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The role of cross-sectional heterogeneity for magnitude and timing of the euro's trade effect

  • Herwartz, Helmut
  • Weber, Henning

This paper examines the role of cross-sectional heterogeneity for estimating the euro's effect on euro-area trade. In the empirical analysis, the impact of trade costs on trade and the transition dynamics to the new monetary regime can vary cross-sectionally in trade sectors and country pairs. Unobserved state variables that account for time-varying and omitted trade costs and multilateral resistance terms can also vary cross-sectionally. The results show that cross-sectional heterogeneity is strongly supported by the data and that the average euro effect coincides with consensus estimates. Decomposing the average effect uncovers large cross-sectional heterogeneity in its magnitude. Also, the average trade effect unfolds only gradually over time, since it is composed of many trade sectors that adjust at different dates.

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

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 48-74

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Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:48-74
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