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Trade effects of the euro: evidence from sectoral data

Author

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

Abstract

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

Suggested Citation

  • Baldwin, Richard E. & Skudelny, Frauke & Taglioni, Daria, 2005. "Trade effects of the euro: evidence from sectoral data," Working Paper Series 446, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2005446
    Note: 176751
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    References listed on IDEAS

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    More about this item

    Keywords

    exchange rate volatility; gravity; monetary union; Rose effect; sectoral trade;
    All these keywords.

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E0 - Macroeconomics and Monetary Economics - - General

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