Explaining the Performance of Italian Exports during the Crisis: (Medium) Quality Matters

A recent study argues that the contraction in total trade that occurred during the crisis was mainly driven by the fall in high quality goods, which should have higher income elasticity owing to a non-linear Engel curve. Our aims are, on the one hand, to test the quality Engel curve assumption for EU15 imports from Italy and, on the other hand, to ascertain whether a break in income elasticities – either temporary or permanent – occurred during the global financial crisis as a result of the changing preference for quality of consumers in the old EU member states. We test these hypotheses by estimating income and price elasticities of EU imports of consumption goods from Italy for both volumes and market shares. The contribution of this paper is twofold. First, we introduce a medium quality category, allowing us to make a more detailed reading of the stylised facts about the performance of Italian trade during the crisis. Second, we perform three different versions of the mean group estimator. Our results are consistent with the assumption of a change in the preference for quality. This change may be due either to a shift in consumption from high to medium quality Italian products or to the higher quality, actual or perceived, of Italian medium quality goods compared with the varieties imported from the rest of the world.