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Modelling intra- and extra-area trade substitution and exchange rate pass-through in the euro area

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Author Info
Alistair Dieppe () (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Thomas Warmedinger () (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)

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Abstract

The paper proposes a modelling approach for euro area goods and services trade volumes and prices on the basis of a break-down of trade data into their intra- and extra-area components. Using the evidence from the newly estimated trade equations, the paper gives new insights into two important issues. The first issue concerns the exchange-rate pass-through (ERPT) to euro area import prices. The second issue relates to substitution effects between intra- and extra-area trade. These issues are further elaborated through simulation analyses using the ECB’s area-wide model (AWM). The simulations illustrate the impact of external and domestic shocks to trade in the euro area, in particular on intra- and extra-area trade. The richer dynamics from this disaggregated perspective provide additional insights and elucidate transmission channels of shocks that are not detectable from an aggregate (i.e. total trade) perspective. For instance, one interesting finding is that an appreciation of the euro has a significant downward impact on intra euro area trade. JEL Classification: E31, F17, C5.

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Paper provided by European Central Bank in its series Working Paper Series with number 760.

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Length: 57 pages
Date of creation: Jun 2007
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Handle: RePEc:ecb:ecbwps:20070760

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Related research
Keywords: Intra-/ extra-area trade euro area competitiveness and trade substitution exchange-rate passthrough pricing-to-market.

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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  3. Dieppe, Alistair & Henry, Jerome, 2004. "The euro area viewed as a single economy: how does it respond to shocks?," Economic Modelling, Elsevier, vol. 21(5), pages 833-875, September. [Downloadable!] (restricted)
  4. Campa, José Manuel & Goldberg, Linda S & González Mìnguez, Jose Manuel, 2005. "Exchange Rate Pass-Through to Import Prices in the Euro Area," CEPR Discussion Papers 5347, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  5. 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)
  6. Nigel Pain & Annabelle Mourougane & Franck Sédillot & Laurence Le Fouler, 2005. "The New OECD International Trade Model," OECD Economics Department Working Papers 440, OECD Economics Department. [Downloadable!]
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  8. Massimo Giuliodori & Roel Beetsma, 2005. "What are the Trade Spill-Overs from Fiscal Shocks in Europe? An Empirical Analysis**," De Economist, Springer, vol. 153(2), pages 167-197, 06. [Downloadable!] (restricted)
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  11. Hamid Faruqee, 2004. "Measuring the Trade Effects of EMU," IMF Working Papers 04/154, International Monetary Fund. [Downloadable!]
  12. Ploberger, Werner & Kramer, Walter, 1992. "The CUSUM Test with OLS Residuals," Econometrica, Econometric Society, vol. 60(2), pages 271-85, March. [Downloadable!] (restricted)
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  14. Elke Hahn, 2003. "Pass-through of external shocks to euro area inflation," Working Paper Series 243, European Central Bank. [Downloadable!]
  15. Kirstin Hubrich, 2004. "Forecasting euro area inflation: Does aggregating forecasts by HICP component improve forecast accuracy?," Computing in Economics and Finance 2004 230, Society for Computational Economics. [Downloadable!]
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  16. Campa, Jose M. & Gonzalez, Jose M., 2002. "Differences in exchange rate pass-through in the euro area," IESE Research Papers D/479, IESE Business School. [Downloadable!]
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  17. Robert Anderton, 2003. "Extra-euro area manufacturing import prices and exchange rate pass-through," Working Paper Series 219, European Central Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Guido Wolswijk, 2007. "Short- and long-run tax elasticities - the case of the Netherlands," Working Paper Series 763, European Central Bank. [Downloadable!]
  2. Philipp Engler & Michael Fidora & Christian Thimann, 2007. "External imbalances and the US current account - how supply-side changes affect an exchange rate adjustment," Working Paper Series 761, European Central Bank. [Downloadable!]
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