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The Importance of Accounting for Time Trends when Estimating the Euro Effect on Trade

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Author Info
Maurice J.G. Bun () (Faculty of Economics and Econometrics, University of Amsterdam)
Franc J.G.M. Klaassen () (Faculty of Economics and Econometrics, University of Amsterdam)

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Abstract

To study the effect of the euro on international goods trade one typically estimates a panel model for the level of trade. Trade levels increase over time, and we show that this is not fully explained by the included regressors. Because the euro is only present at the end of the sample, this may have led to an upward bias in existing euro estimates to help explain the upward trend. To correct for that, we extend the panel model (a gravity model) by including a time trend that may have different effects across country-pairs. Data on industrialized countries over 1967-2002 show the existing euro effects of between 5% and 40% shrink to a statistically insignificant 3%. For comparison, the estimated trade effects of other currency unions are reduced from 90% to 25%. Hence, accounting for time trends matters.

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Publisher Info
Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 03-086/2.

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Date of creation: 21 Oct 2003
Date of revision: 14 Oct 2004
Handle: RePEc:dgr:uvatin:20030086

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Web page: http://www.tinbergen.nl/

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Related research
Keywords: currency union deterministic trend EMU fixed effects gravity model panel data

Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
F15 - International Economics - - Trade - - - Economic Integration
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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References listed on IDEAS
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  1. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CES, MSH, vol. 15(30), pages 7-46, 04. [Downloadable!] (restricted)
  2. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 315-356, October. [Downloadable!] (restricted)
  3. Bergstrand, Jeffrey H, 1989. "The Generalized Gravity Equation, Monopolistic Competition, and the Factor-Proportions Theory in International Trade," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 143-53, February. [Downloadable!] (restricted)
  4. Wansbeek, Tom & Kapteyn, Arie, 1989. "Estimation of the error-components model with incomplete panels," Journal of Econometrics, Elsevier, vol. 41(3), pages 341-361, July. [Downloadable!] (restricted)
  5. David Barr & Francis Breedon & David Miles, 2003. "Life on the outside: economic conditions and prospects outside euroland," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 573-613, October. [Downloadable!] (restricted)
  6. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2003. "A generalized design for bilateral trade flow models," Economics Letters, Elsevier, vol. 80(3), pages 391-397, September. [Downloadable!] (restricted)
  7. Maurice J.G. Bun & Franc J.G.M. Klaassen, 2002. "Has the Euro increased Trade?," Tinbergen Institute Discussion Papers 02-108/2, Tinbergen Institute. [Downloadable!]
  8. Cornwell, Christopher & Schmidt, Peter & Sickles, Robin C., 1990. "Production frontiers with cross-sectional and time-series variation in efficiency levels," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 185-200. [Downloadable!] (restricted)
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