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XXIV EuAWE 2017 PS-VS Bologna Conference Wine export, macroeconomic policy, and production relationships: evidence of the EU region Niaz BASHIRI-BEHMIRI, Leonida Amaral TOMAS CORREIA, Patricia Sofia FIGUEIREDO MARTINS, João Fernandes REBELLO Department of Economics, Sociology and Management (DESG) and CETRAD, University of Trás-os-Montes and Alto Douro (UTAD), 5000-660 Vila Real, Portugal [email protected] Introduction There are few studies concerning about the determinants of wine export, among them for instance, using data from Greek wine exporters, Karelakis et al. (2008) find that the main factors influencing wine exports are competitive export advantages (firm export competence, knowledge related to export channels, product adaptation, competitive price, and distributor support), environmental factors (economic hostility and price competition), and the conditions necessary for the development of an export channel (information exchange and cooperation); Gwynne (2006) highlights the importance of relationship between export-orientation and the concentration of exports in agro-industry products; Fischer and Gil-Alana (2009) suggest that increased import levels in importin wine countries tend to be associated with a more diverse basket of imports, and finally Mourão and Martinho (2016) reveals that the value of Portuguese wine exports has a positive relationship with the size of the government in each destination country, the rural population of the destination country, and real GDP per capita, among other variables. Regarding investigating the macroeconomic factor on wine export, Anderson and Wittwer (2012) applying a partial equilibrium model, examine the impact of changes in real exchange rate during the global financial crisis on Australian wine market, as well as bilateral trades in five wine quality categories under different scenarios for the future. Therefore, there is a lack in the literature about investigating the effect of macroeconomic policy on wine export. In this study, we aim to examine: a) the effect of macroeconomic policy on wine export and production and b) the interrelation between wine export and production. Our study is concentrated on the main EU wine producers, including Italy, France, Spain, Portugal, Germany and Austria, during the time period from 2000 to 2015. ps-vs_bashiri-behmiri_tomas-correia_figueiredo-martins_rebello.docx Page 1/4 XXIV EuAWE 2017 PS-VS Bologna Conference Theoretical background Previous empirical studies suggest that the macroeconomic stability of a country might directly impact on its volume of exports and economic growth rate. In this study we apply the Cobb-Douglas production function to model wine export and production, which is described below. We suppose that, wine production and export equations are based on: Y = A*f (K, H, L) (1) X = g (Y, K, H, L, P, M) (2) In which Y is total wine output, A is technology, K is physical capital, H is human capital, L is labor, P is price competitiveness, and M is a set of macroeconomic policy indicators. Using a Cobb-Douglas functional form and following the contributions of Solow (1956), and Mankiw et al. (1992), we model wine output as: π½ πΎ πΌ π¦π,π‘ =π΄π,π‘ πΎπ,π‘ π»π,π‘ πΏπ,π‘ (3) for country i during period t. π΄π,π‘ depends on the primary level of technology in a country, macroeconomic policy, and the rate of technological progress. We follow Mankiw et al. (1992) in which: π΄π,π‘ = π΄0 π ππ,π‘ ππ,π‘ (4) ππ,π‘ =Ξ·+ΞΈππ,π‘ (5) In which g denotes technological progress and M represents the macroeconomic policies. Technological progress, g, depends on the level of exports, so that: In which X is wine export. The level of exports is developed in the same way. Model specification Therefore, we model the wine export and production as the following equations: π₯π,π‘ = ππ1 + ππ‘1 + πΌ1 ππ,π‘β1 + π½1 βπ,π‘β1 + πΎ1 ππ,π‘β1 + πΏ1 π‘π,π‘β1 + π1 ππ,π‘β1 + π1 ππ,π‘β1 + π1 π¦π,π‘β1 + πππ‘1 π¦π,π‘ = ππ2 + ππ‘2 + πΌ2 ππ,π‘β1 + π½2 βπ,π‘β1 + πΎ2 ππ,π‘β1 + πΏ2 π‘π,π‘β1 + π2 ππ,π‘β1 + π2 ππ,π‘β1 + π2 π₯π,π‘β1 + πππ‘2 ps-vs_bashiri-behmiri_tomas-correia_figueiredo-martins_rebello.docx (6) (7) Page 2/4 XXIV EuAWE 2017 PS-VS Bologna Conference in which x is a vector of export for six EU countries, namely Italy, France, Spain, Portugal, Germany and Austria, y is a vector of production for six EU countries, k is physical capital investment, h is human capital investment, l is the growth rate of labor, and m is a vector of the macroeconomic policy indicators. We include five macroeconomic policy variables, chosen on the basis of data availability and their application in previous studies, namely inflation, the ratio of government debt to GDP, government consumption expenditure, money supply and real interest rate. Moreover, we control for the openness of a country and the stability and the exchange rate, including the tariff rate, t, and the volatility of the real effective exchange rate index, r, in the export equation. i represents each country, over time period t, and Ξ· and ΞΌ control for constants and time effects, respectively. Methodology and expected results In this study, we estimate the wine export and production equations within a system framework, using a two-step system-dynamic GMM method. It is recommended that system-dynamic GMM is the best technique for data having time series less than 20, (Judson & Owen 1999), which is the case of our study. Following, we describe the expected results. We expect that inflation might be negatively associated with the level of wine exports and productions of EU countries, reason why set inflation targets, and making inflation is a sufficient indicator of macroeconomic policy. We expect that the government debt to GDP shows a mixture of effects on wine exports and productions. A country that is highly indebted may unintentionally reduce investment due to a higher interest rates or increased tax liabilities expectations in the future. Therefore, it is not expected that export sector would expand. Otherwise, if a country is indebted because investing large amount of money in infrastructure or human capital, then wine production and exports are expected to increase. The same explanation is applicable for government consumption expenditures. If a significant amount of spending is resulted from investment in infrastructure or stimulus for the economy, wine production and exports might increase. However, if high government expenditures are a sign of instability or weakness in the economy, this may negatively affect consumer confidence, leading to a decrease in wine exports and productions. An increase in the money supply, may show more effect in the economy, in this case wine exports and productions will likely increase. ps-vs_bashiri-behmiri_tomas-correia_figueiredo-martins_rebello.docx Page 3/4 XXIV EuAWE 2017 PS-VS Bologna Conference However, if an increase in money supply is resulted from economic uncertainty and people may just be holding more money, rather than using it to expand output, then there may be a negative effect from more money supply to wine exports and productions. Finally, a low real interest rate is an incentive for businesses to open or expand their operations, which may subsequently increase wine productions and exports, although high interest rates depress investment and business expansion, this may discourage wine productions and exports. References 1. Anderson, K., Wittwer, G., 2012. How much have exchange rate movements reduced competitiveness of Australian wines? Wine Economics Research Centre, Wine Policy Brief No. 6. 2. Fischer C., Gil-Alana L.A., 2009. The nature of the relationship between international tourism and international trade: the case of German imports of Spanish wine. Applied Economics, 41, 13451359. 3. Gwynne R.N., 2006. Export-orientation and enterprise development: a comparison of New Zealand and Chilean wine production. Tijdschrift voor Economische en Sociale Geografie, 97(2), 138-156. 4. Judson, R.A., Owen, A.L., 1999- Estimating dynamic panel data models: a guide for macroeconomists. Economics Letters 65, 9-15. 5. Karelakis C., Mattas K., Chryssochoidis G., 2008. Greek wine firms: determinants of export performance. Agribusiness, 24(2), 275-297. 6. Mankiw, G., Romer, D. & Weil, D.N., 1992. A contribution to the empirics of economic growth. Quarterly Journal of Economics, 107, 407-437. 7. Mourão, P.R., Martinho, V.D., 2016. Scoring the efficiency of Portuguese wine exports β an analysis recurring to Stochastic Frontier Models. Ciência e Técnica Vitivinícola, 31(1), 1-13. 8. Solow, R., 1956. A contribution to the theory of economic growth. Quarterly Journal of Economics, 70, 65-94. ps-vs_bashiri-behmiri_tomas-correia_figueiredo-martins_rebello.docx Page 4/4