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The Trade and FDI Effects of EMU Enlargement

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  • Jelle Brouwer
  • Richard Paap

    ()

  • Jean-Marie Viaene

    ()
    (Erasmus University Rotterdam)

Abstract

This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the 10 countries that obtained EU membership in 2004. One-way and two-way error component gravity models are estimated using a data set of unbalanced panel data that combine bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries. The results reveal a complementarity between trade and investment and a relationship between trade and exchange rate volatility that depend on the sign of bilateral trade balances. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5% for Poland and 30% for Hungary. This discussion paper has resulted in a publication in the Journal of International Money and Finance , 2008, 27(2), 188-208.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 07-077/2.

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Date of creation: 04 Oct 2007
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Handle: RePEc:dgr:uvatin:20070077

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Keywords: EMU; exchange rate volatility; foreign investment; trade diversion; vertical integration;

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