Publication

This paper explores the relationship between domestic demand and export activity in six eurozone countries. The authors argue that the strength of this relationship depends on firms' capacity constraints and the business cycle in general. The rationale behind this is that, in the presence of positive or negative domestic demand shocks, firms are only willing to pay the costs associated with shifting sales between domestic and foreign markets after reaching very high or low levels of production capacity utilization. They also find that the most prominent evidence of this short-term substitutive relationship between domestic and foreign sales can be found in Spain, Portugal and Italy.