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Trade effects of the euro: evidence from sectoral data

  • Baldwin, Richard E.
  • Skudelny, Frauke
  • Taglioni, Daria

This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries. JEL Classification: F12, C33, E0

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Paper provided by European Central Bank in its series Working Paper Series with number 0446.

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Date of creation: Feb 2005
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Handle: RePEc:ecb:ecbwps:20050446
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