatory power:
  - Traditional determinants explain a significant portion of differences in external sector performance, but a significant part remains unexplained (residuals important).
- Exports:
  - REER appreciation during 2001–04:
    - Marginal impact on imports but adversely affected exports of goods and services in all countries, broadly in proportion to the degree of appreciation.
    - Germany relatively less affected by REER appreciation, especially for goods.
    - Italy more affected for both goods and services.
    - Estimated exchange rate elasticities for goods: Germany 0.3; Italy 0.7.
  - Global demand contributions (goods elasticities):
    - France: unit elasticity with respect to global demand could not be rejected.
    - Italy: 1.9
    - Germany: 2.2
    - Spain: 3.6
  - Residual ("other") components:
    - Important for explaining export performance differences.
    - Germany: export vigor consistent with cost competitiveness and global demand and aided by an unexplained buoyancy.
    - France: slightly weaker competitiveness, lower global demand addressed to it, and unexplained export weakness.
    - Italy: steady REER appreciation contributed to export stagnation despite positive global demand; omitted factors also important.
    - Spain: exports expanded but were held back by sharp REER appreciation and unexplained negatives.
- Imports:
  - Domestic demand: primary driver of import growth; especially strong in Spain.
  - Foreign demand and import content of exports: in Germany and Spain, imports driven by foreign demand reflecting high import content of exports.
  - Relative import content of domestic vs. foreign demand explains most import behavior; price and cost competitiveness secondary.

### V. Other variables included in the regressions (lesser contributions)
- Price competitiveness (relative price variable):
  - Contributed intuitively on the import side; significant for Spanish goods imports.
  - On the export side, relative prices were insignificant except for French goods where they point to ability of French exporters to move up the demand curve by lowering relative prices.
- Capacity utilization:
  - Lower capacity utilization in France and Spain dampened imports; positive import elasticities but utilization fell on average over the period.
  - Not significant in Germany and Italy.
- Trends:
  - Significant only in some sectors in France and Germany.
  - Notable trend contributions:
    - Strong positive contribution of trends to imports of goods in France.
    - Sharp trend-driven increase in German services exports (covering about 15 percent of total trade).
    - Trend decline in German goods imports.

### VI. Table 4 — Cumulative growth and contributions of trade determinants, 2001–04 (selected figures)
- France — Exports (Goods manufactured / Nonmanufactured goods and services (Exclud. Oil))
  - Cumulative growth over 2001-04: 7.1 / -2.4
  - Contributions (Goods / Nonmanufactured goods and services):
    - Foreign demand: 7.4 / 10.0
    - Domestic demand: 5.0 / 9.1
    - Relative prices: 13.3 / -0.4
    - Reer: -3.2 / -2.9
    - Trend: -2.5 / ...
    - Unexplained: -7.7 / -9.1
- France — Imports (Goods manufactured / Nonmanufactured goods and services)
  - Cumulative growth over 2001-04: 12.9 / 9.1
  - Contributions:
    - Foreign demand: 1.1 / 0.8
    - Domestic demand: 5.0 / 9.1
    - Relative prices: 1.1 / 0.8
    - Capacity utilization: -1.4 / ...
    - Trend: 11.9 / 2.7
    - Unexplained: -3.8 / -3.5
- Germany — Exports (Goods / Services)
  - Cumulative growth over 2001-04: 18.9 / 12.5
  - Contributions:
    - Foreign demand: 20.4 / 9.3
    - Relative prices: ... / -1.2
    - Reer: -1.7 / -6.7
    - Trend: ... / 14.7
    - Unexplained: 2.1 / -3.0
- Germany — Imports (Goods / Services)
  - Cumulative growth over 2001-04: 11.8 / -0.9
  - Contributions:
    - Domestic demand: -2.0 / -4.9
    - Relative prices: 2.6 / 2.3
    - Exports: 19.3 / 1.1
    - Trend: -9.3 / 0.7
    - Unexplained: 1.0 / -0.1
- Italy — Exports (Goods / Services)
  - Cumulative growth over 2001-04: -0.3 / -1.4
  - Contributions:
    - Foreign demand: 15.5 / 16.1
    - Relative prices: ... / ...
    - Reer: -10.6 / -13.0
    - Unexplained: -5.2 / -4.5
- Italy — Imports (Goods / Services)
  - Cumulative growth over 2001-04: 3.0 / 6.4
  - Contributions:
    - Domestic demand: 6.3 / 6.5
    - Relative prices: ... / 7.1
    - Reer (Exports): 0.0 / -1.0
    - Unexplained: -3.2 / -6.3
- Spain — Exports (Goods / Services)
  - Cumulative growth over 2001-04: 15.8 / 3.4
  - Contributions:
    - Foreign demand: 29.3 / 21.8
    - Relative prices: ... / ...
    - Reer: -7.0 / -6.4
    - Unexplained: -6.5 / -10.9
- Spain — Imports (Goods / Services)
  - Cumulative growth over 2001-04: 23.1 / 14.8
  - Contributions:
    - Domestic demand: 17.4 / 14.3
    - Relative prices: 10.9 / ...
    - Exports: 5.1 / -2.0
    - Capacity utilization: -2.3 / ...
    - Trend: ... / 7.7
    - Unexplained: -8.0 / -5.1
- Source: IMF staff estimates.

### VII. Residuals and unexplained factors
- Residuals averaged zero statistically over the entire sample but were informative in subperiods, reflecting omitted factors such as nonprice competitiveness or sectoral orientation of trade.
- Residual contributions during 2001–04:
  - France: residuals contributed negatively — France lost almost 8 percentage points of goods exports for reasons not captured by the equation, but only 4 percentage points of goods imports.
  - Italy: lost about 2 percentage points in the balance between exports and imports for both goods and services.
  - Germany: exports gained more than imports, particularly goods, by about 1 percentage point.
  - Spain: both exports and imports weaker than predicted; for goods, the residual was larger on the import side.
- Residuals became smaller in 2003–04 and turned positive in some cases in 2004.

### VIII. Timing and drivers from dynamic contributions
- Movement of the euro:
  - France and Germany: initial euro depreciation contributed positively or neutrally to export growth; subsequent appreciation added to the fall in export growth or decline in export levels.
  - Italy: deteriorating competitiveness exerted a drag on exports before the recent euro appreciation.
  - Spain: continuous real appreciation associated with steady negative contribution to export growth throughout 2001–04, but impact less negative than Italy, suggesting part of appreciation could be equilibrium convergence.
- Imports closely followed the time profile of domestic demand and/or exports when exports had high import content.

### IX. Conclusions and implications for further analysis (policy-relevant findings)
- Traditional determinants (REER based on unit labor costs, global demand, domestic demand, relative prices) explain much of the cross-country differences during 2001–04, but residuals indicate important roles for unobserved or omitted factors (nonprice competitiveness, margin behavior, sectoral and firm-level dynamics) — warranting country-specific follow-up analysis.
- Country-specific implications drawn from econometric findings:
  - Germany: comparative strength on price and cost competitiveness; favorable global demand orientation; unexplained export buoyancy.
  - France: marginally weaker competitiveness and lower foreign demand addressed to it; some unexplained export weakness.
  - Italy: substantial REER appreciation and falling labor productivity contributed to export stagnation; exporters passed on a higher-than-average percentage of unit labor cost increases into export prices in euros; unresolved "dynamic inefficiency" linked to sectoral composition and competition.
  - Spain: good export expansion offset by sharp REER appreciation and some unexplained negatives.
- Policy-relevant observation: In a monetary union, structural reforms that affect productivity and labor cost dynamics, and enhancements to nonprice competitiveness, are critical to address persistent export/import performance divergences.
- Specific policy implication for Italy: scope for margin retrenchment and structural reforms facilitating industrial restructuring and technology adoption to prevent further erosion of market shares.

### X. Data sources and econometric framework (high-level)
- Country data sources: INSEE (France), DIW (Germany), ISTAT (Italy), INE (Spain); external environment from WEO database; capacity utilization from WEFA; REER from IFS.
- Econometric framework:
  - Error-Correction Models (ECM); variables in logs (except trends); Phillips-Ouliaris-Hansen cointegration tests.
  - Diagnostic notes: T-statistics reported in parenthesis; significance at 5 percent when T>1.96.
  - Annex Tables report cointegration statistics and long-term elasticities (selected entries preserved in the source).

*Italic: Source: _cr05401 - References (IMF staff paper, section excerpts) — content as provided.*

### References..............................................................................................................

### _cr05401 - References

### I. Introduction — scope and approach
- Purpose: Analyze external sector developments during 2001–04 for France, Germany, Italy, and Spain on a comparable basis as background for Article IV consultations.
- Scope limitations: Does not cover all possible factors; may require country-specific follow-up analysis.
- Methodological note:
  - Uses traditional determinants of exports and imports and univariate error-correction models.
  - Acknowledged limitations: endogeneity of trade volumes not accounted for; structural parameters not identified.
  - Residuals analyzed over 2001–04 to assess unexplained influences, recognizing residuals may reflect unobservable or omitted factors, and statistical/data problems.
- Key conceptual points:
  - Cyclical and structural factors jointly determine trade price and volume developments.
  - In a monetary union, differing cyclical positions affect relative competitiveness via price and wage inflation.
  - Structural differences (labor/product market flexibility, pace of reform) and pricing behavior (import pass-through vs. export margin adjustment) matter (reference to Faruqee, 2004).

### II. Developments in key determinants of trade (2001–04)
- External sector contributions to growth (Table 1 summary):
  - Euro area: contribution positive in 2001–02; mild drag in 2003 and 2004.
  - Germany: external sector contributed positively throughout 2001–04 and exceeded cumulative GDP increase 2001–04.
  - Spain: external sector contribution continuously negative.
  - France: switched from marginally positive in 2001–02 to appreciably negative in 2003–04.
  - Italy: external sector detracted from growth in every year since 2002.
- Memo item (Proj.Real GDP, 2001-05 from WEO):
  - Euro area: 1.5 -0.3 0.0 1.1 6.9
  - France: 0.1 -2.0 -0.9 -2.9 8.3
  - Germany: 3.7 0.3 1.2 5.3 3.9
  - Italy: -0.5 -0.7 -0.6 -1.9 3.4
  - Spain: -0.9 -3.0 -1.8 -6.1 16.4
- Terms-of-trade and resource balance (Table 2 summary):
  - All four benefited from euro appreciation reducing import bill in euros; all adversely affected by recent oil price hike.
  - Non-oil resource account developments 2001–05 (percent of GDP):
    - France: 2.9 3.0 2.5 2.1 1.6 -1.3 (2001 2002 2003 2004 2005 2005-2001)
    - Germany: 3.6 5.9 5.8 6.9 8.5 4.9
    - Italy: 2.5 1.9 1.5 1.5 1.2 -1.3
    - Spain: -0.2 0.1 -0.2 -1.8 -2.9 -2.7
  - Note: Italian exporters passed on a higher-than-average proportion of unit labor cost increases into export prices in euros (Bugamelli and Tedeschi, 2004).
  - Figure 1: Export Unit Values (Euros, Index 2000=100) — broad movements: Italy experienced export price increases; Spain benefited less; Germany and France broadly sideways.
- Price and cost competitiveness (Figure 2 summary):
  - Unit labor cost-based real exchange rates behaved differently across countries despite common currency.
  - Germany: limited impact of euro appreciation due to favorable productivity and cost retrenchment.
  - France: modest real exchange rate appreciation.
  - Italy: substantial appreciation due to falling labor productivity and production cost increases.
  - Spain: larger appreciation due to labor cost increases in excess of productivity gains.
  - Nonprice competitiveness (brand, quality, post-sale service) may play a role but consistent time series not generally available.
- Foreign absorption and geographic orientation (Figure 3 and Table 3):
  - Since 2001, France and Spain faced consistently lower foreign demand addressed to their economies than Germany and Italy.
  - Intra-euro area trade effects: Italy and Germany dampened foreign demand addressed to France and Spain in 2004; Spain’s dynamic imports boosted partners’ exports.
  - Geographic orientation of exports, 2004 (percent of exports to region):
    - Exports to the new EU members: France 3.3, Germany 8.5, Italy 5.4, Spain 2.8
    - Exports to the United Kingdom: France 9.3, Germany 8.2, Italy 6.9, Spain 9.0
    - Exports to the United States: France 6.7, Germany 8.8, Italy 8.0, Spain 4.0
    - Exports to Asia, excluding Japan: France 4.9, Germany 7.1, Italy 5.7, Spain 2.5
  - Germany is structurally more geared toward fast-growing areas and new EU accession countries.
- Sectoral composition:
  - Germany specialized in manufactured capital goods benefiting from global investment upswing in 2001–04.
  - France and Italy concentrated more on consumer goods, vulnerable to competition from emerging markets.
  - Spain concentrated in manufactured goods; trade partner demand key.
- Domestic demand and imports (Figure 4):
  - Spain: most buoyant domestic demand since 2001, average annual growth of 3¾ percent.
  - France: exceeded German domestic demand growth by about 2½ percent per year on average since 2001.
  - Italy: weak domestic demand since 2000; average annual growth rate in consumption about 1 percent; Italian business investment contracted in 2003.
  - Despite weak domestic demand, Italian import volumes grew by 5 percent between 2000 and 2004.

### III. Econometric analysis — models, variables, and dynamics
- Data and estimation:
  - Quarterly data, generally from late 1970s/early 1980s; Germany sample starts after reunification.
  - Separate reduced-form equations estimated for volumes of exports and imports; separate equations for goods and services for each country.
  - Steps: test for cointegration in levels; estimate full error-correction models; choose lag structure using Hendry’s strategy.
  - Annex II reports detailed estimates and cointegration tests; Annex III presents methodology for dynamic contributions.
- Core variables and additional explanatory variables:
  - Cost competitiveness: unit labor cost-based real effective exchange rate.
  - Relative price variable: captures factors beyond labor costs (preference shifts, margins). Definitions:
    - For exports: trade-weighted GDP deflator of trading partners over the export price of the country.
    - For imports: ratio of country import prices over domestic demand price.
    - Caveat: export-side measure may be contaminated by Balassa-Samuelson effects.
  - Trade-weighted foreign demand and domestic demand as scale variables.
  - In Germany, Italy, and Spain: exports included as explanatory variable in import equations (reflecting high import content of exports); not significant in France.
  - Capacity utilization significant for imports in France and Spain.
  - Trends retained where significant.
- Dynamic contributions methodology:
  - Combines estimated elasticities and actual evolution of explanatory variables, accounting for full lag structure.
  - Used to decompose observed export and import volume behavior over 2001–04 (see Annex III).

### IV. Main quantitative findings (dynamic contributions, 2001–04)
- Overall explanatory power:
  - Traditional determinants explain a significant portion of differences in external sector performance, but a significant part remains unexplained (residuals important).
- Exports:
  - Real effective exchange rate appreciation during 2001–04:
    - Had marginal impact on imports but adversely affected exports of goods and services in all countries, broadly in proportion to the degree of appreciation.
    - Germany relatively less affected by REER appreciation, especially for goods.
    - Italy comparatively more affected for both goods and services.
    - Estimated exchange rate elasticities for goods: Germany 0.3; Italy 0.7.
  - Global demand:
    - Contributed positively to exports in all countries.
    - Strongest impact in Spain; weakest in France.
    - Elasticities (goods):
      - France: unit elasticity with respect to global demand could not be rejected.
      - Italy: 1.9
      - Germany: 2.2 (larger impact on goods than services)
      - Spain: 3.6 (high elasticity more than compensated for relatively sluggish global demand addressed to Spain)
  - Residual ("other") components:
    - Important for explaining export performance differences.
    - Germany’s recent export vigor: consistent with cost competitiveness and global demand and aided by an econometrically-unexplained buoyancy.
    - France: slightly weaker on cost competitiveness, lower global demand addressed to it, and some lack of export resilience unexplained by traditional determinants.
    - Italy: steady REER appreciation contributed to export stagnation despite positive global demand; omitted factors also important.
    - Spain: exports expanded well but were held back by sharp REER appreciation and some unexplained negative factors.
- Imports:
  - Domestic demand:
    - Primary driver of import growth; especially strong role in Spain where domestic demand was most energetic.
  - Foreign demand and import content of exports:
    - In Germany and Spain, imports were also driven by foreign demand, reflecting high import content of exports.
    - In Italy, foreign demand significant in import equations but weak export growth limited its role as a driver of imports.
  - Relative import content of domestic vs. foreign demand explains most import behavior; price and cost competitiveness secondary.

### V. Conclusions and implications for further analysis
- Traditional determinants (REER based on unit labor costs, global demand, domestic demand, relative prices) go a long way in explaining trade differences among France, Germany, Italy, and Spain during 2001–04.
- Nevertheless, residuals indicate important roles for unobserved or omitted factors (nonprice competitiveness, margin behavior, sectoral and firm-level dynamics) — warranting country-specific follow-up analysis beyond this paper.
- Country-specific summaries implied by the econometric findings:
  - Germany: comparative strength on price and cost competitiveness; favorable global demand orientation; unexplained export buoyancy.
  - France: marginally weaker competitiveness and lower foreign demand addressed to it; some unexplained export weakness.
  - Italy: substantial REER appreciation and falling labor productivity contributed to export stagnation; other omitted factors also important.
  - Spain: good export expansion offset by sharp REER appreciation and some unexplained negatives.
- Policy-relevant observation: In a monetary union, structural reforms that affect productivity and labor cost dynamics, and nonprice competitiveness enhancement, are critical to address persistent export/import performance divergences.

*Italic: Source: _cr05401 - References (IMF staff paper, section excerpts) — content as provided.*

### 14.      Other variables included in the regressions also contributed, though to a lesser

### 14. Other variables included in the regressions also contributed, though to a lesser extent, and their role is more difficult to interpret

### Price competitiveness, capacity utilization, and trends
- Price competitiveness (relative price variable, see ¶12)
  - Contributed intuitively on the import side; not of major importance except for Spanish goods imports.
  - Global competition and euro appreciation over 2001–04 have likely allowed importers to reduce their prices in euros, helping to boost imports.
  - On the export side, relative prices were insignificant, except for French goods where relative prices point to the ability of French exporters to move up the demand curve by lowering relative prices. The method does not distinguish supply versus demand factors.
- Capacity utilization
  - Lower capacity utilization owing to slack in the French and Spanish economies dampened imports, but this variable did not play in Germany and Italy.
  - Note: In both France and Spain, higher capacity utilization drives up imports (positive elasticities in the estimated equations in Annex II) but the rate of capacity utilization fell on average during the period considered.
- Trends
  - Significant only in some sectors in France and Germany.
  - Notable trend contributions:
    - Strong positive contribution of trends to imports of goods in France.
    - Sharp trend-driven increase in German services exports (though this covers only 15 percent of total trade).
    - Trend decline in German goods imports.

### Table 4 — Cumulative growth and contributions of trade determinants, 2001–04 (selected figures)
- France — Exports (Goods manufactured / Nonmanufactured goods and services (Exclud. Oil))
  - Cumulative growth over 2001-04: 7.1 / -2.4
  - Contributions (Goods / Nonmanufactured goods and services):
    - Foreign demand: 7.4 / 10.0
    - Domestic demand: 5.0 / 9.1
    - Relative prices: 13.3 / -0.4
    - Reer: -3.2 / -2.9
    - Trend: -2.5 / ...
    - Unexplained: -7.7 / -9.1
- France — Imports (Goods manufactured / Nonmanufactured goods and services)
  - Cumulative growth over 2001-04: 12.9 / 9.1
  - Contributions:
    - Foreign demand: 1.1 / 0.8
    - Domestic demand: 5.0 / 9.1
    - Relative prices: 1.1 / 0.8
    - Capacity utilization: -1.4 / ...
    - Trend: 11.9 / 2.7
    - Unexplained: -3.8 / -3.5
- Germany — Exports (Goods / Services)
  - Cumulative growth over 2001-04: 18.9 / 12.5
  - Contributions:
    - Foreign demand: 20.4 / 9.3
    - Relative prices: ... / -1.2
    - Reer: -1.7 / -6.7
    - Trend: ... / 14.7
    - Unexplained: 2.1 / -3.0
- Germany — Imports (Goods / Services)
  - Cumulative growth over 2001-04: 11.8 / -0.9
  - Contributions:
    - Domestic demand: -2.0 / -4.9
    - Relative prices: 2.6 / 2.3
    - Exports: 19.3 / 1.1
    - Trend: -9.3 / 0.7
    - Unexplained: 1.0 / -0.1
- Italy — Exports (Goods / Services)
  - Cumulative growth over 2001-04: -0.3 / -1.4
  - Contributions:
    - Foreign demand: 15.5 / 16.1
    - Relative prices: ... / ...
    - Reer: -10.6 / -13.0
    - Unexplained: -5.2 / -4.5
- Italy — Imports (Goods / Services)
  - Cumulative growth over 2001-04: 3.0 / 6.4
  - Contributions:
    - Domestic demand: 6.3 / 6.5
    - Relative prices: ... / 7.1
    - Reer (Exports): 0.0 / -1.0
    - Unexplained: -3.2 / -6.3
- Spain — Exports (Goods / Services)
  - Cumulative growth over 2001-04: 15.8 / 3.4
  - Contributions:
    - Foreign demand: 29.3 / 21.8
    - Relative prices: ... / ...
    - Reer: -7.0 / -6.4
    - Unexplained: -6.5 / -10.9
- Spain — Imports (Goods / Services)
  - Cumulative growth over 2001-04: 23.1 / 14.8
  - Contributions:
    - Domestic demand: 17.4 / 14.3
    - Relative prices: 10.9 / ...
    - Exports: 5.1 / -2.0
    - Capacity utilization: -2.3 / ...
    - Trend: ... / 7.7
    - Unexplained: -8.0 / -5.1
- Source: IMF staff estimates.

### Residuals and unexplained factors (paragraphs 15 and summary)
- Residuals averaged zero statistically over the entire sample but were informative in subperiods, reflecting omitted factors such as nonprice competitiveness or sectoral orientation of trade.
- Residual contributions during 2001–04:
  - France: residuals contributed negatively — France lost almost 8 percentage points of goods exports for reasons not captured by the equation, but only 4 percentage points of goods imports.
  - Italy: lost about 2 percentage points in the balance between exports and imports for both goods and services.
  - Germany: exports gained more than imports, particularly goods, by about 1 percentage point.
  - Spain: both exports and imports weaker than predicted; for goods, the residual was larger on the import side.
- Residuals became smaller in 2003–04 and turned positive in some cases in 2004.

### Timing and drivers from dynamic contributions (paragraph 16 and Figures 6–9)
- Movement of the euro is clearly discernible:
  - In France and Germany, initial euro depreciation contributed positively or was neutral to export growth; subsequent appreciation (around the time global demand slowed) added to the fall in export growth or decline in export levels.
  - Italy: deteriorating competitiveness exerted a drag on exports before the recent euro appreciation.
  - Spain: continuous real appreciation of similar magnitude as Italy associated with steady negative contribution to export growth throughout 2001–04, but impact was less negative than Italy, suggesting part of appreciation could be equilibrium convergence.
- Imports closely followed the time profile of domestic demand and/or exports when exports had high import content.

### Concluding remarks and implications (paragraphs 17–19)
- Global demand lifted external sector contribution to growth in all large euro area countries during 2001–04, but effects differed:
  - External demand contributed less in France than elsewhere and particularly strongly in Spain.
  - Buoyant domestic demand in France and Spain sharply boosted imports.
  - Germany experienced weak domestic demand but increasing import content of exports stimulated import growth.
- Divergences in price and cost competitiveness are key to recent differences in external-sector performance:
  - Adjustment to cyclical differences in monetary union is consistent with developments in Germany and France and to a lesser extent in Spain, but at odds with Italy.
  - Magnitude of changes in the real effective exchange rate points to crucial importance of underlying structural factors.
  - If domestic demand were to settle at a pace that closes the output gap in all countries over a similar time horizon, there would be only a partial reversal of recent worsening of France’s and Spain’s external accounts and the improvement in Germany’s; for Italy, closure of the output gap would likely further deteriorate its external accounts.
- Italy-specific issues:
  - Exporters’ margin behavior and sectoral composition of exports appear partially responsible for Italy’s idiosyncratic behavior.
  - Italian exporters seem to have responded to euro appreciation by passing on to export prices a higher-than-average percentage of the increase in unit labor costs, implying scope for margin retrenchment to prevent further erosion of market shares in volume.
  - Italian exports are concentrated in relatively slow-growing sectors of world demand and areas with intensifying competition from emerging markets.
  - Resolving this “dynamic inefficiency” likely requires structural reforms facilitating industrial restructuring and technology adoption.

*Source: IMF staff estimates.*

### 20.      The fact that a significant part of trade behavior during 2001–04 cannot be

### _cr05401 - 20.      The fact that a significant part of trade behavior during 2001–04 cannot be

### Trade behavior during 2001–04 — substantive finding
- A significant part of trade behavior during 2001–04 cannot be attributed to the traditional explanatory variables considered in the econometric analysis.
- Germany:
  - The residual was positive.
  - Estimated trends were favorable.
  - Interpretation: possible improvements in competitiveness not measured by standard price and cost indicators.
- France, Italy, and Spain:
  - Trade performed weaker than predicted.
  - Estimated trends, where significant, tended to be negative for exports and positive for imports.
  - Interpretation: These developments, if persistent, signal a need to improve underlying external performance in each of the three countries.

### Data sources (breakdown by country and external environment)
- French data (INSEE quarterly data, base 1995, 1978 Q1–2004 Q4; all seasonally adjusted and corrected for working days):
  - Exports and imports in volume for the manufacturing sector (TD_P6/P7_DIM1).
  - Exports in volume for the nonmanufacturing sector and services (TD_P6 for sectors S1, EA1, EB1 and EG1).
  - Imports in volume for the nonmanufacturing sector and services excluding oil (TD_P6 for sectors S1, EA1 and EB1).
  - Domestic demand in volume for the manufacturing sector: sum of consumption in intermediary manufacturing goods, household consumption, government consumption, investment and change in inventories (sum of TD_P2_DIM1, TD_P3M_DIM1, TD_P3G_DIM1, TD_P51_DIM1, TD_P52_DIM1).
  - Domestic demand in volume for the nonmanufacturing sector and services excluding oil: same components of demand as for the manufacturing sector, but for the sectors S1, EA1 and EB1.
  - Export, import, and domestic demand prices for the same breakdown.
- German data (Deutsches Institut für Wirtschaftsforschung (DIW) quarterly data, base 1995, 1991 Q1–2004 Q3):
  - Exports and imports in volume for goods and services, seasonally adjusted and corrected for working days (P61RFB, P62RFB, P71RFB and P72RFB).
  - Total domestic demand in volume (for all goods, as no breakdown was available), seasonally adjusted (P3R+P5RB).
  - Export, import, and domestic demand prices for the same breakdown.
- Italian data (ISTAT quarterly data, 1980Q1–2004Q4):
  - Exports and imports in volume for goods and services, seasonally adjusted and corrected for working days, expressed in 1995 euros.
  - Total domestic demand in volume (for all goods, as no breakdown is available).
  - Export, import, and domestic demand deflators for the same breakdown.
- Spanish data (INE quarterly data, 1980Q1–2004Q4):
  - Exports and imports in volume for goods and services, seasonally adjusted and corrected for working days, expressed in 1995 euros.
  - Total domestic demand in volume.
  - Export, import, and domestic demand deflators for the same breakdown.
- External environment data (WEO database):
  - Foreign demand faced by France, Germany, Italy, and Spain: weighted GDP at constant prices of trade partners, with weights defined as the share of exports to trade partners (for trade partners whose share is greater than 1 percent of total exports). Detailed export data are derived from the IMF Direction of Trade Statistics.
  - Note: Foreign demand is available only on an annual basis; for econometric analysis the quarterly series for foreign demand is derived by applying the quarterly pattern of G-7 GDP to distribute global demand on a quarterly basis. This simplifying assumption may affect the accuracy of the short-term dynamics.
  - Foreign competitors’ prices (for all goods): weighted GDP deflators converted in euros, with weights similar to those used for foreign demand; only available on an annual basis.
  - Export relative prices (for export equations): ratio of foreign competitors prices, expressed in euros, over domestic exporters’ prices. An increase in the ratio signals an increase in price competitiveness.
  - Import relative prices (for import equations): ratio of importers’ prices over overall domestic demand prices (proxy of the ratio of importers’ prices over the prices of domestic production sold nationally). An increase in the ratio signals an increase in price competitiveness.
- Other data:
  - From the International Financial Statistics (IFS): Real Effective Exchange Rate:
    - For the manufacturing/goods equation, based on unit labor costs.
    - For France and Germany, for the rest of the economy, the indicator used is the REER based on the CPI for the whole economy.
  - From the WEFA database: Capacity Utilization Rate in the manufacturing sector.

### Econometric framework — Error-Correction Models (ECM) and estimation details
- General:
  - Figures in parenthesis below the estimated coefficients are T-statistics. Significance at 5 percent level is reached for T-statistics over 1.96.
  - All variables, except the trends, are in logarithms. Estimation also includes a constant.
  - The relative prices variable for exports is the ratio of foreign GDP prices (expressed in euros) over exporter prices, and for imports the ratio of import prices over domestic demand prices.
  - Phillips-Ouliaris-Hansen tests used for cointegration; critical values derived from Hamilton (1994). A *** signals significance at 1 percent level, ** at 5 percent level, and * at 10 percent.
- France (estimation sample and diagnostic statistics):
  - Exports in the Manufacturing Sector:
    - Estimation: 1979Q2-2004Q4, DW=1.93, SEEstimate=0.018.
    - ECM specification includes lags, ∆ terms, ECM term and variables: LogULCer, LogRelative (manuficelative?), LogDemandWorld, LogManufEx, and trend components as shown in the source equation.
  - Exports in the Nonmanufacturing and Services Sectors:
    - Estimation: 1981Q3-2004Q4, DW=2.08, SEEstimate=0.016.
    - ECM includes CPIerLog, NonManuficelativeLog, DemandWorldLog and related lagged ∆ terms.
  - Imports in the Manufacturing Sector:
    - Estimation: 1979Q1-2004Q4, DW=2.06, SEEstimate=0.012.
    - ECM includes RateUtilCapacityManuf, ManufDemandDomesticLog, ManufLog and ECM terms and trends.
  - Imports in the Nonmanufacturing and Services Sectors, excluding Oil:
    - Estimation: 1979Q3-2004Q4, DW=1.99, SEEstimate=0.011.
    - ECM includes NonManuficelativeLog, NonManufDemandDomesticLog, NonManufLog series, ECM and trend/break terms.
- Germany (estimation sample and diagnostics):
  - Exports of Goods:
    - Estimation: 1992Q3-2004Q3, DW=1.68, SEEstimate=0.013.
    - ECM includes ULCerLog lags, DemandWorldLog, GoodsExLog and dummy variables.
  - Exports of Services:
    - Estimation: 1992Q1-2004Q3, DW=1.62, SEEstimate=0.022.
    - ECM includes CPIerLog, ServicesicelativeLog, DemandWorldLog and lagged ∆ terms.
  - Imports of Goods:
    - Estimation: 1992Q2-2004Q3, DW=1.71, SEEstimate=0.0087.
    - ECM includes GoodsicelativeLog series, GoodsExLog, DemandDomesticLog and GoodsLog lags.
  - Imports of Services:
    - Estimation: 1992Q1-2004Q3, DW=1.80, SEEstimate=0.011.
    - ECM includes ServicesicelativeLog, ServicesExLog, DemandDomesticLog and trend terms.
- Italy (estimation sample and diagnostics):
  - Exports of Goods:
    - Estimation: 1980Q2-2004Q4, DW=2.01, SEEstimate=0.040.
    - ECM includes ULCerLog, DemandWorldLog, GoodsExLog and trend/break terms.
  - Exports of Services:
    - Estimation: 1981Q3-2004Q4, DW=1.77, SEEstimate=0.037.
    - ECM includes ULCerLog lags, DemandWorldLog, ServicesExLog and dummy terms.
  - Imports of Goods:
    - Estimation: 1980Q3-2004Q4, DW=2.01, SEEstimate=0.020.
    - ECM includes ServicesExLog, DemandDomesticLog, ServicesLog and ECM terms.
  - Imports of Services:
    - Estimation: 1980Q2-2004Q4, DW=2.16, SEEstimate=0.034.
    - ECM includes ServicesicelativeLog, ServicesExLog, ServicesLog and trend terms.
- Spain (estimation sample and diagnostics):
  - Exports of Goods:
    - Estimation: 1981Q3-2004Q4, DW=1.81, SEEstimate=0.039.
    - ECM includes ULCerLog, DemandWorldLog, GoodsExLog and dummy terms.
  - Exports of Services:
    - Estimation: 1981Q2-2004Q4, DW=1.74, SEEstimate=0.014.
    - ECM includes CPIerLog, DemandWorldLog, ServicesExLog and dummy/ULCerLog terms.
  - Imports of Goods:
    - Estimation: 1981Q3-2004Q4, DW=, SEEstimate=0.019. (DW statistic not reported in the source excerpt.)
    - ECM includes RateUtilCapacityGoodsicelativeLog, GoodsExLog, DemandDomesticLog, GoodsLog and related lags.
  - Imports of Services:
    - Estimation: 1981Q3-2004Q4, DW=2.17, SEEstimate=0.018.
    - ECM includes ServicesExLog, DemandDomesticLog, ServicesLog and trend terms.

### Cointegration testing and long-term equation summary (Annex Table highlights)
- The Annex Table reports cointegration test statistics (Z(rho) and Z(t)) and long-term elasticities for Manufactured Goods, Nonmanufactured Goods and Services, for Exports and Imports, and for Foreign Demand, Domestic Demand, Exports, Relative Prices, Real Effective Exchange Rate, Capacity Utilization Rate, trends, break-in-trend coefficients, and dummies.
- Selected numeric entries (preserve exact reported figures and significance markers):
  - Foreign Demand elasticities include values: 1.00, 1.00, 2.24, 1.00, 1.93, 1.58, 3.55, 2.36 (with some entries marked (c) and parenthesis figures such as (76.18), (75.07), (52.38), (87.08), (68.04)).
  - Domestic Demand elasticities include values: 1.00, 1.00, 1.00, 2.55, 1.63, 1.19, 1.17, 1.14 and parenthesis figures (10.04), (20.63), (13.11), (15.4), (12.3).
  - Exports elasticities include values: 1.00, 0.46, 0.41, 0.73, 0.38, 0.21 and parenthesis figures (4.93), (13.90), (13.66), (19.3), (6.09).
  - Relative Prices 2/ values: 1.22, 0.59, -0.24, -0.32, 0.30, -0.32, -0.75, -0.75, -0.61 with parenthesis T-statistics (7.90), (21.50), (-4.12), (-2.45), (1.58), (-5.02), (-2.06), (-7.43), (-17.2).
  - Real Effective Exchange Rate (based on ULC in the manufacturing sector) values: -0.80, -0.32, -0.70, -0.91, -1.50, -1.38 with T-statistics (-3.68), (-10.18), (-9.51), (-11.44), (-15.79), (-17.71).
  - Real Effective Exchange Rate (based on CPI in the whole economy) values: -0.46, -0.86 with T-statistics (-4.69), (-4.21).
  - Capacity Utilization Rate values: 0.88, 1.48 with T-statistics (10.03), (9.42).
  - Trend starting in ... rows list years/quarters: 1982:1, 1978:1, 1978:1, 1991:1, 1991:1, 1991:1, 1989:1 and associated trend coefficients including -0.0016, 0.011, 0.0054, 0.0028, -0.0068, 0.0023, 0.0048 with T-statistics (-1.93), (18.67), (11.00), (5.55), (-14.75), (1.50), (9.27).
  - Break in trend 3/ rows list breaks in 1983:1, 1986:1, 2001:31, 1998:1, 1995:1 and coefficients -0.0039, -0.0037, 0.0022, 0.00086, -0.0019 with T-statistics (-8.11), (-6.56), (6.78), (3.16), (-1.83).
  - Dummy over the period of rows list periods: 1993:2-1993:3, 1988:1-1989:4, 1986:1-1989:4, 1993:1-1995:2 and dummy coefficients -0.06, -0.19, -0.19, -0.15 with T-statistics (-3.90), (-8.83), (-11.23), (-10.29).
  - Statistical tests for Cointegration Relationship 4/:
    - Example Z(rho) values: -23.28 *, -24.58 *, -35.97 ***, -20.85 *, -23.21*, -26.13 *, -24.97**, -46.75***, -52.55***, -33.40 **, -28.78**, -32.13**, -59.53 ***, -28.30 **, -4 5.55**, -27.11**
    - Example Z(t) values: -3.52 *, - 3.68 *, -4.95 ***, -3.54**, -3.81 **, -4.40 ***, -4.02***, -5.55***, -5.77***, -4.54 ***, -4.56***, -4.32**, -6.31 ***, -4.02 **, -5.25***, -3 .91**
  - Note: some table entries are marked (c) indicating combinations or conditional entries as in the source table.

### Principle of dynamic contributions (Annex III)
- Purpose:
  - The computation of dynamic contributions visualizes, for each period, the role of each explanatory variable estimated in a univariate mode.
  - Contributions are derived directly from the econometric relationship and take into account the structure and delays with which explanatory variables influence the endogenous variable.
  - This approach differs from accounting breakdowns; it explicitly uses the estimated dynamics and lags.
- Notation and ECM form:
  - Let Yt be the endogenous variable, Xi the explanatory variables and εt the econometric residual.
  - The ECM can be written as:
    ∑∑∑_{i=1..n, j=1..p} c_{ij} ∆LogX_{i,t-j} + ∑_{j=1..p} c_{0j} ∆LogY_{t-j} + λ ECM_{t-1} + ε_t = ∆LogY_t
    - Where ECM_{t-1} = LogY_{t-1} − ∑_{i=1..n} α_i LogX_{i,t-1}; α is determined by the cointegration relationship.
  - The estimated full dynamic can be summarized as:
    ∆LogY_t = A(L) ∆LogY_{t} + ∑_{i=1..p} B_i(L) ∆LogX_{i,t} + ε_t
    - Where L is the lag operator, A(L) and Bi(L) are polynomials in L.
- Dynamic contributions:
  - By inverting A(L), the dynamic contributions of variables Xi to the growth rate of Y are derived (additively) from differentiation:
    ∆LogY_t = ∑_{i=1..p} [LA_i * ∆LogX_{i,t}] + [LA_0 * ∆LogY_{t}] + ε_t
  - The breakdown allows visualization of what remains unexplained via the contributions of the residuals.

### References (as listed in the source)
- Amighini, A., and S. Chiarlone, 2003, “Rischi e opportunità dell’integrazione commerciale cinese per la competitività internazionale dell'Italia,” CESPRI Working Papers 149, (Centre for Research on Innovation and Internationalisation, Universita' Bocconi: Milano, Italy).
- Bugamelli, M., and R. Tedeschi, 2004, “Le Strategie di Prezzo delle Imprese Esportatrici Italiane”, in Concorrenza ed Efficienza delle Imprese Italiane negli Anni Novanta, Mimeo, Bank of Italy.
- Buisán A., and E. Gordo, 1997, “El sector exterior en España,” Estudios Económicos 60, Banco de España.
- Desruennes, A., 2005, “Quelle lecture faire de l’évolution récente des exportations françaises?” DPAE No 70, Ministry of Finance, April 2005.
- ECB - Task Force of the monetary Policy Committee of the European system of Central Banks, 2005, “Competitiveness and the Export Performance of the Euro Area,” Occasional Paper No. 70, European Central Bank, June 2005.
- Estrada A., J.L. Fernández, E. Moral and A.V. Regil, 2004, “A Quarterly Macroeconometric Model of the Spanish Economy,” Working Paper No. 0413, Bank of Spain.
- Faruqee, H., 2004, “Exchange Rate Pass-Through in the Euro Area: The Role of Asymmetric Pricing Behavior,” IMF Working Papers 04/14, (Washington: International Monetary Fund).
- Girard, E., 2004, “Comment expliquer l’évolution récente du compte courant en France?” DPAE No. 56, French ministry of finance, December 2004.
- Hamilton, J., 1994, “Time Series Analysis,” Princeton University Press.
- ISAE, 2005, Rapporto ISAE—Previsioni per l’Economia Italiana, Istituto di Studi e Analisi Economica: Rome.
- L’Angevin, C., and S. Serravalle, 2005, “Performances à l’exportation de la France et de l’Allemagne. Une analyse par secteur et destination géographique,” INSEE Working Paper 2005/5.
- Minefi, 2005, “Peut-on mieux comprendre l’évolution récente de nos exportations? Une analyse économétrique.” DGTPE, Mimeo, French ministry of finance, June 2005.

*Content derived from _cr05401 - 20.      The fact that a significant part of trade behavior during 2001–04 cannot be (IMF source PDF).*

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