Professor Juan Carluccio

This paper looks at how Brexit has affected trade and foreign direct investment (FDI) between the United Kingdom and the EU. In 2020 the United Kingdom and the EU signed the Trade and Cooperation Agreement (TCA)1, establishing the post-Brexit relationship and, in particular, a tariff-free area for goods produced in either of the two economies. However, non-tariff barriers to the trading of goods and services have emerged. Moreover, the United Kingdom’s departure from the EU has affected its attractiveness as an investment target. We analyse recent developments in UK imports and exports with the EU and the rest of the world, in both goods and services, including financial services and tourism. Our estimates suggest that, after the Brexit transition period, UK exports to the EU contracted by almost 40%, due to the emergence of non-tariff barriers with the EU, and the fact that no significant UK trade flows were redirected to other partners. Finally, the analysis of product-level data on German, French, Italian and Spanish exports to the United Kingdom has confirmed the significant negative impact of Brexit, especially for goods highly exposed or highly sensitive to increases in trade costs. The FDI analysis begins with a conjunctural assessment that includes recent trends in EU-UK FDI at a broad level (including sectoral and geographical details), a breakdown of foreign affiliates and an investigation of new FDI projects and jobs in the United Kingdom. The analysis continues with developments in the UK financial sector in terms of the real economy, FDI flows, banks, insurance companies and pension funds, and the evolving status of the United Kingdom as a leading global financial centre. Finally, our analysis also provides an econometric investigation into the potential impact of Brexit on EU-UK FDI, using a gravity model approach. We find that Brexit contributed to a decline in EU FDI flows between the EU and the United Kingdom of around 4%, but business relocations involving temporary capital flows attenuated the overall FDI retreat. Large FDI flows among major European financial centres and the United Kingdom could potentially indicate some decoupling of London from the EU, marking the significant challenge that the departure of the United Kingdom from the EU posed for the financial sector.

This paper assesses how globalisation has shaped the economic environment in which the ECB operates and discusses whether this warrants adjustments to the monetary policy strategy. The paper first looks at how trade and financial integration have evolved since the last strategy review in 2003. It then examines the effects of these developments on global productivity growth, the natural interest rate (r*), inflation trends and monetary transmission. While trade globalisation initially boosted productivity growth, this effect may be waning as trade integration slows and market contestability promotes a winner-takes-all environment. The impact of globalisation on r* has been ambiguous: downward pressures, fuelled by global demand for safe assets and an increase in the propensity to save against a background of rising inequality, are counteracted by upward pressures, from the boost to global productivity associated with greater trade integration. Headline inflation rates have become more synchronised globally, largely because commodity prices are increasingly determined by global factors. Meanwhile, core inflation rates show a lower degree of commonality. Globalisation has made a rather modest contribution to the synchronised fall in trend inflation across countries and contributed only moderately to the reduction in the responsiveness of inflation to changes in activity. Regarding monetary transmission, globalisation has made the role of the exchange rate more complex by introducing new mechanisms through which it affects financial conditions, real activity and price dynamics. Against the background of this discussion, the paper then examines the implications for the ECB’s monetary policy strategy. In doing so, it asks two questions. How is the ECB’s economic and monetary analysis affected by globalisation? And how does globalisation influence the choice of the ECB’s monetary policy objective and instruments?

Inflation started to rise in 2021 in most countries, following almost two decades of moderation. There is consensus that the main drivers of current inflation are related to global variables, in particular disruptions in global value chains, input shortages in key manufacturing sectors, and rising energy and food prices. Aside from current discussions about whether these shocks are temporary in nature and whether inflation will normalize once the effects of the pandemic and geopolitical tensions have subsided, the question of the medium‑term impact of globalisation on price dynamics remains open (Blanchard, 2020) This article aims to contribute to current debates by re‑examining the relationship between globalization and inflation. In an open economy, external shocks affect domestic economic and financial conditions. Therefore, the question of whether the globalization process will continue to progress and what long term impact will it have on inflation remains crucial. In order to shed light on this issue, this article discusses the following questions: what are the channels through which globalisation affects inflation? To what extent was globalisation responsible for the pre‑pandemic low levels of inflation? What can we learn from the past to better understand the current situation?

Since the previous ECB strategy review in 2003, interdependencies across countries have increased, making economic and financial conditions in the euro area more prone to foreign influence. However, the analyses behind the new ECB’s Strategy Review conclude globalisation does not impede the ECB from achieving price stability but calls for the adaptation of instruments and analytical toolkits.

We present results from an analytical tool developed at Banque de France that measures the fragmentation of the world economy. The Ukraine war has reinforced a trend to trade relatively more with countries in the same geopolitical bloc and less so with those in opposing blocs. Such a “East-West divide” can be traced back to the US-China trade war of 2018.

Using monthly firm-level exports and imports over 1993-2020, we uncover four facts: (i) deviations of large exporters from the average growth rate explain a large share of aggregate fluctuations; (ii) an important source for these deviations is the top exporters' higher loadings on common shocks; (iii) the stronger reaction of the top 1% exporters to the GFC and Covid crises contributed to the export collapses; (iv) a higher elasticity to large demand shocks, not a different exposure to global value chain shocks, contributes to this stronger reaction. The results show that idiosyncratic reactions of large firms to common shocks matter for aggregate export fluctuations, and are especially relevant for the trade collapses of the 2008/2009 crisis and the Pandemic.

This bulletin attempts to evaluate the effect of emergency measures introduced by European Union (EU) Member States in 2022 to counter the energy crisis, and their impact on inflation. It analyses their economic consequences with regard to their three objectives: (i) lowering energy bills for households and firms; (ii) minimising the cost to public finances; and (iii) reducing demand for energy and securing energy supplies. The EU attempted to introduce measures aimed at all three objectives. In parallel, national authorities adopted two types of response: directly acting on energy costs for consumers (notably France and Spain) or paying subsidies to households and enterprises (Germany and the Netherlands).

With the first disruptions to Russian gas supplies at end 2021, and especially the invasion of Ukraine in February 2022, European gas prices surged, before subsiding again in 2023. Given that natural gas accounts for only a small share of total European imports, how can we explain the huge impact this shock had on euro area inflationary trends? This article attempts to analyse the mechanisms behind the transmission of the energy shock, focusing on the specific features of the gas and electricity markets that amplified the crisis. It also examines the strategies adopted by the European Union to strengthen its resilience to future shocks, notably the reform of the electricity market.

Using micro data on import values and quantities by product and countries of origin, we quantify the effect of imports of consumption-goods from low-wage countries (LWCs) on inflation in France from 1994 to 2014. Imports of varieties produced in LWCs affect the cost-of-living price index through pure-price and taste-shift variations (which, conditional on prices, drive expenditure shares). The pure-price effect includes both the contribution of imported inflation (given the share of imports in consumption) and the effect of imports of intermediate goods from LWCs on domestic prices. The taste shock effect cannot be directly observed but is recovered from actual expenditure shares and relative prices. We derive an expression of inflation that allows us to disentangle the impact of imports of consumption goods from LWCs on cost-ofliving versus CPI inflation – the latter abstracting for composition effects. Overall, we estimate that imports from LWCs lowered CPI inflation by 0.02 pp per year on average, and had a much larger effect on cost-of-living inflation (between 0.13 to 0.20 pp per year depending on how we measure unit values).

Using French manufacturing firm-level data for the years 1996-2007, we uncover a novel set of stylized facts about offshoring behavior: (i) Low-productivity firms ("non-importers") obtain most of their inputs domestically. (ii) Medium-productivity firms offshore skill-intensive inputs to skill-abundant countries and are more labor intensive in their domestic production than non-importers. (iii) Higher-productivity firms additionally offshore labor-intensive inputs to labor-abundant countries and are more skill intensive than non-importers. We develop a model in which heterogeneous firms, subject to fixed costs, can offshore intermediate inputs of different skill intensities to countries with different skill abundance. This leads to endogenous within-industry variation in domestic skill intensities. We provide econometric evidence supporting the factor-proportions channel through which reductions in offshoring costs to labor-abundant countries have significantly increased firm-level skill intensities of French manufacturers.

How is corporate investment affected by the weighted average cost of capital (WACC)? Since existing studies focus on listed firms, little is known of the case of private firms, in spite of their relevance in both developed and developing economies. In this paper, we attempt to fill this gap. We develop an empirical study on the impact of the WACC on private firms' investment rates. We exploit accounting information on a panel of around 1700 French private corporate groups in the non-farm, non-financial sectors, covering the period 2005–2015. We overcome the challenge posed by the lack of observable information about the cost of equity for private firms by developing a methodology that relies on estimates for comparable public firms. We find that a one-standard deviation increase in the WACC (2 percentage points) leads to a 0.7 percentage point decrease in the investment rate the following year. Increases in both components of the WACC, namely the cost of debt and the cost of equity, are associated with lower investment rates. A back-of-the-envelope calculation suggests that the heightened WACC following the euro area crises reduced the aggregate corporate investment rate of French private firms by a cumulative 1.6 percentage points over 2009–2015.

We develop a simple model to study how globalization affects wage inequalities. The model features three goods, one is an “international” good, and two are local non-tradable goods. The non-tradable goods are produced by local labor, either skilled or unskilled, while labor of all types and all origins contribute to the production of the international good. We find that increasing participation of the South in global production and consumption lead to an increase in wage inequalities in the North. Higher South integration into global value chains reduces North-South wage inequalities.

We estimate the impact of international trade on wages using data for French manufacturing firms. We instrument firm-level trade flows with firm-specific instrumental variables based on world demand and supply shocks. Both export and offshoring shocks have a positive effect on wages. Exports increase wages for all occupational categories while offshoring has heterogeneous effects. The impact of trade on wages varies across bargaining regimes. In firms with collective bargaining, the elasticity of wages with respect to exports and offshoring is higher than in firms with no collective bargaining. Wage gains associated with collective bargaining are similar across worker categories.

Does foreign entry improve host country productivity and welfare? Previous studies have looked at the role of backward linkages with domestic suppliers and their effects on domestic competitors. In this paper, we study how these externalities are affected by technological incompatibilities between foreign and domestic technologies. When foreign technologies require specialized inputs, some local suppliers self-select into production for multinational firms. A decrease in the cost of inputs compatible with the foreign technology has heterogeneous effects. It benefits foreign firms and the most productive downstream domestic firms that adopt the foreign technology, and negatively affects firms using the domestic technology. Technological incompatibilities reduce the welfare gains from openness to FDI, but this negative effect can be overcome by domestic technology adoption. The model's predictions are consistent with the stylized facts drawn from the empirical literature on FDI spillovers.

Do variations in labor market institutions affect the cross-border organization of the firm? Using firm-level data on multinationals located in France, we show that firms are more likely to outsource the production of intermediate inputs to external suppliers when importing from countries with high worker bargaining power. This effect is stronger for firms operating in capital-intensive and differentiated industries. We propose a theoretical mechanism that rationalizes these findings. The fragmentation of the value chain weakens the workers' bargaining position, by limiting the amount of revenues that are subject to union extraction. The outsourcing strategy reduces the share of surplus that is appropriated by the union, which enhances the firm's incentives to invest. Since investment creates relatively more value in capital-intensive industries, increases in worker bargaining power are more likely to be conducive to outsourcing in those industries. Overall, our findings suggest that global firms choose their organizational structure strategically when sourcing intermediate inputs from markets where worker bargaining power is high.

We develop a simple model to study the interactions between a supplier's financial constraints and contract incompleteness in a vertical relationship. Applied to the analysis of multinational firms' sourcing strategies, the model predicts: (i) that complex and specific inputs are more likely to be sourced from financially developed countries and (ii) that multinationals are more likely to integrate suppliers located in countries with poor financial institutions, especially when trade involves complex goods. These predictions are examined and validated using firm-level trade data on multinational firms with operations in France.