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Trade creation, trade diversion and imbalances in the EMU

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  • Esposito, Piero

Abstract

The aim of this paper is to provide a unified explanation for the mixed evidence on the euro effect on trade and the development of imbalances in the European Monetary Union (EMU). It is argued that the two phenomena are the result of trade creation and trade diversion effects generated by the euro introduction and by globalisation-induced changes in trade patterns. Trade creation and trade diversion effects are estimated as structural changes in the relation between trade flows and financial opening, growth, prices, and measures of globalization. While most of these effects point to the increase in imbalances, financial opening is found to positively affect intra-EMU trade. On the other hand, GDP growth and global changes in production technology reduced intra-EMU trade. The results suggest that policies aimed at rebalancing the EMU should be strengthened and supported by measures aimed at improving the competitiveness of the single market as a whole.

Suggested Citation

  • Esposito, Piero, 2017. "Trade creation, trade diversion and imbalances in the EMU," Economic Modelling, Elsevier, vol. 60(C), pages 462-472.
  • Handle: RePEc:eee:ecmode:v:60:y:2017:i:c:p:462-472
    DOI: 10.1016/j.econmod.2016.09.014
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    Cited by:

    1. Roberta De Santis & Piero Esposito & Elena Masi, 2017. "Are there common structural determinants of potential output growth in Europe? An empirical exercise for 11 EMU countries," Working Papers 4, Department of the Treasury, Ministry of the Economy and of Finance.

    More about this item

    Keywords

    C23; F15; F32; F36; O52; Imbalances; Trade; Euro area; Competitiveness; Financial flows; Panel data;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F15 - International Economics - - Trade - - - Economic Integration
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • O52 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Europe

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