The Research Centre International Economics – FIW announces its 16 th Research Conference ‘International Economics’ and invites the submission of (full) working papers to be presented at the conference. The main objective of the conference is to provide a platform for economists working in the field of ‘International Economics’ to present recent research. Papers from Ph.D. students, young faculty members and young researchers in similar positions are particularly welcome as the conference aims to support and encourage young economists by providing an opportunity to present their work to fellow junior economists as well as experienced senior researchers. The conference also aims at bringing together researchers and policy makers to provide a forum for discussion on how empirical evidence can more effectively inform actual economic policy making.
TIME & LOCATION
The 16th FIW Research Conference on ‘International Economics’ will take place on Thursday, 22nd February 2024 and Friday, 23rd February 2024 at the Vienna University of Economics and Business (WU Vienna), Welthandelsplatz 1, 1020 Vienna.
PAPER SUBMISSION
We invite the submission of (full) working papers on all topics in the field of International Economics.
Selection decisions will be communicated in December 2023. Uploaded submissions can be updated until the end of the extended deadline.
AWARDS
Two prizes for the best contributions to the Research Conference will be awarded – the‘Best Conference Paper Award 24’ and the ‘Young Economist Award 24’. Each award is worth € 1000. The ‘Young Economist Award 24’ is intended for Ph.D. students, young faculty members and young researchers in similar positions. To be considered for this award all authors of the paper have to be 34 or younger at the time of submission.
TOPICS COVERED
The broad topic of the conference is ‘International Economics’. This includes, inter alia, International Trade, International Factor Movements, Economic Integration, Effects of international economic activities on Climate Change, Trade Policy, International Trade Organizations, Economic Growth of Open Economies, Multinational Firms, Global Value Chains, International Macroeconomics and other related fields.
The 16th FIW-Research Conference ‘International Economics is organized by FIW with support from the Program Committee and the Austrian Federal Ministries for Education Science and Research (BMBFW) and Labour and Economy (BMAW).
ABOUT FIW
The FIW – Research Centre International Economics (https://www.fiw.ac.at) is a cooperation between the Vienna University of Economics and Business (WU), the University Vienna, the Johannes Kepler University Linz and the University of Innsbruck, WIFO, wiiw and WSR. FIW is grateful for financial support by the Austrian Federal Ministries for Education, Research and Science (BMBFW) and Labour and Economy (BMAW).
Program Committee
Harald Oberhofer (FIW, WU Vienna, WIFO) Julia Bachtrögler-Unger (WIFO) Marta Bisztray (KTRK, Budapest) Jesus Crespo-Cuaresma (WU Vienna) Alejandro Cunat (University of Vienna) Peter Egger (ETH Zürich) Katharina Erhardt (HHU Düsseldorf, DICE) Harald Fadinger (University of Mannheim) Gabriel Felbermayr (WIFO, WU Vienna) Lisandra Flach (LMU Munich) Michael Irlacher (JKU Linz) Inga Heiland (University of Oslo) Mario Holzner (wiiw) Mario Larch (University of Bayreuth) Dalia Marin (TU Munich) Karin Mayr-Dorn (JKU Linz) Birgit Meyer (WIFO) Katrin Rabitsch (WU Vienna) Michael Pfaffermayr (University of Innsbruck) Robert Stehrer (wiiw) Roman Stöllinger (TU Delft) Joschka Wanner (University of Würzburg) Yvonne Wolfmayr (WIFO)
The conference programme will be published on https://www.fiw.ac.at and https://conference2024.fiw.ac.at. Attendance of the FIW Research Conference is free of charge. The conference language is English. Travel expenses will not be refunded.
FIW Award for PhD theses in the field of International Economics
Submission deadline: 15 November 2023
Within the framework of the Research Centre International Economics” the “FIW Award” is offered to promote excellent young female researchers in the field of International Economics
The award is intended for qualified female researchers up to the age of 35 who have written a PhD thesis at an Austrian university in the field of international economics or Austrian citizens who have written their thesis at a university abroad.
The “FIW Award” aims to make outstanding research work by women visible and to award prizes. The goal is to motivate women to pursue an academic career.tiviert werden, eine wissenschaftliche Karriere einzuschlagen.
The total amount of the award is € 5,000.00 and can be divided among several young women scientists. The actual distribution of the prize money depends on the quality and number of submissions.
Funding is available for theoretical, empirical and economic policy theses on the following topics:
Foreign trade, direct investment, development economics, European integration, geoeconomics, globalisation, international financial markets, international trade and financial institutions, international macroeconomics, international economic development, international trade, international competition, multinational enterprises, environmental impacts of international economic activities, economic effects of migration, exchange rate regimes or similar topics.
The following criteria will be used to evaluate submissions:
The Phd thesis must have been completed in the period 1 October 2021 to 15 November 2023.
– The submission must include the thesis in PDF form and a CV.
The Department V/7 “Trade and Competition Policy Analysis and Strategies” of the Federal Ministry of Labour and Economic Affairs invites proposals for a study:
Study topic: Analysis of the effects of the EU trade agreements with Australia and New Zealand.
This FIW Spotlight focuses on the impact of sanctions on trade by the European Union (EU) and Austria with Russia. The imposition of sanctions has led to a significant drop in trade, with a 40% drop in EU exports to Russia and a 19% drop in Austrian exports. Remarkably, Russia bears the economic cost of these sanctions, as illustrated by a significant GDP loss of 7.9% on a permanent basis. This analysis shows the profound impact of sanctions on international trade relations as well as the economic losses of the sanctioned country, in this case Russia.
The invasion of Ukraine by Russia in February 2022 has led to a wave of outrage around the world and triggered a complex response of sanctions and counter-sanctions. These policies not only have a direct impact on the nations involved, but also send shockwaves through the global economy that reach far beyond the countries directly affected. At a time when the global economy is still struggling with the aftermath of the COVID-19 pandemic, understanding the economic costs of these sanctions is crucial.
At the beginning of the conflict, studies were published promptly that analysed the economic costs of possible sanctions and trade stops (Bachmann et al., 2022; Balma et al., 2022). At that time, however, it was not yet possible to measure the exact impact of these measures on trade. The authors could only make assumptions and create models. Seventeen months later, it is now possible to measure the changes in trade volumes and thus provide a precise analysis of the costs of these measures. First, the author takes a look at the impact of the sanctions on trade before examining the macroeconomic consequences in more detail in a hypothetical scenario.
Trade collapses
The sanctions taken have had a significant impact on trade with Russia. EU exports to Russia plummeted by over 60% when the first set of sanctions came into force in May 2022. Subsequently, exports have recovered somewhat. However, they were still 40% below the multi-year average in January 2023. These aggregate figures at the EU level do not give an indication of the differences in trade depression between member countries (see chart 1). Among the largest member countries, France’s and Germany’s exports to Russia fell the most. German exports in January were 59% below the long-term average, French exports 48% below. Austria’s trade with Russia was less affected. Austrian exports initially fell by 41% in May 2022. They then recovered and even reached a plus of 2% in July 2022. Nevertheless, the sanctions also have a negative impact on trade for Austria. In January 2023, exports were still 19% below the multi-year average. The different trade effects between the member states show that the countries trade very different goods with Russia. Each “basket of goods” contains different shares of sanctioned goods and services. For example, the Austrian export mix contains an above-average number of non-sanctioned goods groups, such as food and pharmaceutical products, which explains the small decline.
In order to calculate the economic impact of the sanctions, the different “baskets of goods” of the countries in trade with Russia must be taken into account. To do this, the author first calculates the sanction effect at the level of different product groups using the so-called “gravity equation” from the international trade literature (Head and Mayer, 2014). Subsequently, the author uses these sanction effects in a model of international trade (Felbermayr et al., 2023). This allows the author to explore the following “what if” scenario: What would the world look like if there were only the Russia sanctions, but all other economic influencing factors were held constant? Since all other influencing factors are excluded – for example, other crises or political measures in the past year – the “pure” effect of the sanctions can be examined.
Russia bears the brunt
The calculations show that Russia clearly bears the costs of the sanctions (see chart 2). Russian GDP falls by 7.9% in the long term due to the sanctions imposed by the West and Russian counter-sanctions. This means that the sanctions alone permanently lower the level of the Russian economy. In other words, without the sanctions, Russian society would be 7.9% “richer”. The effect remains even if the Russian economy were to grow again in real terms in the future.
In contrast, GDP in the EU decreases by only 0.21%. This corresponds to a sum of 33 billion euros. Of the large member states, Germany is the hardest hit. German GDP falls by 0.26%. This is mainly due to its dependence on energy imports from Russia. In Austria, GDP falls by 0.2% and is thus slightly below the EU average.
Austrian exports fall by 1.7%. Pharmaceutical products (-9.5%) and other transport equipment (-8.6%) are the most affected. Machinery and equipment (-4%) and electronic equipment (-2.2%) are other export-strong sectors that are negatively affected (see chart 3). However, some sectors also benefit from the sanctions. Not surprisingly, exports of petroleum (11.9%) increase significantly. Austria can take over part of the lost Russian exports here. The production of petroleum refers to the processing of crude oil. Austria does not produce oil, but processes more imported oil than before the sanctions, when petroleum was also imported directly from Russia to the EU. Other sectors that benefit from the sanctions are the production and casting of metals and the mining of metal ores, whose exports each increase by 1.6%.
The analysis of the Russia sanctions highlights the complex and far-reaching impact of policy measures on the global economy. While the sanctions hit Russia significantly, with a long-term GDP loss of 7.9%, the impact on the EU as a whole is smaller but still noticeable. The Austrian economy can absorb some of the West’s sanctioned trade flows with Russia. However, it is not enough to offset the economic costs for Austria.
Author:
Hendrik Mahlkow has been working an an economist in the WIFO Research Group “Industrial, Innovation and International Economics” since 2023. He is a quantitative trade economist who is mainly interested in environmental economics and geopolitics. Using large computational general equilibrium models, he calculates so-called counterfactual scenarios: “what-if” considerations that allow to evaluate planned policy measures ex ante, or to review already implemented measures ex post. He is pursuing a PhD in Quantitative Economics at the Christian-Albrechts-University of Kiel. Most recently, he spent a research semester at the University of California, Berkeley.
References:
Bachmann, Ruediger, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Benjamin Moll, Andreas Peichl, Karen Pittel, and Moritz Schularick, “What if? The economic effects for Germany of a stop of energy imports from Russia,” Technical Report, ECONtribute Policy Brief 2022.
Balma, Lacina, Tobias Heidland, Sebastian Jävervall, Hendrik Mahlkow, Adamon N Mukasa, and Andinet Woldemichael, “Long-run impacts of the conflict in Ukraine on food security in Africa,” Technical Report, Kiel Policy Brief 2022.
Felbermayr, Gabriel, Hendrik Mahlkow, and Alexander Sandkamp, “Cutting through the value chain: The long-run effects of decoupling the East from the West,” Empirica, 2023, 50 (1), 75–108.
Head, Keith and Thierry Mayer, “Gravity equations: Workhorse, toolkit, and cookbook,” in “Handbook of international economics,” Vol. 4, Elsevier, 2014, pp. 131–195.
Organizers: Pol Antràs (Harvard), Alejandro Cuñat (University of Vienna), and Kalina Manova (UCL)
Keynote Speakers: Swati Dhingra (LSE) and Marc J. Melitz (Harvard)
Following upon the first five editions of WIEN, the University of Vienna will again host a two-day meeting that will draw together researchers interested in international economics, global value chains and economic geography.
The workshop will take place in the beautiful Sky-lounge of the University of Vienna’s Faculty of Business, Economics and Statistics, overlooking the city center.
To be considered for inclusion on the program, papers must be submitted in PDF format to economics@univie.ac.at by Friday, March 10th 2023. Authors chosen to present papers at the conference will be notified in late March.
The organizers are particularly keen on receiving submissions from young scholars, including Ph.D. students and researchers who have just completed their Ph.D‘s. With that in mind, we would appreciate it if you could circulate this Call for Papers among your junior colleagues, former students and current Ph.D. students. As in past editions, we will actively seek diversity in the set of selected speakers.
Participants will be provided with accommodation in central Vienna, and airfares for speakers will also be reimbursed subject to certain budget guidelines. The conference is generously supported by the Heinrich Graph Hardegg’sche Stiftung, FIW, University of Vienna, VGSE, wiiw, and the European Research Council under the EU Horizon 2020 Research and Innovation Programme (grant agreement 724880).
As a highlight of the FIW workshop “Women in International Economics”, Secretary General Eval Landrichtinger (BMAW) and FIW Project Manager Univ.-Prof. Harald Oberhofer presented the FIW Award for Master Theses in International Economics to the two winners Nicole Sattler and Johanna Treiber.
Within the framework of the “Research Centre International Economics”, the “FIW Award for Women in Economic Research” is announced annually as a promotion for excellent young female scientists in the research area of International Economics.
This year’s prize was aimed at qualified female scientists who have written a diploma or master thesis at an Austrian university in the field of “International Economics” or Austrian citizens who have written their master thesis at a university abroad
The total amount of the sponsorship award is € 5,000; this year, the two winners will each receive € 2,500.
The winners are:
Nicole Sattler (BMF) for her master-thesis “The impact of the AfCFTA on the EU-Africa trade relation”
Johanna Treiber (Deutsche Bundesbank) for her master thesis “Labor Laws and FDI Productivity Spillovers – Analysis of the Labor Mobility Channel”.
It is important to study how other countries trade policies affects us. We often are only concerned with our trade policies. What others do matters! This is what we know from trade theory. Economic relationships with African economies will be crucial for tackling main challenges like climate change. Need for raw materials such a rare earths for green technologies. Technology transfer from EU to Africa crucial for development of global CO2-emmission.This is an excellent Master thesis, very well conducted and timely.
Harald Oberhofer on the justification of the FIW Award 2022 to Nicole Sattler.
This thesis applies state of the art econometric methods for studying an important question in the International Economics, namely on potentially positive effects of FDI for the host countries.The findings are relevant for understanding potential heterogeneity in positive FDI spillover effects for productivity also contributing to the policy debate on the role of host market institutions for the effects of FDI.This is important to our understanding of potential effects of technology transfer that might become relevant with respect to green technologies.
Harald Oberhofer on the justification of the FIW Award 2022 to Johanna Treiber.
After strong growth years, Austria’s foreign trade stagnates in 2023
After a dynamic development in 2022, the “Forschungsschwerpunkt Internationale Wirtschaft” (FIW) expects a low growth of Austrian exports and imports in 2023.
https://youtu.be/Aijw4S7luRU
FIW’s fourth annual report on the “Situation of Austria’s Foreign Trade” was presented together with Labor and Economics Minister Martin Kocher. The annual report is dedicated to the current international framework conditions for Austria’s foreign trade and trade developments in 2022. In addition, study authors Harald Oberhofer (WIFO, WU Vienna) and Robert Stehrer (wiiw) as well as study author Bettina Meinhart (WIFO) presented short- and medium-term forecasts for the expected future development of Austria’s foreign trade relations.
The year 2022 was dominated by the Russian attack on Ukraine and the subsequent energy price crisis. Households and companies were massively affected by the rise in energy costs. From the 2nd half of the year, the resulting supply shock and high inflation rates left their mark on the global economy. Austria’s dependence on Russian natural gas posed particular challenges for domestic households, companies and politicians. Austrian foreign trade held up relatively well under these difficult conditions, but suffered from the significant deterioration in terms of trade, i.e. a worsening of the relationship between export and import prices, in 2022. Prices for Austrian goods exports increased by 5.5 percentage points less than import prices. In pure volume terms, Austrian exports have developed more dynamically than imports: According to the forecast, total exports of goods and services rose by 8.8% in real terms in 2022, while imports increased by 5.1%.
In 2022, the negative terms-of-trade effect outweighed the quantity effect, so that in 2022 Austria’s trade balance deteriorated by €7.6 billion compared with 2021 and showed a deficit of €-20.5 billion. The more positive development of the services balance, which was driven by a massive increase in travel exports (more trips to Austria by foreign tourists), was able to offset the trade deficit last year. In 2022, the current account balance will be in positive territory at € 200 million.
For 2023, the “Research Centre International Economics” (FIW) forecasts growth in total exports of 0.3%. Imports are expected to rise by 0.9% this year. Mainly due to rising import prices – caused by the energy crisis – Austria could show a negative current account balance in 2023 for the first time since 2001. According to the forecast, the deficit will amount to € -1.8 billion (0.4% of GDP).
In 2023, the deterioration in terms of trade based on the study forecast continues with a decline of 1%. Exports of goods are expected to increase by 0.1%, with services exports recording growth of 1.2%. Total imports will grow by 0.9%. The difference between exports and imports results from higher services import growth of 3.3%. The trade balance could deteriorate to -€23.3 billion due to the further negative terms-of-trade effect. This deficit will no longer be fully compensated by the services balance surpluses. In 2023, the Austrian current account will show a negative balance with a deficit of €-1.8 billion (0.4% of GDP). According to the forecast, the current account should return to a small surplus in 2024.
One year ago, the world’s largest trade agreement, the RCEP agreement, was concluded. The trade of the EU and Austria with this region developed very dynamically in the last 20 years, with China playing the main role.
The RCEP Agreement
It has been exactly a year since another chapter of history in international trade was written and the largest trade block globally was formed. This resulted from the Regional Comprehensive Economic Partnership (RCEP) agreement implemented in January 2022, after ten years of negotiations. The RCEP gathered China, Japan, South Korea, New Zealand, Australia, and ASEAN countries into a unified trade block. This agreement assures the gradual elimination of tariffs between the RCEP members until 2040 and almost full commodity trade openness (90%). Great trade and growth implications globally are expected due to the size of this region. To demonstrate, RCEP countries together have approximately 70% higher GDP and over four times larger population than the EU. Thus, what we will likely witness in the next twenty years is a change in the gravity of the trade towards Asia-Pacific and away from the West (Quah, 2011; UNCTAD, 2021).
Strong momentum towards Asia even before the agreement …
Obviously, the dynamics whereby RCEP impacts the future of trade will mostly depend on China, RCEP’s dominant trade member. China alone takes up over half of the RCEP population and production. In addition, its role in international trade grew exponentially after its entry into World Trade Organization in 2001. Twenty years after its entry into WTO, EU trade with the RCEP members increased significantly: imports as a share of the total increased by 4.5p.p and export by 3.1p.p (see Figure 1, left). This trade boom with RCEP mostly attributes to China and at the expense of some other members like Japan whose export to the EU (as a share of the total) decreased from 2.8% to 1.2% over the corresponding period. The same narrative applies to Austria (Figures 1, right), although the RCEP 2020-2001 increase in trade share is smaller than for the EU as a whole.
… especially for high-tech products
However, the share of EU total imports from RCEP increased much more for high-tech goods (see Figure 2): from roughly 15% in 2001 to 24% in 2020. For Austria, the increase is even higher – a jump of 14p.p in the 20-year-period (Figure 2, right). Nowadays, almost 43% of total EU imports of computer, electronic and optical products, 26% of computer, electronic and optical products, and about 20% of machinery and equipment are sourced from the RCEP bloc. The export with the RCEP members also increased, although it represents lower shares of total EU and Austrian exports (see Figure 3).
This makes this sector particularly dependent and thus vulnerable given the further shift toward Asia and the potential changes in trade patterns resulting from the RCEP agreement. With this comes greater economic implications too, as the high-tech sector relies much more on R&D and innovation than traditional manufacturing. As such, high-tech sectors are an important catalyst of technological growth (Hornbeck and Moretti, 2018), especially in the times of digital and green transition. The obvious sign of risks already exists in relation to the recent semiconductor shortage, which put the production of many EU factories at a halt.
However, stagnation of trade relations in the last year
Even though only one year after the agreement implementation elapsed, we can witness a smaller decline or a stagnation of EU-RCEP trade (see Figure 1 and 2). EU export to the RCEP declined by about 1p.p, while Austrian high-tech imports from RCEP decreased by about 3p.p, the largest decline in high-tech trade with the new trade block in last 20 years. Not surprisingly, this shift is mostly driven by China alone (annual decline of 3.5p.p). This annual decline could be only a tip of the iceberg.
It is difficult to distinguish what drives this decline in the EU-RCEP trade as there are many factors at play. After the COVID-19 pandemic, new trends are on the trade horizon (i.e. nearshoring, reshoring, friend shoring) all marking the start of shorter supply chains, away from globalization. In line with this is RCEP trade bloc that is expected to contribute to the formation of the supply chain across the Asian-Pacific. On the other hand, the ‘EU’s Open Strategic Autonomy by 2040’ assumes a higher economic relationship between the EU and its neighborhood as well as its further trade positioning with respect to China. Besides this, the European Chip Act enacted in December 2022 aims to strengthen the resilience of the high-tech supply chains – precisely the EU semiconductor products for which the demand will double by 2030 according to the European Commission. All these trends should strengthen trade between geographically close countries at the expense of more distant countries. Hence, it is very reasonable to speculate that the next twenty years may bring lower trade with the RCEP due to trade distortion effects (see e.g. Stehrer and Vujanovic, 2022) resulting from the agreement, as well as further trade decoupling.
References
Hornbeck, R., & Moretti, E. (2018). Who benefits from productivity growth? Direct and indirect effects of local TFP growth on wages, rents, and inequality (No. w24661). National Bureau of Economic Research.
Quah, D. (2011). The global economy’s shifting centre of gravity. Global Policy, 2(1), 3-9.
Stehrer, R., & Vujanovic, N. (2022). The Regional Comprehensive Economic Partnership (RCEP) agreement: Economic implications for the EU27 and Austria (No. 054). FIW.
UNCTAD (2021), A new centre of gravity: The Regional Comprehensive Economic Partnership and its trade effects.
Nina Vujanović is an economist at wiiw, researching topics on international trade, foreign direct investment, and the Balkans. She previously worked as an advisor to the Vice Governor at the Central bank of Montenegro, as a consultant at UNCTAD (Division on Investment and Enterprise) and a research fellow at the WTO (Economic Research and Statistic Division). She published papers in the area of foreign direct investment, productivity, innovation as well as credit risk. She holds a PhD in International Economics from Staffordshire University and Msc in Economic Policy from University College London.
The interactive graphics were created by Alireza Sabouniha. He is a research assistant at wiiw and a master’s student in Economics at the WU (Vienna University of Economics and Business).
Since the start of 2022 the euro depreciated by some 15%, beginning the year at 1.14 USD per EUR and declining below parity towards 0.97 recently. One major factor causing this decline can be viewed as truly exogenous: the war in Ukraine was unexpected and resulted in several rounds of sanctions imposed on Russia, with sizeable negative repercussions on the EU’s export volumes and impairments for active foreign direct investment (FDI) of EU-firms in Russia. The EU received a second blow through rising energy prices. Many member countries showed a high dependence on Russian gas and oil, and the Russian government deliberately used its position to generate uncertainty in spot as well as futures gas markets leading to severe risk premiums after sanctions and countervailing measures by Russia were going back and forth. Due to its high dependence on Russian energy, the euro area suffered a set-back as a business location, making the euro area less attractive for passive FDI, destroying potential output, and finally leading to a depreciation of the euro vis-a-vis areas less exposed to Russia as a trade partner.
There is a second endogenous source for the devaluation of the euro, resulting from the build-up of inflationary pressure throughout the world economy, except Japan. The US-Federal Reserve Bank (Fed) was first confronted with rising inflation rates since in April 2021 (+4.2% YoY) while inflation in the euro area at that time still remained below target (+1.6% YoY). Both monetary authorities interpreted higher inflation rates as energy driven and transitory but by December 2021 the Fed changed its opinion and corrected its forward guidance from accommodative to restrictive. The Fed first announced to unwind its asset purchase program and started to increase the target rate by March 2022, while the ECB waited until the end of July 2022 to follow suit. By the end of September 2022 the target range for the US-interest rate reached 3% to 3.25% and the euro area‘s main refinancing rate was at 1.25%, creating an interest rate differential of almost 2 percentage points.
Deviations between US and European short term interest rates were a regular feature in the past. Figure 1 shows the interest rate differential between the US-target rate and the corresponding European equivalent from 1985 through 2022. A positive value on the horizontal axis implies that US-rates were above the main refinancing rate in the euro area. The vertical axis shows the exchange rate measured in USD per EUR. The slight negative slope of this cloud indicates that relatively high target rates in the US go along with a strong US-dollar, while a relatively high refinancing rate in the euro area typically involves a strong euro. The red dots in Figure 1 show the development from January to September 2022; the movement towards the lower right hand corner reflects the more aggressive policy stance in the USA together with the appreciation of the US-dollar.
Figure 1 – Relatively higher domestic interest rates support the home currency
Starting from this situation, what can we expect for the rest of 2022 and the following year? The WIFO forecast (Glocker – Ederer, 2022) expects a further tightening of monetary policy in both areas with the ECB acting more decisively such that the interest rate differential will be reduced to around 0.5 percentage points at the end of 2023. Accordingly, the euro will appreciate slightly (green dots in Figure 1), resulting in annual averages of 1.05 (2022) and 1.04 (2023) USD per euro with a trough in fall 2022. This development can be interpreted using the uncovered interest rate parity condition: after the US-monetary tightening, the USD must jump to a lower value (appreciation) in order to keep the interest parity condition valid, thus providing room for a consecutive depreciation which balances higher US-interest rates (Dornbusch, 1976). This adjustment mechanism does not hold empirically, however (Engel, 2014). A time-variable degree of asset market segmentation (Alvarez et al., 2009) or a liquidity premium on the deposit earning higher interest (Engel, 2016) provide alternative explanations.
Does the USD-EUR exchange rate actually jump around announcements dates of monetary policy actions? Figure 2 offers some insight. The lines in Figure 2 depict the exchange rate during the 10 business days before and after a monetary policy meeting, on which either the Fed (green) or the ECB (blue) announced a change in their target rate. To facilitate comparison, I norm the exchange rate for all episodes to unity at the day of the monetary policy announcement, thus a value of 1.02 indicates that the exchange rate was 2% above the level prevailing at the announcement date. The period runs from 16.3.2022, when the Fed published the first rate-hike through 21.9.2022, when the Fed increased the target range to 3% to 3.25%. Because both central banks explicitly use forward guidance, their moves appear to be somewhat expected. While the ECB does not seem able to move markets, the Fed announcements effectively make the dollar stronger, either at the date of the publication or even five to ten days ahead. Whether the ECB policy decision on 27.10.2022 includes some surprise element for the participants on the foreign exchange market, can be tracked in real time in Figure 2 over the next ten business days following the announcement date.
Finally, will there be consequences from the euro’s depreciation on the real economy? Probably price effects will dominate over the forecast horizon. A weaker euro implies higher import prices on intermediates, energy, consumer products, and tourism services in a period already plagued by inflationary strain. Such an environment makes it easier to pass-through higher import prices on to euro area customers. Positive wealth effects related to foreign USD-denominated portfolio investments by Europeans, however, will not compensate the price losses on international asset markets during 2022. Consequently, the potential positive effect on euro area consumption will remain limited. A cheaper euro will boost euro area exports, but at the same time weak foreign demand is likely to be the dominating force affecting international trade flows.
is Senior Economist at WIFO and has been working in the Research Group “Macroeconomics and European Economic Policy” since 1994. From 1999 to 2002 he was editor-in-chief of WIFO-Monatsberichte (WIFO Monthly Reports). He is an expert in the Austrian Fiscal Council, lecturer at the University of Vienna and head of the Working Group on Economic Statistics and National Accounts of the Austrian Statistical Society. He works on issues of risk diversification, funded pensions, the European Monetary Union and econometric applications in the field of macroeconomics.
