Euro introduction and the behaviour of Italian exporting firms

The paper examines the effects on Italian manufacturing firms of trade cost reduction due to the introduction of the euro over the period 1996–2004. Using the gravity approach and a difference-in-differences (DID) empirical strategy, the results reveal the importance of properly controlling for heterogeneity. The euro’s effect on the performance of exporting firms is estimated not to be statistically significant when considering eurozone destination markets as a whole. Nevertheless, an increase of flows to ‘peripheral’ eurozone countries is channelled through the intensive margin. When heterogeneity in terms of firm-level labour-productivity is controlled for, a competition effect emerges in core markets, with a reduction of the intensive margin for less productive firms and an increase for the more productive ones. Finally, more financial contrained firms decreased the extensive margin in core markets, regardless of their productivity level.