Has the Euro Increased International Price Elasticities?

Oliver Holtemöller and Goetz Zeddies

No 18/2010, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: The introduction of the Euro has been accompanied by the hope that intra-EMU trade would increase and that prices would converge due to increased elasticities of international substitution. This paper contributes to the literature on the Euro's effects on international trade by analyzing price elasticities in international trade flows between Germany and France and between Germany and the United Kingdom before and after the introduction of the Euro. Using disaggregated Eurostat trade statistics for up to 715 product categories, we adopt a heterogeneous dynamic panel framework for the estimation of price elasticities. We suggest a Kalman-filter approach to control for unobservable quality changes which otherwise would bias estimates of price elasticities. This approach delivers reasonable estimates of price elasticities for a broad set of products. Furthermore, we divide the complete sample, which ranges from 1995 to 2008, into two sub-samples and show that the hypothesis that price elasticities in trade between EMU members did not change substantially after the introduction of the Euro cannot be rejected. This result is robust with respect to changes in the estimation technique.

Keywords: European Integration; introduction of the Euro; import price elasticity; panel data; Kalman-filter; structural vector autoregression; Europäische Integration; Euro-Einführung; Preiselastizität der (Import-) Nachfrage; Paneldaten; Kalman-Filter; strukturelles vektorautoregressives Modell (search for similar items in EconPapers)
JEL-codes: C32 C33 F14 F15 F41 (search for similar items in EconPapers)
Date: 2010
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Journal Article: Has the Euro increased international price elasticities? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:iwh-18-10

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