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Euros and zeros: The common currency effect on trade in new goods

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Abstract

This paper tests whether trade in new goods were partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data (about 16 million observations) set covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.

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Bibliographic Info

Paper provided by Economics Section, The Graduate Institute of International Studies in its series IHEID Working Papers with number 21-2006.

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Length: 25
Date of creation: Sep 2006
Date of revision: 31 Oct 2006
Handle: RePEc:gii:giihei:heiwp21-2006

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Keywords: heterogeneous firms; Eurozone trade effects; Melitz model; extensive margin.;

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