Olivier De Bandt

Tovonony Raza…ndrabe

Keywords: Exchange rate pass-through, nominal rigidity, import price JEL: F31, E31, C23

Relying on a novel dataset of detailed micro-data on import prices, this paper explores the close link that exists between nominal import price rigidity and the extent of exchange rate pass-through (ERPT). We show that previous evidence in favor of incomplete and low value of ERPT in the empirical literature may be explained by two factors: the relative importance of small variations in the exchange rate and, mainly, nominal rigidity. Once nominal rigidity is taken into account, we …nd for French manufacturers that ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run. In addition, assessing non-linearity and asymmetry issues, we provide evidence that the shape of the import price reaction function is distorted by the presence of nominal rigidity. Indeed, the linearity assumption is veri…ed once nominal rigidity is taken into account. However, in the case where it is rejected, the import price reaction function is concave rather than convex, indicating that …rms aim at protecting market shares. As a consequence, the common belief that "prices rise faster than they fall" is the results of nominal import price rigidity as far as ERPT is concerned.

Introduction

The phenomenon of exchange rate pass-through, henceforth ERPT, is an issue of a particular relevance for policy makers and has received a great deal of attention in both the theoretical and empirical literature. As shown by Obstfeld and Rogo¤ (2000), [START_REF] Betts | Exchange rate dynamics in a model of pricing-tomarket[END_REF] and [START_REF] Engel | Expenditure switching and exchange-rate policy[END_REF], the traditional Keynesian e¤ects of exchange rate movements such as expenditure switching e¤ect, consumption risk sharing, terms of trade e¤ect, international competitiveness, welfare analysis and the law of one price assumption are altered by the extent of the ERPT. In addition, the ERPT plays an important role for monetary policy analysis as evidenced by [START_REF] Gagnon | Monetary policy and exchange rate pass-through[END_REF] and [START_REF] Monacelli | Monetary policy in a low pass-through environment[END_REF]. Thus, there is no doubt concerning the impact of the ERPT on macro-economic environment and its important role for policy decision making. However, no clear consensus has been reached so far concerning its extent. From a positive perspective, the extent of the ERPT is low and incomplete as a result of an increasing degree of pricing-to-market behavior of …rms or of a change in the import consumption basket towards products characterized by a high degree of pricing-to-market. 1 From a normative perspective, the pass-through is incomplete in the short run due to price stickiness but complete in the long run. 2 The aim of this paper is not to reconcile these two di¤erent points of view. However, it highlights the important role of nominal rigidity in explaining the commonly observed phenomenon of incomplete ERPT on the basis of a unique dataset of import prices recorded at company level. As argued by [START_REF] Burstein | International prices and exchange rates[END_REF], the latter phenomenon might be explained by two factors: nominal rigidity and pricing-behavior of …rms through a mark-up adjustment. This paper focuses on the normative approach by studying the close link that exists between price stickiness and ERPT. The reason why nominal rigidity should be the main polar star in this study when trying to rationalize incomplete ERPT is twofolds. First, the use of micro-data at company level o¤ers the possibility of controlling for nominal rigidity by conditioning import prices on adjustment, i.e. to take into account that import prices adjustments take place at discrete points in time while exchange rates move continuously. It is worth noting that data availability for Euro-area import prices prevented so far previous studies from using thoses indices for ERPT analysis. 3 Second, given that the literature that 1 We can refer to the seminal work of [START_REF] Betts | Exchange rate dynamics in a model of pricing-tomarket[END_REF] for theoretical approach of this literature. One can cite, however, among the large number of empirical studies in this …eld, the work of [START_REF] Marazzi | Declining exchange rate pass-through to u.s. import prices: The potential role of global factors[END_REF], [START_REF] Bouakez | Has exchange rate pass-through really declined? evidence from canada[END_REF], [START_REF] Gust | Trade integration, competition, and the decline in exchange-rate pass-through[END_REF], and more recently [START_REF] Auer | Market structure and exchange rate pass-through[END_REF]. 2 This strand of the literature is composed in a large part by the New-Keynesian general equilibrium model such as Obstfeld and Rogo¤ (2000), [START_REF] Smets | Openness, imperfect exchange rate pass-through and monetary policy[END_REF] and [START_REF] Monacelli | Monetary policy in a low pass-through environment[END_REF]. To cite a few empirical studies that support this approach, we can refer to the work of [START_REF] Campa | Exchange rate pass-through into import prices: A macro or micro phenomenon?[END_REF], [START_REF] Campa | Exchange rate pass-through to import prices in the euro area[END_REF] and [START_REF] Campa | Di¤erences in exchange rate passthrough in the euro area[END_REF]. 3 The import price index was o¢ cially introduced by the Regulation (EC) No. 1158/2005 of the European Parliament and of the Council of 6 July 2005 amending Council Regulation (EC) No. 1165/98 concerning short-term statistics, and was published in the O¢ cial Journal of 22 July 2005. Among the scarce recent studies that use …rm-product-level imports prices data for the Euro-area, one can cite [START_REF] Amiti | Importers, exporters, and exchange rate disconnect[END_REF] who study the role of maket share and/or import intensity of Belgian exporting …rms in explaining the phenomenon of incomplete ERPT.

supports the positive approach generally shares the same common point of using data that exhibit some degree of nominal rigidity, it is legitimate to ask whether these …ndings are distorted by the presence of price stickiness. Therefore, isolating the role of nominal rigidity in explaining the phenomenon of incomplete ERPT will help us disentangle about the two alternative explanations advanced in the literature.

To tackle this issue, we use unpublished micro-data of French import prices at the monthly frequency for the period 2005M8 to 2011M5 made available to us by the French National Statistical Agency (INSEE). First, relying on statistical analysis commonly used in the consumer and producer prices micro-data studies, we advance some new import prices stylized facts in order to get some insight of the close link that exists between nominal rigidity and ERPT. Namely, we show that import prices are more prone to frequent changes and that the amplitude of these price changes is relatively small. Second, we …nd that evidence in favor of incomplete and low values of ERPT is the result of nominal import price rigidity and small exchange rate changes that occur more frequently. Once price stickiness is taken into account, the pass-through is high, if not complete in the short run, and complete in the long run. Third, we provide evidence that price stickiness distorts the shape of the import price reaction function to exchange rate changes. That is, as far as ERPT is concerned, the common belief that "prices rise faster than they fall" (Pelzman (2000)), which is formally characterized by a convex import price reaction function, is the result of nominal import price rigidity. Once nominal rigidity is taken into account, the linearity assumption is veri…ed. But in some cases where the latter is rejected, import price reaction function is concave, indicating that …rms aim at protecting market share.

In light on these …ndings, we contribute to the literature by proposing some new stylized facts on import prices and by contributing to shed light on the blurred but important issue of the extent of ERPT. Our results mainly show that nominal rigidity plays an important role in explaining the phenomenon of incomplete ERPT and that its presence in the import prices misleads our perception of the observed ERPT, especially when using aggregate prices.

The rest of the paper is organized as follows: section 2 describes the data; section 3 proposes some import price related facts; section 4 assesses the extent of ERPT; Section 5 concludes.

Data description

Data used in this study are based on the unpublished monthly import price index issued by the French National Statistical Agency (INSEE). 4 The monthly import prices provided by the INSEE are "at the dock" company-level transaction prices of French importing …rms for the month considered. This is the …nest possible degree of import prices that can be recorded for France. It corresponds to the 6-digit level which we denote as the entry level items, henceforth ELI. This amounts to a set of around 4150 individual prices each month. Notice that, in contrast with some countries such as the United States and the United Kingdom where prices are collected on a particular day at the beginning of the month, …rms give their transaction price for the month. This methodology could lead to collect what is called a "mean price" but in turn would avoid collecting a "list price" (without rebate and discount) which may have a di¤erent evolution than the actual transaction price. Therefore, given the methodology adopted by the INSEE, the exchange rate used in this study is the monthly averaged one. [START_REF] Gopinath | Sticky borders[END_REF] used the end of the month exchange rate but lagged one period due to the price collection procedure.

Our dataset covers the 2005M8 to 2011M5 period. In order to present and compare our results to other studies, we rely on some product classi…cations -or sector/product break downs -generally used in this type of literature. We refer to the classi…cation used by [START_REF] Rauch | Networks versus markets in international trade[END_REF], [START_REF] Vermeulen | Price setting in the euro area: Some stylized facts from individual producer price data[END_REF] and the 2-digit European Statistical Classi…cation of Economic Activities, henceforth NACE2. 5 Rauch (1999) classi…ed goods into di¤erentiated products (DP), homogeneous products (HG) that are traded on an exchange and reference priced (RP) products whose prices are listed in a trade publication. [START_REF] Vermeulen | Price setting in the euro area: Some stylized facts from individual producer price data[END_REF] classi…ed goods into six categories that are consumer food products (CFP), consumer non-food non-durables (CNFND), consumer durables (CD), intermediate goods (IG), energy (ENER) and capital goods (CG). Moreover, we choose to use the NACE2 classi…cation, because it is the level at which import prices begin to be published by INSEE and Eurostat. Some de…nitions are necessary for the rest of the paper. They are standard de…nitions in the literature on price persistence. Quote-line (also refered to as price quote in the literature) indicates the time, de…ned in terms of number of months in our study, that elapses between the entry of a given ELI in the sample and its exit. Table 1 in the appendix D depicts quotelines for the di¤erent classi…cations listed above. In general, the weighted (respectively, the non-weighted) mean of quote-lines amounts to 38:23 months (respectively, 39:70). That is, import prices at the entry level last in general three years in the sample. However, quote-lines are heterogeneous across products. Some categories of products rotate more frequently, such as the manufacture of leather and related products (LEATH) that rotate in average every two years, while some products last longer such as the manufacture of beverages that rotates in average every …ve years.

Price spell refers to the time that elapses between the current observed price change and the last one. There may be several price spells, possibly with di¤erent durations which henceforth are denoted as s, within a given quote-line. Moreover, price spells are heterogeneous across products. There are products that have frequent price changes, and thus a low price spell, as well as products that do not have any price change during their entire life in the sample. Therefore, some assumptions are sometimes needed regarding price change concerning the entry and exit of products. We consider that a price introduction also corresponds to a price change. That is, we do not take left censoring into account. Indeed, the value of the import price prior to the introduction of the ELI in the sample is unknown. In turn, several speci…cations are possible concerning exit. It will be indicated throughout the analysis whether or not we consider right censoring, which we will refer to as censoring for short. 6Finally, the weight used throughout this study is calculated from individual import turnovers that were also provided to us alongside the import prices. However, those weights, denoted w i , are only available until the 4-digit classi…cation. Hence, we use the turnover to compute the weighted mean of the variables of interest until 4-digit and from there on, compute an arithmetic mean until a given classi…cation provided above.

Some stylized facts on import prices

In order to guide us for the estimation of the ERPT, it is useful to contemplate a few summary statistics of our database and derive a few stylised facts. The use of micro-data in the literature of the ERPT has received a great deal of interest since the seminal work of [START_REF] Gopinath | Sticky borders[END_REF], henceforth G.R. For instance, Gopinath, Itskhoki and Rigobon (2010) estimate the extent of ERPT depending on the currency (Dollar or non-Dollar) in which import prices are denominated. In turn, Gopinath and Itskhoki (2010) focus on the relationship between the frequency of price changes and the extent of ERPT. For the Euro-area, while there are many studies conducted by the In ‡ation Persistence Network team at the European Central Bank that use micro-data, they focus only on consumer and producer price indexes. Álvarez et al. (2005) provide a comprehensive review of this literature. To the best of our best knowledge, our study is the …rst to provide detailed statistics on import prices at the micro-level and their use for the ERPT analysis for the Euro-area and mainly for France. This lack in the literature may be explained by data availability constraints, given that the import price index exists o¢ cially for the Euro-area since 2005. It is thus of interest to present some important import price statistical facts in order to complement the literature and to better understand some features of the observed ERPT.

Hazard rate

Following the seminal paper of [START_REF] Monacelli | Monetary policy in a low pass-through environment[END_REF], a signi…cant part of the literature relates the extent of ERPT to the degree of nominal price rigidity. The latter is de…ned as the probability that import prices remain unchanged for a given period. 7 For micro-data based studies such as G.R, it is common to measure nominal rigidity by the means of the hazard rate. This is the instantaneous probability of a price change (of leaving a state) conditional on no price change (on survival) until the considered period. In the following, we assess hazard rate conditional on price duration or price spell.

Let us de…ne p m it the import price index of a given quote-line i for the period t, I i t is a price change indicator that takes the value of 1 if p m it 6 = p m it 1 and 0 otherwise, and I i;fs= g t a price spell indicator that takes the value of 1 if the price spell s lasts months and 0 otherwise. Rather than specifying a given functional form, as the exponential function that gives a constant hazard rate, 8 we use the speci…cation adopted in [START_REF] Klenow | State-dependent or time-dependent pricing: Does it matter for recent u.s. in ‡ation?[END_REF], henceforth K.K, and compute the hazard rate conditional on price spell. That is, 9

j fs = g = X i w i i j fs = g = X i w i " P t I i t :I i;fs= g t P t I i;fs= g t # (1)
Recall that w i is the weight of the individual product i. This yields the following Figure 1 of the hazard rate by spell, that is, the probability of price change conditional on the length of the period (in months) represented in the horizontal axis during which prices remain …xed. As shown in Figure 1, the hazard rate of the …rst spell, namely the probability of a price change every month, is slightly less than 0.6. It is three times greater than the hazard rate of the second and third spells which indicate that when prices have not changed for 2 or 3 is constant and does not depend on the number of periods elapsed since the last price change. 8 See for example G.R and [START_REF] Klenow | State-dependent or time-dependent pricing: Does it matter for recent u.s. in ‡ation?[END_REF]. The use of the exponential function assume ex-ante that the hazard rate is constant. We opt for non-parametric speci…cation and assess this hypothesis. 9 Detailed and intuitive derivation of the following conditional hazard rate can be found in the Appendix A.1. months, the probability of a price change is around 0.2. This …nding is mainly explained by the volatility of the exchange rate that contributes to frequent changes (lower degree of stickiness) of the import prices compared to the producer and consumer prices. It is worth noting that 57:6% of the observations fall in the …rst three spells. Moreover, there is clearly a decline in the hazard rate as the length of the spell increases. That is, the stickier the prices, the lower the probability of price changes.

However, as is common in duration analysis, this situation may occur as a result of an aggregation of heterogeneous individuals. That is, the hazard rate may e¤ectively be constant within a category of goods but may di¤er across di¤erent categories even if they are driven by the same covariates due to unobserved heterogeneity. 10 Aggregating across heterogenous categories of goods which have constant but di¤erent hazard rates, in other words ignoring unobserved heterogeneity, will lead to a decreasing shape of the hazard rate. Therefore, before drawing any conclusion, it is necessary to correct the conditional hazard rate above for a possible unobserved heterogeneity by normalizing hazard rates within di¤erent categories of goods before aggregation. To this end, let i be the unconditional hazard rate, which is the frequency of price changes, of a given import price i. In order to obtain normalization coe¢ cients which we refer to as …xed e¤ects, let us sort import prices into decile based on the value of i and compute the mean of the unconditional hazard d for each decile.

Therefore, the corrected hazard rate (before aggregation) is obtained by dividing the conditional hazard rate i j fs = g of the ELI i de…ned in (1) by the corresponding average frequency of price changes d of the decile category to which the individual import price belongs, which we denote d i for the sake of clarity. Therefore, the aggregate corrected hazard rate with decile …xed e¤ects is given by:

~ j fs = g = X i w i i j fs = g d i (2)
This yields the corrected hazard rate by spell dispayed in Figure 2.

1 0 As far as exchange rate pass-through is concerned, heterogeneity may stem from micro and macro-factors. [START_REF] Devereux | Endogenous exchange rate pass-through when nominal prices are set in advance[END_REF] and [START_REF] Goldberg | Vehicle currency use in international trade[END_REF] study the explicit role of industry-speci…c features in contrast to macro-economic variability. They argue that the macro-economic environment plays an important role in the extent of pass-through for di¤erentiated products. In contrast, producers of homogeneous goods characterized by high elasticity of demand, the so-called Walrasian goods, are much more in ‡uenced by microdeterminants. Clearly, the decreasing shape of the hazard rate disappears once we take into account the unobserved heterogeneity, but the fact that prices in the …rst spell have a higher hazard rate remains. 11 Thus, the probability of import price changes is higher within the …rst spell relative to other spells. In contrast to …ndings of K.K that concerns PPI and CPI, this result indicates that import prices are more prone to frequent changes due to exchange rate volatility. Finally, apart from some spikes every twelve months, the hazard rate is essentially ‡at. Recall that the number of prices that last one and two years is small, more precisely 1:4% and 0:5% of the total observations, so the higher value of the hazard rate for those spells does not really matter.

Import prices change more frequently

As shown in Table 1, the average duration of the import price stickiness 12 amounts to 6:67 months. That is, changes in the import price index occur in average twice a year. This duration is short as compared to a change of once a year for the Euro-area CPI (13:0 months) and PPI (10:8 months) in Álvarez et al. (2006) and the import price duration of 10:6 months for the United States in G.R. 13 However, price rigidity is heterogeneous across products. As one may expect, homogeneous goods (HOMO) have a shorter price duration which is only equal to 1:65 month. Indeed, this category of goods, which is traded essentially on an exchange, is characterized by a high price elasticity of demand. It is more sensitive to international price ‡uctuations within raw materials market. For instance, the manufacture of electricity, gas, stream and air conditioning supply (EGSA) has its price changed each month, that of petroleum products (PETRO) and mining and quarrying (MINQUA) have their prices changed every 2 months (respectively, 2:29 and 1:66 months). On the contrary, di¤erentiated products (DP) are characterized by a low price elasticity of demand, at least in the short run. Hence, they are characterized by a higher price stickiness which amounts to 7:44 months. For instance, the manufacture of furniture (FURN) has the highest price duration, reaching 15 months.

The amplitude of import price changes is small

In our sample, the weighted (respectively, the non-weighted) mean of the absolute size of the import price changes amounts to 4:26% (respectively, 4:32%). This is relalively small compared to the value of 8:2% found by G.R for the United States. However, this should be related to our earlier …ndings that prices change relatively more often than in other countries. When splitting into price increases and decreases, the weighted average size amounts respectively to 5:9% and 3:4%. These are small compared to the value of 8:2% and 10% found by Álvarez et al. ( 2006) for the consumer price index of the Euro-area. Note that the inter-quartile interval of the size of import price changes ranges from 0:56% to 1:26%. A value that is relatively small. Plots of the evolution of the absolute size of price changes in Figure 3 show that apart from a sharp increase in the last quarter of 2008 during the world trade collapse and which was associated to an appreciation of the US Dollar, it remains small and ‡uctuates around 3% before 2008 and around 4% thereafter.

Exchange rate pass-through

On the basis of these stylized facts which show that import prices are more volatile than in the US, but exhibit a signi…cant degree of rigidity, we now estimate the degree of the ERPT. First, to serve as a benchmark and in order to compare our results to those of previous studies, we proceed to panel estimation of the ERPT without any transformation of the data. Second, we take into account the presence of nominal rigidity in the estimation of the ERPT. For that purpose, we condition our data on price adjustments and price changes. 14 Intuitively, conditioning data on price adjustment permits to measure, for each complete spell, the extent of price adjustment that is explained by the cumulative sum of exchange rate changes during the spell. While conditioning data on price change considers, for each period, only products that have a price change. This distinction is important in order to assess if …rms take into account either the cumulative sum over the entire price spell or the current, and possibly lags, of exchange rate changes whenever they adjust their prices. Third, we assess non-linearity and asymmetry issues using the threshold model under the panel and conditional on price adjustment speci…cations. It permits to assess how common results of the ERPT are altered by the presence of nominal rigidity as far as non-linearity and asymmetry issues are concerned.

Panel estimation

An important puzzle in the empirical literature of the ERPT is the choice of partner's export prices. This includes both the relevant exchange rate and a proxy for domestic costs. Thus, we adopt the same approach as Nakamura and Steinsson (2012) and use the real e¤ective exchange rate due to the lack of information on the country of origin and, hence, on the relevant nominal bilateral exchange rate to use. This also has the advantage of taking into account the change in the relative price (PPI) between home and foreign directly in the real exchange rate, rendering the equation of pass-through homogeneous across countries and products. 15 Fixed e¤ect panel estimates of the ERPT are given by the following equation:

p m t p ppi t = 6 X j=0 j q t j + d 0 w + " t (3)
where p m t and p ppi t denote respectively the (log) stacked import and domestic producer prices, q t is the logarithm of the e¤ective real exchange rate, 16 and d w is the vector of dummy variables corresponding to the 4-digit level of the NACE2 classi…cation used to control individual heterogeneity. Results are presented in Table 2 of appendix D. It is worth noting that for the di¤erent speci…cations adopted in this paper, our results are robust to the number of lags chosen in the estimation as shown in appendix C. Pass-through is incomplete both in the short and long run with estimates that amount respectively to 0:214 and 0:475. G.R obtained similar estimates where the weighted average of the ERPT for market transaction amounts to 0:21 and is in general around 0:33 or lower across individual products. For the Rauch clas-si…cation, pass-through into import prices of di¤erentiated products is lower and incomplete both at the short and long run, respectively 0:196 and 0:399. Pass-through in turn is low in the short run, 0:186 and 0:281, but high in the long run, 0:722 and 0:700, respectively for homogeneous and reference priced products. These are common results in the pass-through empirical literature. Di¤erentiated products that are characterized by high transformation have lower price-elasticity of demand. In turn, homogeneous and reference priced products are more sensitive to international price ‡uctuations within raw materials market and are characterized by high price-elasticity of demand. Therefore, ERPT is higher for these categories of products compared to that of di¤erentiated products. At a more disaggregated level, there is complete pass-through, in both the short and long run, for the mining and quarrying (MINQUA), the manufacture of coke and re…ned petroleum (PETRO) and the manufacture of electrical equipment (ELEC) products.

Stickiness and pass-through

If we rely on the panel speci…cation above, one could conclude, as is common in the literature, that pass-through is in general low and incomplete at the short run and it remains true for a large number of products at the long run, especially for di¤erentiated products. From a t . The right-hand side variable is nothing but the real e¤ective exchange rate qt. Taking …rst di¤erence and adding a constant, an error term and lags to real e¤ective exchange rate, yield the equation (3). See [START_REF] Barhoumi | Di¤erences in long run exchange rate pass-through into import prices in developing countries: An empirical investigation[END_REF] for a discussion. Baillu and Fujii (2004) in turn use unit labor cost based on real e¤ective exchange rate in their study. 1 6 The e¤ective real exchange rate used in this study is de…ned as a geometric weighted average of the relative producer prices (expressed in the same currency) between the Euro-area and each of its 20 major trading partners. positive perspective, this phenomenon is explained as an increase in the degree of pricingto-market or a declining value of the pass-through. Initiated by the seminal work of [START_REF] Betts | Exchange rate dynamics in a model of pricing-tomarket[END_REF], this strand of the literature supports the hypothesis that an increasing fraction of …rms practice the Local Currency Pricing -Pricing-to-Market (LCP-PTM) strategy relative to those that practice the Producer Currency Pricing (PCP) one. Thus, as the number of …rms that practice LCP increases, the ERPT becomes low and incomplete both at the short and long run. From a normative perspective, initiated by the seminal paper of Monacceli (2005), short term ERPT might be incomplete as a result of nominal import price rigidity but long term ERPT instead is complete. The degree of price stickiness in turn is measured by the means of the Calvo import price rigidity.

Thus, as argued by Burstein and Gopinath (2013), the phenomenon of observed incomplete ERPT is the result of Pricing-to-Market behavior of …rms through mark-up adjustment or/and nominal import price rigidity. One may therefore wonder what happens to the extent of ERPT once nominal price rigidity is taken into account. This is of particular importance in order to disentangle the two alternative explanations advanced in the literature. It will help us to better understand some features of the ERPT, such as the role of pricing-to-market, passthrough dynamics, currency invoicing, measurement errors, etc, without having results that are distorted by nominal rigidity. 17

Conditioning on price adjustment

In order to take into account the presence of nominal price stickiness as in Gopinath, Itskhoki and Rigobon (2010), we condition the estimation of the extent of ERPT on import price adjustments. To this end, we run a regression were the dependent variable is de…ned as the di¤erence between the (log) value of the current import price when adjustment is observed and that of the previous price change. 18 The elapsed time during price adjustments, the price spell, depends on the degree of price stickiness and is di¤erent across categories of products. By the same analogy, independent variables are de…ned as the (log) cumulative sum during the import price spell. Formally, estimates of the ERPT conditional on price adjustment result from the following regression: 19

s p m t p ppi t = c 0 r s q t + 6 X j=1 c j q s;t s j + d 0 w + " t (4)
1 7 This part is not tackled in this paper. Our …rst objective is to estimate the extent of pass-through and to present facts that have to be taken into account to avoid misleading interpretation due to the presence of nominal price rigidity. This is however an important topic for future research. 1 8 In the case of the …rst price change, it is the di¤erence between the (log) value of the import price where the …rst price change is observed and the one that corresponds to the introduction of the product. For the last spell before the exit, if no price change is observed before the item leaves the sample, this price spell is discarded. That is, we do not consider censoring. 1 9 See appendix B.2 for detailed explanation of the conditional on price adjustment speci…cation.

where the subindex s refers to a complete spell of length s, s is the di¤erence operator over the spell of length or duration s, r s is the cumulative sum operator over the price spell and q s;t s j denotes the (log) change in the real exchange rate j-month prior to the s-th spell. The short run ERPT conditional on price adjustment is measured by the coe¢ cient c 0 whereas that of the long run is given by the sum of the pass-through of the cumulative exchange rate changes during the spell ( c 0 ) and the pass-through of the …rst 6 months past exchange rate changes prior to the spell ( P 6 j=1 c j ), that is,

P 6 j=0 c j .
Results that are depicted between square brackets in Table 2 in the appendix show that ERPT is incomplete in the short run, whereas it is complete in the long run. In stark contrast with the estimated values found in the panel speci…cation, the short run estimate is slightly higher and amounts to 0:32 whereas it amounts to 0:86 in the long run and is not statistically di¤erent from one (complete). The same conclusion can be drawn for the Rauch classi…cation.

Conditioning on price change

In the next speci…cation, we condition the estimation of the ERPT on price changes. That is, within each 4-digit category of goods and for each time period, we only consider goods that have a price change. Taking the mean of prices that have changed across individual goods for each time period yields a time series observations for each 4-digit good. Therefore, to estimate the extent of ERPT conditional on price changes, we run the following regression: 20

p m t p ppi t = 6 X j=0 j q t j + d 0 w + " t (5)
where p m t denotes (stacked observation of) the mean of the import price changes across goods within the 4-digit bin at the period t. This speci…cation di¤ers from equation ( 4) -where changes were conditional on price adjustment -in the sense that it gives now a picture of the pass-through where the nominal rigidity is corrected for each time period rather than for each spell. The correct interpretation is now the following: if …rms change their prices, to what extent the current (not the cumulative) exchange rate changes and its lags, six months in our speci…cation, are passed-through changes in price? Here lags take into account possible delays in the response of import prices to previous exchange rate movements. Table 2 in the appendix reports between parenthesis the pass-through estimates resulting from the conditional on price change speci…cation. The conclusion is relatively the same as that for the conditional on price adjustment speci…cation except that, and this is of a great deal of importance, the short run ERPT is now high, if not complete, with the weighted mean that amounts to 0:60 for a large number of products. That is, the observed low estimates of the ERPT, as found in subsection 4.1, may be explained in large part by the presence of price stickiness. Once the latter is taken into account, pass-through estimates are in general high if not complete both at the short and long run. This …nding, combined with the one obtained in the conditional on price adjustment speci…cation, is a support of the staggered price setting fashion à la Calvo or à la Taylor commonly used in the general equilibrium models of the ERPT. A similar conclusion is advanced by K.K.

Non-linearity and asymmetry

The phenomenon of asymmetry and non-linearity in the ERPT has received a great deal of attention recently. This strand of the literature 21 tries to answer the following question: Do an appreciation and a depreciation be passed-through into import prices in the same magnitude (the phenomenon of asymmetry), and does the size of the exchange rate changes in ‡uence the magnitude of the pass-through (the phenomenon of non-linearity)? In order to see how results are sensitive to price stickiness, we use two speci…cations which are (1) the pooled panel and (2) the conditional on price adjustment. The …rst speci…cation, which we denote "panel" in Table 3, corresponds to the speci…cation generally used, using micro or macro-data, in the literature of asymmetry and non-linearity and thus will permit to compare our results with those of other studies. The second speci…cation in turn, which we denote "conditional on price adjustment", henceforth "cpa", permits to isolate the phenomenon of asymmetry and non-linearity, if they exist, from nominal price rigidity. Notice that the conditional on price change speci…cation is not retained due to the …nding of Buissière (2013). He argued that aggregation of the import prices leads to non-linearities that cancel each other given the sign of the convexity of the export reaction function that varies across di¤erent trading partners.

Nominal rigidity distorts the shape of the import price reaction function

We assess the asymmetry and non-linearity issues using the Threshold model that is described in the appendix B.4. Positive (respectively, negative) signi…cant estimate of the Threshold parameters in Table 3 indicates a more (respectively, less) than proportional e¤ect of the exchange rate changes into import price changes. Note that for the sake of clarity, only signi…cant estimates are reported and that non-signi…cance of the parameters supports the linearity assumption. For the panel speci…cation, a depreciation has a total impact of 0:33, while an appreciation has a corresponding impact of 0:09 on the import price changes in the short run. This is a support of the convex import price reaction function that relies on two disctinct micro-economic behavioral assumptions. The …rst one concerns the price downward rigidity at the export side during an appreciation of the exporter's currency. This will yield a higher ERPT at the import side during a depreciation of importer's currency and is characterized by a positive signi…cant estimate of . The second assumption concerns the quantity upward rigidity on the export side during a depreciation of exporter's currency. Competitiveness gain due to depreciation leads exporting …rms to raise prices rather than quantities due to production capacity constraints or when it is more costly to raise production compared to the gain issued by the rise in demand. This will yield a lower ERPT at the import side during an appreciation of importer's currency and is characterized by a negative signi…cant estimate of . For the cpa speci…cation however, di¤erent but important results emerge. In the short run, the linearity assumption could not be rejected. In the long run in turn, a depreciation has a total impact of 0:65, while an appreciation has a corresponding impact of 1:27 on the import price changes. This is a support of the concave import price reaction function which indicates that …rms are more concerned with demand conditions. In other words, once nominal rigidity is taken into account, linearity assumption prevails, and if it is not the case, as for the long run ERPT, import price reaction function curvature is no longer convex but rather concave. 22 Therefore, and as long as ERPT is concerned, the common belief that "Prices rise faster than they fall" in response to exchange rate changes is the result of nominal import price rigidity. Firms are concerned with demand conditions once price stickiness is taken into account. It is worth noting that the convex shape of the import price reaction function remains even if unobserved heterogeneity across products has been taken into account by the means of …xed e¤ects in the panel speci…cation. That is, apart from unobserved heterogeneity which can be handle with various econometric speci…cations, price stickiness distorts the reaction of the import prices to exchange rate changes and, hence, has to be taken into account rather in the estimation or in the interpretation.

Small exchange rate changes

At a more thinner grid, if the linearity assumption is rejected, parameters remain positive for depreciation except for the small exchange rate changes of magnitude 0 < q 1%, and negative for appreciation. 23 That is, prices rise in response to a small depreciation, q 1%, but the impact is less than proportional. This result is in favor of incomplete ERPT both at the short and long run for the panel speci…cation. It may be of a relevant importance, and could be advanced as an explanation of the results obtained in the empirical literature, given that this category represents 34:1% of the total observations and 59:7% of the observed depreciation episodes. For the cpa classi…cation however, the linearity assumption is not rejected for small depreciation of magnitude 0 < q 1%. Therefore, one can argue that the observed low value and incomplete ERPT in the empirical literature may be explained by two factors: the relative importance of small exchange rate changes and, mainly, the nominal rigidity. Once nominal rigidity taken into account, this fact vanishes.

Conclusion

To conclude, the extent of exchange rate pass-through and the shape of the import price reaction function to exchange rate changes are distorted by the presence of nominal rigidity. Namely, the linearity hypothesis is veri…ed once nominal rigidity is taken into account. However, in the case where it is rejected, import price reaction function is concave rather than convex, indicating the objective of …rms to maintain market shares. Consequently, and as long as ERPT is concerned, the common belief that "prices rise faster than they fall" is a result of nominal price rigidity. Therefore, care must be taken when interpreting ERPT results in the literature, especially when using aggregate prices. As shown through a number of speci…cations adopted in this paper, ERPT may be incomplete in the short run, but with relatively high value, and complete in the long run once nominal price rigidity is taken into account.

While we acknowledge that micro-data are rarely available when estimating or investigating ERPT, caution must be taken when interpreting pass-through estimates if nominal price rigidity is not accounted for. Our paper provides evidence in favor of the staggered price setting framework à la Calvo or à la Taylor commonly used in the general equilibrium model. In other words, …rms gradually pass-through exchange rate changes whenever they are able to adjust prices but the commonly observed low and incomplete value of ERPT in the litterature is explained by the relative importance of small exchange rate changes and, mainly, the presence of nominal rigidity.

In terms of policy implications, given that (1) the size of import price changes is small, (2) the extent of ERPT is distorted by the nominal rigidity especially for small exchange rate changes where the impact on import prices is less than proportional, and (3) the home consumption bias is important, the role of the ERPT is considerably reduced in in ‡uencing in ‡ation. From a normative point of view, it seems therefore important to understand the reasons behind import price rigidity for di¤erentiated goods that are characterized by high degree of nominal price rigidity. However, for homogeneous products that are characterized by low degree of price stickiness and less home consumption bias, such as the manufacture of coke and re…ned petroleum (PETRO), pass-through of exchange rate changes will have an important impact on in ‡ation.

A Import price statistics A.1 Concepts and speci…cations

In order to better understand the di¤erent speci…cations adopted in the statistical analysis of the import prices in section 3, let us depict in the following - ( ) indicates that price introduction is a price change.

is the number of months elapsed since the last price change.

-s cs indicates the length of "Complete Spell". Notice that s cs = I i : . -s rcs indicates the length of "Right Censored Spell".

-s indicates the length of complete and censored spell.

-Q is the quote-line -I i;fs= g t is the price spell, complete and censored, indicator Denote p m it the (log) import price of an individual product i. I i t is a price change indicator that takes the value of 1 if p m it 6 = p m it 1 and 0 otherwise. For the sake of illustration, we assume that the individual product i enters the sample at the period t and that price introduction is a price change. The latter assumption implies that I i t = 1 at the period t and simply means that we do not consider left censoring.

is the number of months elapsed since the last price change. The complete spell of length s cs is de…ned to be the number of months elapsed between the current observed price change and the last one. It is given by the value of conditional on observed price change, that is, j I i = 1 . In turn, the right censored spell of length s rcs is de…ned to be the number of months elapsed since the last price change but where the current period does not correspond yet to the price change. It is therefore given by the value of where no price change is observed, that is, j I i = 0 . The quote-line Q, de…ned to be the number of months that elapsed between the entry of the individual product i in the sample (period t) and its exit (period t + 8), is equal to 8 months in our simple example.

Finally, I i;fs= g t is a price spell indicator that takes the value of 1 when the number of spell s, complete and censored, corresponds to a given value of , and 0 otherwise. It permits to classify observations by the number of spell.

A.2 Hazard rate

The expression of the conditional hazard rate in equation [START_REF] Adolfson | Bayesian estimation of an open economy dsge model with incomplete pass-through[END_REF] Denote p m i the (log) import price of an individual product i and q the (log) real exchange rate. Assume that all products enter the sample at period t for simplicity. Under the assumption that a price introduction is a price change, the row corresponding to period t contains "x" which indicates a price change. This assumption simply means that we do not consider left censoring.

B.2 Speci…cation of ERPT equation conditional on price adjustment (cpa)

Concerning the "conditional on price adjustment" (cpa) speci…cation, the variables used in the estimation are constructed as follows. Let us take the case of the import price of the …rst individual good p m 1 . For this good, we observe 2 complete price spells: from t to t + 3 and t + 3 to t + 4. The …rst spell lasts 3 months and the second spell 1 month. Therefore, import price changes conditional on price adjustment is given by 3 p m 1 = p m 1t+3 p m 1t and 1 p m 1 = p m 1t+4 p m 1t+3 . De ‡ating with the PPI index yields the dependent variable s p m p ppi in equation ( 4). Independent variables in turn are obtained as the cumulative sum of real exchange rate changes during each complete spell. That is in the case of individual good 1, r 3 q = (q t+1 q t ) + (q t+2 q t+1 ) + (q t+3 q t+2 ) = (q t+3 q t ) and r 1 q = (q t+4 q t+3 ). This yields the cumulative real exchange rate changes r s q for complete spell of length s (or more precisely, of length s cs ) in equation ( 4).

B.3 Speci…cation of ERPT equation conditional on price change (cpc)

In turn, "conditional on price change" (cpc) speci…cation considers, for each period, only products that have a price change. That is, period t import price changes p m t in equation ( 5) is obtained by taking the mean of import prices that have changed at period t across individual products. In our example, if we denote p m it = p m it p m it 1 , conditional on price change dependent variable p m t is given by: p m t+1 = mean( p m 3t+1 ; p m 4t+1 ), p m t+2 = p m 4t+2 , p m t+3 = mean( p m 1t+3 ; p m 3t+3 ) and so on. Independent variables in turn correspond simply to one period change of the real exchange rate q t and the last six lagged values.

B.4 The Threshold model

We assess non-linearity and asymmetry issues using the following Threshold model:

(panel) : p m t p ppi t = 6 X j=0 j q t j + 6 X j=0 j D x q t j + d 0 w + " t (cpa) : s p m t p ppi t = c 0 r s q t + 6 X j=1 c j q s;t s j + c 0 D x r s q t + (6) 6 X j=1 c j D x q s;t s j + d 0 w + " t
where D x is a dummy variable that takes the value of 1 if x is true and 0 otherwise. We consider di¤erent hypothesis for x, namely positive vs negative exchange rate changes, and various amplitudes for exchange rate changes. Thus, for the panel and cpa speci…cation, we make a general distinction between appreciation and depreciation in order to assess asymmetry issue, and add a thinner grid of exchange rate changes in order to assess non-linearity issue.

The interest lies in estimating and testing the sign of the threshold parameters 0 or c 0 for short term and P 6 j=0 j or P 6 j=0 c j for long term. We denote henceforth this set of Threshold parameters. Positive signi…cant estimate of the Threshold parameters in Table 3 indicates a more than proportional e¤ect ( + ) of the exchange rate changes into import price changes. In turn, negative estimate of the Threshold parameters indicates a less than proportional e¤ect ( ). For the panel speci…cation, a positive signi…cant estimate of = 0:24 indicates that a depreciation ( q > 0) has a more than proportional e¤ect of 0:33 ( + = 0:09 + 0:24 = 0:33) on import price in the short run. In turn, a negative signi…cant estimate of = 0:24 indicates that an appreciation ( q < 0) has a less than proportional e¤ect of 0:09 ( = 0:33 0:24 = 0:09) on import price in the short run. For the conditional on price adjustment speci…cation, a depreciation has a less than proportional e¤ect with a total impact of 0:65 (1:27 0:62 = 0:65) in the long run. In turn, an appreciation has a more than proportional e¤ect with a corresponding impact of 1: 27 (0:65 + 0:62 = 1: 27) in the long run. Plots of pass-through estimates for di¤erent number of lags below con…rm the choice of 6 lags included in the estimation. As shown in …gure 4, the estimated values of ERPT show a rather stable evolution for both cpa and cpc speci…cations. Moreover, long term pass-through rises gradually and reaches its maximum value within the …rst 6 months after exchange rate changes. This …nding is line with Obstfeld and Rogo¤ (2000) who argued that in general, import price adjustments take place within 90 days or less. -The table provides results from …xed e¤ects panel estimation of ERPT equation. Three di¤erent speci…cations are considered:

C Lag-evolution of the ERPT

1-the benchmark panel speci…cation (equation ( 3)) where results are depicted in the …rst value of the table, 2-the conditional on price adjustment (equation ( 4)) where results are depicted between square brackets, 3-the conditional on price change (equation ( 5)) where results are depicted between parenthesis.

-([) ERPT is not statistically di¤erent from 0 at 95% level (zero ERPT).

- (z) ERPT is not statistically di¤erent from 1 at 95% level (complete ERPT).

Figure 1 :

 1 Figure 1: Hazard rate conditional on price spell (from 1 to 24 months)

Figure 2 :

 2 Figure 2: Corrected hazard rate conditional on price spell (from 1 to 24 months)

Figure 3 :

 3 Figure 3: Evolution of the absolute size of price changes in percentage

Figure 4 :

 4 Figure 4: Lag-evolution of pass-through estimates

  ; [0:32]; (0:60) 0:47; [0:86 z ]; (0:81 z ) M IN Q U A 0:56 z ; [0:46 [ ]; (0:59 z ) 2:3; [ 3:1]; ( 2:0 [ ) F O O D 0:24; [0:27]; (0:51) 0:79; [1:21 z ]; (1:21 z ) Rauch B E V E 0:23; [0:75 z ]; (0:57 z ) 0:60; [2:09 z ]; (0:54) ; [0:84 z ]; (0:81 z )T E X T 0:0 [ ; [0:18 [ ]; (0:03 [ ) 0:43; [1:01 z ]; (0:82 z ) H G 0:18; [0:30]; (0:32 [ ) 0:72; [0:65 z ]; (0:06 [ ) ; [0:32]; (0:83 z ) 0:70; [1:07 z ]; (1:14 z ) L E AT H 0:66; [0:57]; (0:91 z ) 0:77 z ; [1:14 z ]; (0:47) N C 0:29; [0:28]; (0:42) 0:68; [0:82 z ]; (0:54 z ) W O O D 0:17; [0:30]; (0:77 z ) 0:13 [ ; [0:85 z ]; (1:22 z ) PA P E 0:35; [0:41]; (0:65 z ) 0:24 [ ; [0:10 [ ]; (0:50 z ) Vermeulen P E T R O 0:62 z ; [0:45 [ ]; (0:98 z ) 1:71 z ; [0:55 z ]; (1:18 z ) Group ST-ERPT LT-ERPT C H E M 0:25; [0:48]; (0:75 z ) 0:97 z ; [1:05 z ]; (1:08 z ) C F P 0:30; [0:36]; (0:59) 0:87 z ; [1:35]; (1:28 z ) P H A R 0:14; [0:28 [ ]; (1:33 z ) 0:50; [2:31 z ]; (2:14)C N F N D 0:17; [0:39]; (0:86 z ) 0:38; [0:85 z ]; (1:25 z ) R U B B 0:11; [0:13 [ ]; (0:36) 0:07 [ ; [0:72 z ]; (0:15 [ ) ; [0:55]; (0:35 [ ) 0:29 [ ; [ 0:0 [ ]; ( 1:2 [ ) E N E R 0:54; [0:48 [ ]; (0:46) 1:2; [ 2:2]; ( 1:5 [ ) F M E T 0:19; [ 0:0 [ ]; (0:83 z ) 0:36; [0:79 z ]; (1:17 z ) ; [0:96 z ]; (0:88 z ) V E H I 0:05 [ ; [ 0:0 [ ]; (0:05 [ ) 0:14 [ ; [0:23 [ ]; (0:21 [ ) O T R A 0:04 [ ; [0:03 [ ]; (0:05 [ ) 0:07 [ ; [1:16 z ]; (0:49) F U R N 0:16; [0:51]; ( 0:01) 0:93 z ; [1:55 z ]; (2:18 z ) O M A N 0:45; [0:33]; (1:29 z ) 0:53; [0:95 z ]; (1:61) E G S A 0:3 [ ; [ 0:3 [ ]; ( 0:3 [ ) 2:0; [ 2:0]; ( 2:0)

1 5

 1 Let us start from the following simple equation of the import price with full and immediate pass-through:

	p m t = et + p x; t . Assuming that the foreign export price p x; t subtracting importer's producer price p ppi t on both sides of the equation yield p m is proxied by exporter's producer price p ;ppi t t p ppi t = et +p ;ppi t p ppi	and

table a

 a

									simple picture of our
	database structure. That is,
	Entry	period p m i t 4:61	p m i	I i 1 ( ) 1	s cs s rcs s Q I t i;fs=1g 1 1 1	I t i;fs=2g 0	i;fs=3g t I 0
		t + 1 4:64 0:03	1	1	1	1	1	0	0
		t + 2 4:64 0:00	0	1	1	1	1	0	0
		t + 3 4:64 0:00	0	2	2	2	0	1	0
		t + 4 4:68 0:04	1	3	3	3	0	0	1
		t + 5 4:68 0:00	0	1	1	1	1	0	0
		t + 6 4:70 0:02	1	2	2	2	0	1	0
		t + 7 4:70 0:00	0	1	1	1	1	0	0
	Exit	t + 8 4:70 0:00	0	2	2	2 8	0	1	0
	-I i is a price change indicator.

  in the denominator computes the number of observations/occurrences for which the length of spell s of an individual price i last months. Namely, it corresponds to the total number of complete and censored spell of length months. In our example, it is given by P t+8 T =t I i;1 T and is equal to 5 for s = 1. While the term in the numerator computes the number of observations/occurrences having a spell of length months with price changes. Namely, it corresponds to the total number of complete spell of length months. In our example, it is given by P t+8 T =t I i T :I i;1 T and is equal to 2 for s = 1. Finally, taking the weighted mean across individual products i yields the expression of the hazard rate conditional on a given price spell.

	as follows. The term	P t I t i;fs= g					in section 3.1 is obtained
							P t I i t :I t i;fs= g
	B Pass-through and price stickiness
	B.1 Speci…cation
			p m 1	p m 2	p m 3	p m 4	q
		t	x	x	x	x	q t
		t + 1	o	o	x	x	q t+1
		t + 2	o	o	o	x	q t+2
		t + 3 x	o	x	o	q t+3
		t + 4 x	x	o	o	q t+4
		. . .	. . .	. . .	. . .	. . .	. . .
		-x indicates price change
		-o indicates no price change

Table 2 :

 2 ERPT estimates

	General

We are thankful to the INSEE for making these data available to us under con…dentiality restriction following the agreement of the Secrecy Committee (Comité du Secret Statistique).

Classi…cations and tables of correspondence are presented in a supplement available upon request.

[START_REF] Nakamura | Lost in transit: Product replacement bias and pricing to market[END_REF] and[START_REF] Gagnon | The hitchhiker's guide to missing import price changes and pass-through[END_REF] go in depth into this problem of missing price change before entry and after exit, which they call "product replacement bias". The …rst authors argue that this generates a large downward bias in the estimation of the ERPT using aggregate import price index and …nd an estimate of the long run pass-through that amounts to 0:60 after correcting the bias, whereas the second authors argue that this downward bias is mitigated and …nd in turn an estimate of 0:28 after the bias correction. This issue is, however, beyond the scope of this study.

It is common to measure this rigidity by the means of Calvo parameter in the open macro-economic models, namely for the dynamic stochastic general equilibrium model used extensively for policy analysis as in Adolfson et al. (2007) and Christo¤el et al. (2008). Moreover, it is generally assumed that the degree of nominal rigidity

[START_REF] Adolfson | Bayesian estimation of an open economy dsge model with incomplete pass-through[END_REF] Taking into account only complete spell, that is, not considering the introduction of a given quote-line in the sample as a price change, does not alter the conclusion.1

As is standard in the literature of Calvo price setting, duration is calculated as the inverse of the unconditional probability (frequency) of price changes. It is given by 1=(1) where denotes the (Calvo) probability that …rms keep price unchanged for a given period that is independent of the time elapsed since …rms last reset price.

1 3 Compared to the results of G.R., di¤erence in the value of import price duration may stems from various factors such as the di¤erence in import basket composition, the data collection procedure and the di¤erence in the degree of entry level items, namely, G.R. used United States data at 10-digit level compared to the French data at 6-digit we use in this study. This di¤erence was also pointed out by[START_REF] Berman | How do di¤erent exporters react to exchange rate changes?[END_REF].

[START_REF] Auer | Market structure and exchange rate pass-through[END_REF] Details of these data transformation can be found in the Appendix B.1.

0 See appendix B.3 for detailed explanation of the conditional on price change speci…cation.

1 Bussière (2013) provides a comprehensive review of this literature.

[START_REF] Alvarez | Sticky prices in the euro area: A summary of new micro-evidence[END_REF] As robustness check, we run the Quadratic model speci…ed by Buissière (2013) that permits to formally test and identify the shape of the import price reaction function. We uncover that this …nding is not solely an aggregate case and remains true at a disaggregated level (NACE2). Results are available upon request.2

Except for the long term estimate of for large exchange rate changes of 3% > q

4% where it is only signi…cant at 10% level.

We owe a special thanks to the French National Institute

database and providing us unpublished data of French import prices. Indeed, we owe

D Tables

Short term long term positive negative total q > 0 0:24 57:2% q < 0 0:24 42:8% Sign and magnitude Short term long term positive negative total 3% < q 4% 0:10 0:97 6:2% 3:5% 2% < q 3% 0:11 9:4% 5:3% 1% < q 2% 24:8% 14:2% 0% < q 1% 0:20 0:47 59:7% 34:1% 1% q < 0% 0:35 55:3% 23:7% 2% q < 1% 33:3% 14:3% 3% q < 2% 3:4% 1:4% 4% q < 3% 0:23 4:3% 1:8% 5% q < 4% 0:18 0:23 3:6% 1:6% II-Conditional on price adjustment Exchange rate changes Threshold Percentage relative to: Sign Short term long term positive negative total r s q > 0 0:62 48:9% r s q < 0 0:62 51:1% Sign and magnitude Short term long term positive negative total 5% < r s q 0:32 19:5% 9:5% 4% < r s q 5% 0:25 5:9% 2:9% 3% < r s q 4% 0:40 10:2% 5:0% 2% < r s q 3% 0:48 1:54 9:1% 4:4% 1% < r s q 2% 0:34 14:9% 7:3% 0% < r s q 1% 40:5% 19:8% 1% r s q < 0% 0:79 35:2% 18:0% 2% r s q < 1% 0:20 25:0% 12:8% 3% r s q < 2% 0:30 1:13 15:9% 8:1% 4% r s q < 3% 10:2% 5:2% 5% r s q < 4% 1:06 6:1% 3:1% r s q < 5% 7:6% 3:9% -( ) Parameter estimate is statistically signi…cant at 5% (10%) level q is the one period exchange rate changes r s q is the cumulative sum of exchange rate changes during the complete spell s -Positive sign in the Threshold model indicates a more than proportional e¤ect.

-Negative sign in the Threshold model indicates a less than proportional e¤ect.


Françoise Hay

Christian Milelli
email: milelli@u-paris10.fr

The increasing interest of Middle Eastern Sovereign Wealth Funds for Europe: presenting original data

Keywords: Sovereign Wealth Fund, Middle East, Europe

The paper examines the rise of Sovereign Wealth Funds (SWFs) as a new source of financing investment worldwide and, more specifically, tries to get a better understanding of SWFs from Middle East which accounted in 2013 for 35 percent of overall assets managed by them, with the bulk of them focused on Developed countries, and in particular on Europe.

The paper is descriptive and informative. It is based on an original database set up from different sources of information. The idea is to advance the main characteristics of these new investors, and also to assess the primary consequences of their operations on European economies. The role of the states as important arbiters of market economies is emphasized as well as the shift of power in favor of the emerging economies.

Introduction

Sovereign Wealth Funds (SWFs) are emerging as a new source of financing investment worldwide. Their overall assets were estimated at $6.3 trillion in early 2014 3 . Interestingly, a large part of these assets are-directly or indirectly-managed by SWFs from Developing countries: in particular, in 2013, SWFs from Middle East accounted 35 percent of overall assets, while Abu Dhabi Investment Authority (ADIA) was the second largest SWFs worldwide in terms of assets under management (AUM) 4 , just behind the Norway's Government Pension Global 5 .

The bulk of the investments made by Middle Eastern SWFs are focused on Developed countries, and in particular on Europe: in 2012, 48 percent of the concerned deals and 75 percent of the investment cumulated flows (except intra-region ones) have gone to Europe [START_REF] Bortoletti | Trends and challenges in sovereign investment: the SWF discount[END_REF]. Predominantly, they consist of the acquisition of quoted shares or bonds, and in several cases the equity stake may surpass 10 percent, the standard threshold value, and, as a result, the investment made is qualified as direct investment.

The role played by state behind Middle Eastern SWFs confirms the reemergence of state as important arbiters of market economies [START_REF] Aglietta | Sovereign Wealth Funds in the mutation of global finance[END_REF]. This finding is somehow at odds with the standard view in economic circles of the withdrawal of the state. In addition, they can contribute to counterbalance the banks' power and the rising instability of finance, particularly in Europe which is experiencing a profound financial crisis with severe austerity programs in place for the coming years.

In spite of a recent surge of investments made by SWFs from Developing Countries towards Developed countries-through acquisitions or extensions of previous stakes, and also through the coming of new funds or associated Sovereign-Wealth Enterprises (SWEs) 6 -limited understanding of the strategies followed by this new class of investors into Developed market economies is available.

The paper addresses these questions by collecting and matching different sources of information to set up an original dataset in order to conduct a descriptive study and present the main findings. Actually, the fact to take into consideration the investments by Middle Eastern SWFs allows not only to pinpoint their characteristics and the strategies involved, but 3 SWF Institute (2014). 4 With 773 billion of dollars of AUM. 5 SWF Institute (2014). 6 Enterprises owned and controlled by SWFs.

3 also to draw illuminating comparisons with other Southern investors into Developed countries, Chinese or Russian in particular.

The paper is organized as follows: section 1 introduces the general context and the real nature of Middle Eastern SWFs, specifically those from the United Arab Emirates and Qatar; section 2 provides details about their geographical destinations and sectoral distribution in Europe with a focus on main sectors; section 3 seeks to identify the motivation and the advantages of these funds; last, to conclude, an assessment of the consequences of the arrival of these funds in Europe is drawn.

Middle Eastern SWFs

During the last decades, SWFs in general have thriven, in line with the globalization and the growing influence of finance in the economy. They have particularly flourished in the Middle East where they used to provide long-term assurance to domestic sovereignty, their legitimacy being a function of their utility to the ruling elite through their contribution to support and stability of their territory [START_REF] Lo Turco | Sovereign Wealth Funds: an opportunity properly managed? Paris Nanterre Workshop on Sovereign Investment[END_REF].

Background

Middle Eastern SWFs primarily include funds from the United Arab Emirates (UAE), a federal state where Abu Dhabi constitutes the major state, and Qatar, an independent Emirate.

We focus on these two countries because one, Abu Dhabi, is the most important Middle

Eastern SWF, and the other, Qatar, has made highly visible investments in Europe. In addition, both share many commonalities: they are located in the same region (Persian Gulf), they detain huge foreign-exchange reserves coming from commodity trade, and they have the same political structure (autocratic regime) along with the same culture (language and religion).

The growth of these funds, in number or average size, has been driven by increasing oil and gas prices and resulting current account surplus of their countries.

The investments conducted overseas by SWFs are basically portfolio investments; however, the share of stakes taken in foreign companies may surpass 10%, so they can have an impact on the governance structure.

On behalf of their respective government, SWFs carry out their asset allocation in order to transfer wealth from the present to the future, and contrary to other long-term investors they participate to the sustainability of the public finances of the nation over time [START_REF] Aglietta | Sovereign Wealth Funds in the mutation of global finance[END_REF].

They select targets by their own or by appointing professional fund managers: approximately 75% of the ADIA total assets are managed by external fund managers.

The behavior of these funds is variable: they can be passive, active or even act according to political or strategic agendas.

Actually, the most important Middle Eastern funds in terms of AUM are generally passive: they do not seek to manage or take operational role in the companies in which they invest; they develop 'buy-and-hold' strategies in a long-term perspective. To be sure data collected here are not exhaustive as several investments have been made by appointed professional fund managers, for example, in private equity funds without an indication of the ultimate investor. Overall, the subsequent figures underrate the all 7 These deals accounted for around 90% of SWFs foreign direct investment flows (UNCTAD, WIR 2013).

phenomenon (UNCTAD, WIR 2013). However, general trend and characteristics are supported by anecdotal evidence and empirical studies. Obviously, the impact of the global financial crisis is visible and if there is a rebound in 2011 and 2012 the number of transactions was less than before the crisis whereas 2013 highlights a substantial decline for both investors.

Figure 2 shows that the number of acquisitions has followed the same orientation that the reference price of crude oil for the same period except for the last year, and this rough linkage suggests that commodity trade resources may be the main driver of SWFs strategies.

Main European destinations of Middle Eastern Sovereign Wealth Funds

Despite-or thanks to-the Eurozone crisis, Europe is the privileged destination for Middle Eastern SWFs: in 2012: 48% of total deals and 75% of investment cumulated flows (except intra-region ones) have gone to Europe [START_REF] Bortoletti | Trends and challenges in sovereign investment: the SWF discount[END_REF].

The United Kingdom is the preferred destination for UAE and Qatar's investors when they invest or expand in Europe (figures 3 and 4), as well it is also a preferred host country for total SWF investment 11 .

Behind UK one can find a handful of host countries (figure 3). The majority of the acquisitions made in Greece have been realized prior to the onset of the crisis.

At the periphery of Europe, Turkey is an attractive destination for UAE investors with 24 deals completed or pending during the period with a focus on food and beverage (4), financial services (4), and transportation (3). UK includes the largest investments. In addition, it has important commercial links with Qatar which is its largest supplier of liquefied natural gas.

For Qatari investors

France second place is due to several acquisitions or stakes in luxury hotels, fashion industry (Le Printemps, LVMH, Le Tanneur), and also to significant deals related to energy, environment and sport activities. Germany comes behind with several strategic investments in industrial sectors (Siemens, Volkswagen, Hochtief).

Turkey with 9 deals, particularly in banking (3) and broadcasting (3), is also attractive in line with a cultural proximity.

Sectoral distribution of Middle Eastern Sovereign Wealth Funds

When comparing the sectoral distribution of UAE and Qatar investors in Europe through their acquisitions or equity stakes, one can identify more differences than similarities (figures 5 and 6).

First, UAE has a larger array of major sectors including manufacturing (machinery), whereas

Qatar is more focused on services.

Second, transportation is the privileged target sector for UAE, whereas hotel business, finance and real estate are the main ones for Qatar.

Third, SWFs from UAE display rather a long-term strategy in relation with their own development with investments in specific domains (transportation, oil and gas) considered as strategic. On the opposite, investors from Qatar follow rather a financial strategy in order to get best returns in a short-term perspective. As a result, they behave as standard portfolio investors with a focus on real estate and hotel business. We can also observe that many investments by Middle Eastern SWFs in fashion and luxury brands in Europe are complementary to those made in luxury buildings and hotels. They are probably often made on grounds of prestige for the ruling family behind the SWFs.

Bank and finance

The investments made by Gulf investors in European finance are in phase with their wealth, their will to corner new markets (for example, Islamic finance), or the need to diversify their assets, along with the search for capabilities in management (table 2). These investments are buoyed by political stability, plenty of assets, and favorable macroeconomic environment at home. Indeed, according to the Union of Arab banks, the size of assets of Gulf banks stood, in

Oil and Gas, other energy

The investments by Gulf SWFs in energy are predominantly associated with their own oil and gas production, and the search of optimization of their resources along the value chain (table 3).

Investors from UAE (IPIC and TAQA) are more active than those from Qatar which so far have only equity stakes in two 'majors', Royal Dutch Shell and Total (table 3). UAE investors have stakes in oil and gas fields, not only in large companies (for example, TAQA acquired a stake, in 2012, in BP North Sea Oil Assets), but also in mid-cap firms (i.e. in Bowleven located in Edinburgh). They also acquire complementary skills in drilling.

Actually, they aspire to manage the entire production chain to become integrated operators from crude oil and gas to added-value petrochemical products or service stations, and, as a result they behave like Russian oil companies which are looking to diversify downstream internationally [START_REF] Panibratov | International strategies of Russian MNEs: Competitive advantages and the role of government, International workshop[END_REF].

Some investors are even venturing into renewable energy (wind turbine or wind cogeneration)

which is somehow a means to prepare the post-oil or gas era. United Kingdom, France, Germany, Italy, and Greece were the main destinations of these investments.

Advantages and main motives of Middle Eastern Sovereign Wealth Funds

Middle Eastern SWFs have true specific advantages which are mostly country specific: that is prominently huge and cheap financial resources coming from commodity trade (oil and gas).

As a result, they can conduct mergers, acquisitions or take minority stakes overseas, on one side, or hire talented people to manage assets or run companies, on the other. However, in very few cases, UAE or Qatari investors have built true firm specific advantages: transport and logistics are here illustrative sectors (cf. 3.5).

The motives of Gulf SWFs when coming into Europe correspond:

First, to those related to portfolio investments. As a result:

-they invest their foreign reserves surplus in assets which market displays substantial liquidity with sustainable risk;

-they diversify portfolios by selecting different classes of assets.

Second, they follow a long-term strategy as they want to ensure, by 2030, more income from foreign investments than from gas and oil's revenues. In this perspective, they try to acquire stakes in companies having good potential returns and valuable technologies and brands.

Stakes acquired in European companies are sometimes seen as strategic investments Third, political issues can drive investments: the Al Jazeera television network is here a prominent example of a kind of "soft power".

As a conclusion: assessing consequences of the presence of Middle Eastern Sovereign Wealth Funds in Europe

The investments from Middle Eastern SWFs in Europe remain unknown for a large part, except a handful of very visible investments in sponsorship into prominent European football teams. The fact that they concern a little number of investments and minority stakes in European enterprises can make them kind of harmless.

However, the recent increase in SWFs resources-stimulated by the global financial crisesprovide them opportunities of buyouts in industrialized countries, and particularly in Europe where enterprises or banks encountered financial difficulties or shareholders wanted to divest.

These investments are more and more courted by European governments in search of financial resources. They are also welcome by enterprises seeking 'ad hoc' or ephemeral partnerships, the time to strengthen their cash positions in order to continue their growth and investment-i.e. a kind of bridge financing (noticeable in the automotive industry and finance).

They can also contribute to rescue companies or to support employment as, to date, there is no evidence of major negative consequences for employment at the EU level (Diaz-Fuentes & Clifton, 2010).

In addition, SWFs' investments can help stimulate the investments of European companies in the Middle East, insofar as they strengthen inter-governmental relationships and potentially increase the opportunities for direct co-investments. Such reciprocity is obvious, for instance, in sectors of civil engineering because Persian Gulf countries actually have large projects in infrastructure-e. g., roads, metros, airports. For instance, while Qatar has stakes in the French company Vinci, the latter is in charge of many construction sites in Qatar.

But they may raise concerns among policy-makers on regulatory issues (lack of transparency, corruption), and the important role played by their government which may follow long-run policy. Don't forget that SWFs are strategic by their very nature.

Figure 1 .

 1 Figure 1. Number of acquisitions in Europe by investors from Qatar and UAE 2000-2013

Figure 2 .

 2 Figure 2. Number of acquisitions in Europe by investors from UAE and Qatar, and crude oil prices, 2000-2013

Figure 4 .

 4 Figure 4. Main European host countries for Qatari investors 2000-2013(number of acquisitions)

Figure 5 .

 5 Figure 5. Main target sectors for UAE investors in Europe, 2000-2013 (number of acquisitions)

  2012, at 1.3 trillion of dollars, i.e. around 80% of the total of the top 100 Arab banks. Besides stakes in large banks (Barclays or HSBC in UK, Dexia in Belgium, Credit Suisse in Switzerland or UniCredit in Italy), the sector encompasses a larger array of deals concerning investment companies, security brokerages, insurance services or stock exchanges. Financial investments from UAE are driven by Dubai which authorities set up, in 2004, an 'ad-hoc' SWF, Dubai International Financial Centre.

  providing the investors an access to capabilities and knowledge of first-rank companies. For instance, the equity investments of QIA in Hochtief (2010) or Siemens (2012) are viewed as part of a broader strategic alliance to be close to the German market. Besides stakes or acquisitions, SWFs can have a more pro-active behavior by setting partnerships with European global players (e.g. Airbus, Total or Rolls-Royce).

2. Who are the investors from Middle East in Europe?

	However, SWFs of smaller size (i.e. International Petroleum Investment Company/ IPIC from
	Abu Dhabi, or Istithmar World or Dubai International Capital from Dubai) are more active
	and take stakes in private equity funds, hedge funds or select their targets on political or
	strategic considerations. For example, IPIC invest globally in energy and related industries.
	Some SWEs, as Qatar Sports Investments, can take full control and run a company.
	Last, Gulf SWFs have initiated several partnerships with European companies. Indeed,
	Mubadala Development from Abu Dhabi has partnerships which encompass a broad range of
	business initiatives and areas of joint cooperation with first-rank European firms-i.e. Airbus
	and Total from France, Finmeccanica and its subsidiary Alenia Aeronautica from Italy,
	Siemens from Germany, or Rolls-Royce from UK.
	To conduct our empirical research, we have set-up a dataset on the mergers and acquisitions
	carried out by investors from UEA and Qatar in Europe during the period 2000-2013 7 . First,
	rough data were extracted from the Thomson Reuters database on mergers and acquisitions
	which is regularly updated. Second, the above data have been matched by complimentary
	information collected from a systematic gathering of economic news on the same topic from a
	variety of newspapers, including the Financial Times and The Economist. The resulting dataset
	includes approximately 250 deals completed or pending: i.e. 179 for investors from UEA origin and
	79 for Qatari investors.

1.

Sovereign Wealth Funds from UAE in Europe

  When considering UAE investors, one finds, on the one side, public investors operating through SWFs (box 1), SWEs (e.g. Tamweelview European Holdings or Infinity Investments), or zones administered by local authorities (Dubai International Financial Centre, for example). On the other side, there are private investors including local societies, very wealthy individuals or foreign companies from different origins, such as Dubai in particular. Some investments made by so-called 'private' persons are often made by members of the ruling family or Ministers' families, so, they can be likened to public-i.e. with a more general interest. On the opposite 'public' entities can act as pure opportunistic individuals. For example, the Sheik Mansour from Abu Dhabi remained in 2010 shareholder of the British bank Barclays after IPIC sold its stake. Furthermore, he personally acquired, in 2008, a 90% stake for £210 million in the British football team, Manchester City.

	Box 1. water desalination, oil and gas exploration and production, and technologies. TAQA has a subsidiary
	in Netherlands (storage and exploration of oil and gas both on-and offshore), and another one in UK
	(5 platforms across the Northern and the Central North Sea, among others)
	TDIC (Tourism Development & Investment Co.) develops and invests in the tourism industry

ADIA (Abu Dhabi Investment Authority) 9 : it is the world's second largest SWF in terms of overall assets (around $773 billion in January 2014)

10

. It has divisions specialized in equities, real estate, alternative investments, and infrastructure Aabar Investments PJS, subsidiary of IPIC (95.5%): it is engaged in investing activities in various industries (infrastructure, aviation, real estate, automotive, commodities, energy and financial services) ADBIC (Abu Dhabi Basic Industries Corporation Investment Co.) invests in industrial sectors, basic materials, and metal production Dubai Holdings, with its arm Dubai International Capital, invests in public and private equity (midcap companies in Europe and North America) IPIC (International Petroleum Investment Company): it focuses investments in oil, hydrocarbons and energy abroad

(exploration, production, pipelines, petrochemicals, etc.)

Mudabala Development: established in 2002, it is the principal agent of the diversification of Abu Dhabi's economy. It invests in infrastructure and industrial sectors. Its aim is to manage long-term investments intended to deliver strong financial returns and tangible social benefits for the Emirate TAQA (Abu Dhabi National Energy Co.) invests in power generation (wind and solar projects),

9

It was set up in 1976 to replace the Financial Investments Board which was created in 1967.

10

In early 2014, the world's largest SWF is from Norway.

  government, whereas Italy attraction lies in jewelry, fashion and manufacturing. France encompasses a variety of activities from clothing up to hotel business and software.

	2.1.	For UAE investors
		Figure 3. Main European host countries for UAE investors, 2000-2013
		(number of acquisitions)
		Others; 38	UK; 59
		Sweden; 6
		Netherlands; 6
		Greece; 6
		Italy; 9
		France; 10	Germany; 30
		Spain; 15
	Source: from Thomson Reuters, April 2014	Total number: 179 acquisitions
	The attractiveness of the UK lies in transport and logistic activities, before sports, particularly
	football (table 5), and finance. Real estate and non residential are also targeted due to
	attractive fiscal regime and latent capital benefits.
	Germany is attractive in professional services (engineering) and transport. Interestingly, Spain

pulls investors in agriculture, in relation with the strategic food security program set up by

11

For the period 2000-12 UK attracted $70 bn, i.e. 13.7% of total value

[START_REF] Bortoletti | Trends and challenges in sovereign investment: the SWF discount[END_REF]

. UAE

Hotel business, property and real estate

  European investments from Gulf investors, particularly from Qatar, in hotel business and nonresidential have expanded during the last years, with sometimes large amounts. They have taken advantage of the euro debt crisis and resulting fresh opportunities to buy hotels and property at attractive prices. Qatari investors have selected ritzy residential complex in European capitals as One Hyde Park in London, luxurious hotels along with beach resorts, marinas or golfs and spas which have flourished since 2008 in France-Paris and French Riviera-and Italy (table1). One can be quite astonished by the relative high level of public investors in hotel business. In fact, they are viewed as basically financial, with high potential returns; in other words, they ensure capital for the future and regular steady income.Gulf investors are also attracted by fiscal incentives as in UK or France. Indeed in France, Qatari investors are exempted since 2008 from the tax on the capital gains on immovable property as well as of wealth tax during their first five years of residency.

	freight forwarding services or cruise ships. Indeed, SWF Istithmar from Dubai acquired, in
	2007, the Queen Elisabeth 2 cruise ship of Cunard Line from London.
	Others
	Auto
	Transportation
	Chemicals
	Sports
	Real Estate
	Finance, Insurance
	Hotel
	0	5	10	15	20	25
	Overall, this interest is driven by different but converging reasons. The search for
	geographical expansion is very important. Can be evoked, for instance, the will of the local
	carrier, Etihad Airways, to expand abroad by taking stakes in European companies (Air Berlin
	and Cargolux Airways), in order to face a severe competition from neighboring companies
	(Emirates and Qatar Airways). Another reason lies in the political commitment of UAE
	authorities to promote locally a zone for aviation activities.
	Shipping activities are another point of interest: they include either hard undertakings such as

Transportation is targeted by UAE investors and contrary to other sectors one can find locally global players such as Dnata in combined air services

12

or Dubai Ports/ DP World 13 in container and terminal operations.

UAE investors focus two sub-domains: civil aviation and shipping. The former includes services (air transportation, aircraft maintenance, cargo handling, catering or leasing) as well as manufacturing activities (aerospace equipment, jet engines). It also includes infrastructure such as airport: for instance, SWF ADIA acquired, in 2010, a minority stake in Gatwick Airport, London's second-biggest airport.

shipbuilding and ship repair, docks and container terminals, and more soft ones such as

12

In 2014, the company has a payroll of 23 000 and offices in 38 countries, including 7 European countries.

13

In 2014, DP World has 28 000 people across 6 continents.

3.2.

Table 1 . Main investments in hotel business made by Qatari investors in Europe 2000-2013

 1

	European country	Target company	Year	Investor	Share
	France	Hotel Martinez, Cannes	2012	Katara Hospitality	-
	France	Hotel du Louvre, Paris	2012	Katara Hospitality	-
	France	Concorde Lafayette, Paris	2012	Katara Hospitality	-
	France	Carlton Hotel, Cannes	2012	Ghanim Bin Saad Al Saad	100%
	France	Le Royal Monceau, Paris	2012	Katara Hospitality	100%
		Société fermière de Cannes -	2008	QIA
	France	Hotel Majestic and Hotel Gray			22.7%
		d'Albion
	Italy	Excelsior Hotel Gallia, Milan	2006	QIPCO Holding	-

Table 2 . Main investments made by UAE and Qatari investors in banking and finance sector in Europe, 2000-2013 UAE investors

 2

	European	Target
	Country	company	Year	Investor	Share	Amount
			2009		4%
	Italy	Unicredit	2012	Aabar	6.5%	-
		Falcon Private
	Switzerland	Bank	2009	Aabar		-
		Clariden Leu
	UK	Falcon Private Wealth	2013	Aabar	100%	$2bn
				Sheik
	UK	Barclays Bank	2010	Mansour		-
	UK	Carlyle Europe	2007	Mudabala	7%	-
	Qatar investors
	European	Target
	Country	company	Year	Investor	Share	Amount
	Greece	Alpha Bank	2012	QIA	7%	$685mn
	Greece	Eurobank EFG	2012	QIA	7%	€500mn
		Banco		QIA
	Spain	Santander	2010		5%	$1.95bn
		Brazil
	Sweden	Nordic exchange OMX	2007	QIA	10%	-
	Switzerland	Credit Suisse	2013	QIA	7%	$4.5bn
	UK	Barclays Bank	2008	QIA	30%	$8bn
	UK	London Stock Exchange	2007	QIA	20%	-
	Sources: from Thomson Reuters and systematic gathering of economic news, April 2014

Table 3 . Main investments made by UAE and Qatari investors in the energy sector in Europe, 2000-2013 UAE investors

 3 Strategic reasons could also explain such a move: the candidacy of Qatar for the 2022 FIFA World Cup is a prominent example 15 . Last, some projects (Aspire Zone Foundation or Anglo Holding) are driven by true philanthropic motives. If support by UAE investors concerns more European countries than Qatar, with a focus on UK and Germany, Qatari investors have targeted France, particularly Paris, to set up a team able to compete with European super-teams (table 4). The acquisition of the remaining 30% of Paris Saint-Germain in 2012 by SWE Qatar Sports Investment is probably related to the candidacy of Qatar previously mentioned. Such investments as they channel huge financial resources to already most affluent teams, are contributing to change the rule of the game in European football by cutting the power of national federations. These considerations were taken into consideration in 2013 and the Union of European Football Association declared in mid-2014 after an audit of major European clubs that Paris Saint-Germain, Malaga CF and Manchester City FC-all supported by Gulf investors-(among 6 others) have not respected the rules of financial fair play and have to pay a fee and would have limited budgets for the coming years.

	European
	country	Target company	Year	Investor	Sub-sector	Share	Amount
	Austria	Borealis	2009	IPIC	chemistry	65%	-
	Austria	Austria OMV	2011	IPIC	oil gas		-
					renewables
					energies
	Finland	WinwinD	2008	Mudabala	(wind)	25%	$165mn
					renewables		-
	France	Theolia	2008	TAQA	energies	50%
					renewables		-
					energies
	Germany	Masdar solar farm	2012	Mudabala	(solar)	100%
		BP Nederland					-
	Netherlands	energie BV	2006	TAQA	oil	-
				ADIA &			-
	Norway	Gassled	2011	consortium	gas	24.10%
				Infinity			-
	Norway	Stateoil	2011	Investment	oil	24.10%
	Spain	Cepsa	2011	IPIC	oil	96%	€3.7bn
					renewables		-
					energies
	Spain	Torresol energy	2010	Mudabala	(solar)	-

Table 4 . Acquisitions, stakes and sponsorship in European football by Gulf investors

 4

	European		Investor	Year	Investor
	country	Target company			origin	Share	Amount
	Belgium	Club KAS Eupen (2 nd Division)	Aspire Zone Foundation	2012	Qatar	100%	-
		FC Vestsjaelland)	Anglian Holding	2011	UAE		-
	Danemark		(multinational conglomerate from			-
			Indian origin)
	France	Paris Saint-Germain	Qatar Sports Investment (SWF)	2011	Qatar	70% 2	€595.5M 1
	Germany	Hamburg SV	Fly Emirates	2012	UAE		sponsorship
	Germany	TSV Munich von 1860	Hasan Abdullah Mohamed Ismaik	2011	UAE	49%	€18M
			(individual)
	Italy	Milan AC	Fly Emirates	2007	UAE		sponsorship
	Spain	Real Madrid	Fly Emirates	2013	UAE		€150M 3
	Spain	FC Barcelona	Qatar Airways	2013	Qatar	-	€95.5M 4

5 €50M expenses were added afterwards

3.6. Investments in industry and trade

Investments made by Middle Eastern SWFs in industrial and trade sectors rose these last years in Europe, in line with the search of diversification, new opportunities of acquisition and divestments by former shareholders (table

5

).

The contracts can also include the construction of a new stadium as in London for Arsenal FC. Besides, their involvement covers other sports (e.g. rugby or tennis).

Fly Emirates is already supporting since 2005 the international federation for the World Cup.

Sports

This sector is privileged, both, by investors from UAE and Qatar, particular in football.

Reasons lie in the will to communicate and advertise across Europe on their home countries.

Gulf airlines companies are aggressively seeking worldwide brand recognition through an impressive portfolio of sponsorship rights in prominent European football teams 14 . In parallel, support of European football teams is important and mostly driven by personal motives with very wealthy persons including the Emir of Abu Dhabi. This commitment is not specific to Gulf investors as it is shared by other Southern investors (Russian oligarchs and Latina tycoon).