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The Euro and the CFA Franc: Evidence of Sectoral Trade Effects

Inmaculada Martínez-Zarzoso

Open Economies Review, 2019, vol. 30, issue 3, 483-504

Abstract: Abstract This paper estimates a gravity model of trade to evaluate the trade effects of the Euro on sectoral trade within the Eurozone (EZ), the CFA Franc Zone (CFA) and between the EZ and the CFA, when CFA countries acquired fixed rates against the non-francophone EZ members. The formation of the EZ provides a quasi-natural experiment to estimate the effects on trade of fixed exchange rates, since the change in exchange rate regime for CFA countries with all EZ countries but France was not trade related. This is tested using sectoral trade data for 175 countries over the period 1995–2016 and validated using a longer time period starting in the seventies. The main departure from Frankel (2008), is the estimation of a structural gravity model using sectoral trade and bilateral-sectoral fixed effects as well as controls for multilateral resistance, namely time varying country-sector fixed-effects for exporters and importers, in a PPML framework. The main results indicate that the introduction of the Euro does show positive and significant effects for export flows from the CFA to other EZ countries different from France, whereas exports in the opposite direction are negatively affected. Moreover, the results differ by sector and we find that agricultural and homogeneous goods exports from CFA countries to Euro adopters increased by around forty and hundred twenty percent, respectively after the euro adoption.

Keywords: CFA; Euro effect; Bilateral trade; Panel data; Rauch classification; Sectoral trade; PPML; Structural gravity (search for similar items in EconPapers)
JEL-codes: F10 F14 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:kap:openec:v:30:y:2019:i:3:d:10.1007_s11079-018-09520-8