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The Impact of the Euro on Trade: The (Early) Effect is Not So Large

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Abstract

We investigate the impact of the euro adoption on commercial transactions of EMU countries. We refer to the abundant gravity-model literature about the effect of Currency Unions on trade originated by Rose (2000). We adapt this kind of modelling to the specific case of the European Monetary Union drawing from former literature some guidelines summed up as follows: distinction of "pure" common currency from exchange rate volatility effect; selection of sample of countries strictly focussed on EMU economies; consideration of time as well as space dimension; inclusion of other political factors promoting integration. We add to these provisions the observation that the panel estimation of the gravity equation must be dynamic, because EMU is a young phenomenon; short run effects, like trade persistence, can hence play a crucial role. Our main finding is that the euro adoption has had a positive but not exorbitant impact on bilateral trade of European countries (the estimated percentage increase ranges between 2.6 and 6.3%), much lower than that derivable from Rose's estimates referred to a larger and heterogeneous set of countries (providing a trade increase following the adoption of a common currency by as much as 200%). Our results refer to short-run impacts; long-run effects could be stronger (but, in our opinion, not by the order of a doubling or a trebling effect indicated in the existing literature on currency unions), particularly if the structural change implied by the new currency regime (a fraction of foreign trade is potentially equivalent to domestic trade) becomes completely internalised in the perception and the behaviour of Euroland citizens.

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Bibliographic Info

Paper provided by European Network of Economic Policy Research Institutes in its series Economics Working Papers with number 017.

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Length: 20 pages
Date of creation: Apr 2003
Date of revision:
Handle: RePEc:epr:enepwp:017

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Keywords: Bilateral; Economic Integration; Dynamic Panel Data.;

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Cited by:
  1. Richard E. Baldwin & Virginia Di Nino, 2006. "Euros and Zeros: The Common Currency Effect on Trade in New Goods," NBER Working Papers 12673, National Bureau of Economic Research, Inc.
  2. Petr Gocev, 2011. "Prospects of Adopting the Euro in the Czech Republic," ACTA VSFS, University of Finance and Administration, vol. 5(2), pages 177-185.
  3. Aristovnik, Aleksander & Matevz, Meze, 2009. "The Economic and Monetary Union’s effect on (international) trade: the case of Slovenia before euro adoption," MPRA Paper 17445, University Library of Munich, Germany.
  4. Joan Costa-i-Font, 2010. "Regional single currency effects on bilateral trade with the European Union," LSE Research Online Documents on Economics 53292, London School of Economics and Political Science, LSE Library.
  5. Michael Diederich, 2011. "Corporate Governance in Germany," ACTA VSFS, University of Finance and Administration, vol. 5(2), pages 148-165.
  6. Jaroslav Vostatek, 2011. "The Role of Governance in Pension Systems," ACTA VSFS, University of Finance and Administration, vol. 5(2), pages 106-125.
  7. Karel Lacina, 2011. "Remarks to the Development of Public Administration from the Concept of ½Government½ to the Concept of ½Governance½," ACTA VSFS, University of Finance and Administration, vol. 5(2), pages 126-147.
  8. Ladislav Prusa, 2011. "Public Governance, Social Services and Social Assistance Benefits," ACTA VSFS, University of Finance and Administration, vol. 5(2), pages 166-176.
  9. Salvador Gil-Pareja & Simon Sosvilla-Rivero, 2007. "Price convergence in the European car market," Applied Economics, Taylor & Francis Journals, vol. 40(2), pages 241-250.

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