The Impact of Euro on Trade: The (Early) Effect is not so Large
AbstractWe 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 that can be 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, where short run effects, like trade persistence, may 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 Roses’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, they certainly are not by the order indicated in the existing literature), particularly if the structural change implied by the new currency regime (intra-EMU trade is potentially equivalent to domestic trade) becomes completely interiorised in the perception and the behaviours of Euroland citizens.
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Bibliographic InfoPaper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 31.
Length: 28 pages
Date of creation: Jan 2003
Date of revision:
Bilateral; Economic Integration; Dynamic Panel Data;
Find related papers by JEL classification:
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
- F15 - International Economics - - Trade - - - Economic Integration
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
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