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In the neighbourhood: the trade effects of the euro in a spatial framework

  • Harry Kelejian

    (University of Maryland)

  • George S. Tavlas

    ()

    (Bank of Greece)

  • Pavlos Petroulas

    ()

    (Bank of Greece)

Trade is spatial in nature. However, when specifying trade regressions, spatial issues are typically not accounted for in a satisfactory way. We specify a trade model which relates to the effects that the introduction of the euro had on exports for the euro countries. Our model contains country pair fixed effects and error terms which are spatially and time autocorrelated, as well as heteroskedastic. Our spatial weighting matrix has unique characteristics. Our model also allows for endogenous regressors, and so we estimate it by an instrumental variable procedure. We find that the results of estimation are substantially affected when one accounts for statistical complications. Specifically, euro effects on exports are significantly reduced and are only "borderline" significant. Also, dummy variables measuring the effects of EU-membership on exports become insignificant. The results relating to other variables do not seem to be substantially affected. All of this suggests that, perhaps, the effects of currency unions on trade as described in the previous literature has been severely overstated.

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Paper provided by Bank of Greece in its series Working Papers with number 136.

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Length: 33
Date of creation: Aug 2011
Date of revision:
Handle: RePEc:bog:wpaper:136
Contact details of provider: Web page: http://www.bankofgreece.gr

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  22. Baltagi, Badi H. & Egger, Peter & Pfaffermayr, Michael, 2008. "Estimating regional trade agreement effects on FDI in an interdependent world," Journal of Econometrics, Elsevier, vol. 145(1-2), pages 194-208, July.
  23. Esteban Rossi-Hansberg, 2005. "A Spatial Theory of Trade," American Economic Review, American Economic Association, vol. 95(5), pages 1464-1491, December.
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  26. Kelejian, Harry H. & Prucha, Ingmar R., 2004. "Estimation of simultaneous systems of spatially interrelated cross sectional equations," Journal of Econometrics, Elsevier, vol. 118(1-2), pages 27-50.
  27. Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 0446, European Central Bank.
  28. Flam, Harry & Nordström, Håkan, 2006. "Trade Volume Effects of the Euro: Aggregate and Sector Estimates," Seminar Papers 746, Stockholm University, Institute for International Economic Studies.
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