Putting currency misalignment into gravity: The currency union effect reconsidered

Jan Hogrefe, Benjamin Jung and Wilhelm K. Kohler

No 32, University of Tübingen Working Papers in Business and Economics from University of Tuebingen, Faculty of Economics and Social Sciences, School of Business and Economics

Abstract: Member countries of a currency union like the euro area have absorbed asymmetric shocks in ways that are inconsistent with a common nominal anchor. Based on a reformulation of the gravity model that allows for such bilateral misalignment, we disentangle the conventional microeconomic trade effect and macroeconomic trade effects deriving from bilateral misalignment within currency unions. Econometric estimation reveals that for the euro area the misalignment channel exerts a significant trade effect on bilateral exports. We retrieve country-specific estimates of the misalignment-induced effect on trade which demonstrate heterogeneous outlooks across countries for the costs and benefits from adopting the euro.

Keywords: Euro; gravity model; exchange rates; trade imbalances (search for similar items in EconPapers)
JEL-codes: F12 F13 F15 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-eec, nep-int, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Readdressing the trade effect of the Euro: Allowing for currency misalignment (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:tuewef:32

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