The euro's trade effect under cross-sectional heterogeneity and stochastic resistance

Helmut Herwartz and Henning Weber

No 1631, Kiel Working Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: This paper investigates if the euro's effect on euro-area trade differs across trade sectors and across country pairs, and to what degree heterogeneity matters for estimating the aggregate euro effect. Time-varying latent variables, which are specific to each sector in each country pair, control for omitted trade costs and mismeasured resistance terms. Parameter heterogeneity and time-varying latent variables are both strongly supported by the data. Due to decreasing trade costs, aggregate exports within the euro area increase between 2000 and 2002 by 15 to 25 percent compared with aggregate exports between European economies which are not members of the euro area. Adjustment within individual sectors is rapid whereas aggregate adjustment is more spread out and gradual since different sectors adjust at distinct times.

Keywords: Euro's trade effect; parameter heterogeneity; smooth-transition model (search for similar items in EconPapers)
JEL-codes: C31 C33 F13 F15 F33 F42 (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwkwp:1631

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