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The Trade and FDI Effects of EMU Enlargement

  • Jelle Brouwer
  • Richard Paap
  • Jean-Marie Viaene

This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the ten countries that obtained EU membership in 2004. One-way and two-way error component gravity models are estimated using a dataset of unbalanced panel data that combines bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries. The results reveal a complementarity between trade and investment and a relationship between trade and exchange rate volatility that depends on the sign of bilateral trade balances. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5 percent for Poland and 30 percent for Hungary.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-10/cesifo1_wp2123.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2123.

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Date of creation: 2007
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Handle: RePEc:ces:ceswps:_2123
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