Abstract Recent empirical evidence has highlighted how the export patterns of multi-product firms dominate world trade flows, and how these multi-product firms respond to different economic conditions across export markets by varying the number of products they export. In this paper, we further analyze the effects of those export market conditions on the relative export sales of those goods: we refer to this as the firm's product mix choice. We build a theoretical model of multi-product firms that highlights how market size and geography (the market sizes of and bilateral economic distances to trading partners) affects both a firm's exported product range and its exported product mix across market destinations. We show how tougher competition in an export market -associated with a downward shift in the distribution of markups across all products sold in the market -induces a firm to skew its export sales towards its best performing products. We find very strong confirmation of this competitive effect for French exporters across export market destinations. Our theoretical model shows how this effect of export market c o m p e t i t i o n o n a f i r m ' s p r o d u c t m i x t h e n t r a n s l a t e s i n t o d i f f e r e n c e s i n m e a s u r e d f i r m productivity. Thus, a firm operating a given technology will produce relatively more output per worker when it exports to markets with tougher competition. This productivity gain is further compounded by the effect of competition on the mix of exported products. ____________________________ *We thank Steve Redding for helpful comments and suggestions. Ottaviano thanks MIUR and the European Commission for financial support. Melitz thanks the Sloan Foundation for financial support.

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The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium.

Tommaso Padoa-Schioppa was one of the great architects of the euro. He is remembered in particular as co-rapporteur for the Delors Committee and as a founding member of the European Central Bank's Executive Board. For Padoa-Schioppa, becoming Director-General of the European Commission's DG II (from 1979 to 1983), was a defining moment in his career and life. This period is the main focus of this paper. At the Commission, Padoa-Schioppa's main priority was the European Monetary System, which was launched in March 1979. He was closely involved in several projects to strengthen the EMS, to improve economic policy convergence and the position of the ECU. The other main objective for Padoa-Schioppa was the strengthening of DG II's analytical capacity, especially its model-building capacity and its links with the academic world. As such, he played a crucial role in the professionalisation of economics at the Commission and in preparing DG II for the important role it would play in the EMU process. At the Commission, Padoa-Schioppa became also immersed in several European networks. Of crucial importance here were his contacts with Jacques Delors. This would be of major importance for his further career, becoming one of the architects of the single currency.

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks-that dimension has so far received little attention in the macro literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.

Since the intensification of the financial crisis in September 2008 many euro area countries have provided financial support to their banking system and have adopted expansionary fiscal policies to counter the negative effects of the economic downturn. Together with the operation of automatic stabilisers this has led to a sharp deterioration of public finances. Against this backdrop, this paper discusses the risks to the sustainability of public finances as they may arise from adverse developments in the primary fiscal balance, output growth, interest rates and stock-flow adjustments. In addition, simulations for the euro area government debt-ratio over the period 2010-2030 are provided. Even abstracting from the increasing costs of ageing, they point to the risk of a rapidly rising debt ratio. In order to prevent such developments, there is a need to implement a credible fiscal adjustment strategy, which would restore confidence in the sustainability of public finances.

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Statement of purpose: The purpose of these working papers is to promote the circulation of research results (Research Series) and analytical studies (Documents Series) made within the National Bank of Belgium or presented by external economists in seminars, conferences and conventions organised by the Bank. The aim is therefore to provide a platform for discussion. The opinions expressed are strictly those of the authors and do not necessarily reflect the views of the National Bank of Belgium.

The aim of this paper is to analyze how the primary government balance in Central and Eastern European countries reacts in the short term, in order to assess fiscal sustain-ability in the long run. For the purpose of this study, a fiscal reaction function is used. Given the different orders of integration of the variables involved in the model, modified forms of the fiscal reaction function are considered. The results show that for Bulgaria,