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The Impact of Euro on Trade: The (Early) Effect is not so Large

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Author Info

  • Sergio de Nardis

    (ISAE - Institute for Studies and Economic Analyses)

  • Claudio Vicarelli

    (ISAE - Institute for Studies and Economic Analyses)

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 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 Info

Paper provided by ISTAT - Italian National Institute of Statistics - (Rome, ITALY) in its series ISAE Working Papers with number 31.

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Length: 28 pages
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:isa:wpaper:31

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Related research

Keywords: Bilateral; Economic Integration; Dynamic Panel Data;

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Citations

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Cited by:
  1. Yongcheol Shin & Laura Serlenga, 2007. "Gravity models of intra-EU trade: application of the CCEP-HT estimation in heterogeneous panels with unobserved common time-specific factors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 361-381.
  2. Tanasie, Anca & Fratostiteanu, Cosmin, 2007. "Romania And The Euro. A Relative Positioning Among The Candidates," MPRA Paper 5832, University Library of Munich, Germany.
  3. Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 0446, European Central Bank.
  4. Luigi Bocola, 2006. "Trade and Business-Cycle Comovement: Evidence from the EU," Rivista di Politica Economica, SIPI Spa, vol. 96(6), pages 25-62, November-.
  5. Matthieu Bussière & Jarko Fidrmuc & Bernd Schnatz, 2008. "EU Enlargement and Trade Integration: Lessons from a Gravity Model," Review of Development Economics, Wiley Blackwell, vol. 12(3), pages 562-576, 08.
  6. Salvador Gil-Pareja & Simón Sosvilla-Rivero, . "Price Convergence in the European Car Market," Working Papers 2005-22, FEDEA.
  7. Tomáš Havránek, 2009. "Rose Effect and the Euro: The Magic is Gone," Working Papers IES 2009/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2009.
  8. 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.
  9. Weber, Henning & Herwartz, Helmut, 2008. "When, how fast and by how much do trade costs change in the euro area?," Discussion Papers 2008/18, Free University Berlin, School of Business & Economics.
  10. Tomáš Havránek, 2010. "Rose effect and the euro: is the magic gone?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(2), pages 241-261, June.
  11. Salvador Gil-Pareja & Rafael Llorca-Vivero & Jose Martinez-Serrano, 2006. "The border effect in Spain: The Basque Country case," Regional Studies, Taylor & Francis Journals, vol. 40(4), pages 335-345.
  12. Joan Costa-i-Font, 2010. "Regional Single Currency Effects on Bilateral Trade with the European Union," Europe in Question Discussion Paper Series of the London School of Economics (LEQs) 6, London School of Economics / European Institute.
  13. Matthias Helble, 2007. "Border Effect Estimates for France and Germany Combining International Trade and Intranational Transport Flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(3), pages 433-463, October.
  14. Marek Jarocinski, 2003. "Nominal and Real Convergence in Spain, Portugal and Greece During Their Accession to the EMU," CASE Network Studies and Analyses 0256, CASE-Center for Social and Economic Research.

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