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The effect of a common currency on the volatility of the extensive margin of trade

  • Auray, Stéphane
  • Eyquem, Aurélien
  • Poutineau, Jean-Christophe

This paper studies the effects of the European monetary unification on the volatility of the extensive margin of trade. First, we highlight empirical novel facts about the effects of monetary unification. We build country-level measures of the extensive margin of intra-EMU exports and describe how their volatilities evolved over time. We show that the adoption of a common currency has been associated with an increase of the volatility of the extensive margin of exports for most countries, and a decrease in the volatility of the extensive margin of exports for Germany. Second, we address this question theoretically and build a two-country version of the model of Ghironi and Melitz (2005) with endogenous entry, heterogenous firms, endogenous tradability, endogenous labor supply and sticky prices. We compare the volatility of the extensive margin of trade under fixed exchange rates and in a monetary union. Monetary unification does imply an increase in the volatility of the extensive margin of trade for pre-EMU followers (such as France or the Netherlands) and a decrease in the volatility of the extensive margin of trade for the leader (Germany). This pattern is qualitatively consistent with the data but arises only if monetary policy responds moderately to output.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 5 ()
Pages: 1156-1179

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:5:p:1156-1179
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