Trade effects of the euro - evidence from sectoral data

Richard Baldwin, Frauke Skudelny () and Daria Taglioni ()
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Frauke Skudelny: Corresponding author: European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 446, Working Paper Series from European Central Bank

Abstract: This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries.

Keywords: Rose effect; exchange rate volatility; monetary union; sectoral trade; gravity. (search for similar items in EconPapers)
JEL-codes: F12 C33 E0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec, nep-ifn, nep-int and nep-mac
Date: 2005-02
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