The effect of a common currency on the volatility of the extensive margin of trade

Stéphane Auray, Aurélien Eyquem and Jean-Christophe Poutineau ()

Journal of International Money and Finance, 2012, vol. 31, issue 5, 1156-1179

Abstract: This paper studies the effects of the European monetary unification on the volatility of the extensive margin of trade. First, we highlight empirical novel facts about the effects of monetary unification. We build country-level measures of the extensive margin of intra-EMU exports and describe how their volatilities evolved over time. We show that the adoption of a common currency has been associated with an increase of the volatility of the extensive margin of exports for most countries, and a decrease in the volatility of the extensive margin of exports for Germany. Second, we address this question theoretically and build a two-country version of the model of Ghironi and Melitz (2005) with endogenous entry, heterogenous firms, endogenous tradability, endogenous labor supply and sticky prices. We compare the volatility of the extensive margin of trade under fixed exchange rates and in a monetary union. Monetary unification does imply an increase in the volatility of the extensive margin of trade for pre-EMU followers (such as France or the Netherlands) and a decrease in the volatility of the extensive margin of trade for the leader (Germany). This pattern is qualitatively consistent with the data but arises only if monetary policy responds moderately to output.

Keywords: Extensive margin; Variety effect; Monetary union; Monetary policy (search for similar items in EconPapers)
JEL-codes: E32 E52 F41 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (16)

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Working Paper: The Effect of a Common Currency on the Volatility of the Extensive Margin of Trade (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:31:y:2012:i:5:p:1156-1179

DOI: 10.1016/j.jimonfin.2011.12.016

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