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Modelling intra- and extra-area trade substitution and exchange rate pass-through in the euro area

Author

Listed:
  • Dieppe, Alistair
  • Warmedinger, Thomas

Abstract

The paper proposes a modelling approach for euro area goods and services trade volumes and prices on the basis of a break-down of trade data into their intra- and extra-area components. Using the evidence from the newly estimated trade equations, the paper gives new insights into two important issues. The first issue concerns the exchange-rate pass-through (ERPT) to euro area import prices. The second issue relates to substitution effects between intra- and extra-area trade. These issues are further elaborated through simulation analyses using the ECB's area-wide model (AWM). The simulations illustrate the impact of external and domestic shocks to trade in the euro area, in particular on intra- and extra-area trade. The richer dynamics from this disaggregated perspective provide additional insights and elucidate transmission channels of shocks that are not detectable from an aggregate (i.e. total trade) perspective. For instance, one interesting finding is that an appreciation of the euro has a significant downward impact on intra euro area trade. JEL Classification: E31, F17, C5

Suggested Citation

  • Dieppe, Alistair & Warmedinger, Thomas, 2007. "Modelling intra- and extra-area trade substitution and exchange rate pass-through in the euro area," Working Paper Series 760, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2007760
    Note: 95834
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp760.pdf
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    References listed on IDEAS

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    1. Dieppe, Alistair & Henry, Jerome, 2004. "The euro area viewed as a single economy: how does it respond to shocks?," Economic Modelling, Elsevier, vol. 21(5), pages 833-875, September.
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    Citations

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    Cited by:

    1. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2008. "The new area-wide model of the euro area: a micro-founded open-economy model for forecasting and policy analysis," Working Paper Series 944, European Central Bank.
    2. Styliani Christodoulopoulou & Oļegs Tkačevs, 2016. "Measuring the effectiveness of cost and price competitiveness in external rebalancing of euro area countries: What do alternative HCIs tell us?," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(3), pages 487-531, August.
    3. Lombardo, Giovanni & Vestin, David, 2008. "Welfare implications of Calvo vs. Rotemberg-pricing assumptions," Economics Letters, Elsevier, vol. 100(2), pages 275-279, August.
    4. Jaime Martinez-Martin, 2016. "Breaking down world trade elasticities: a panel ECM approach," Globalization Institute Working Papers 275, Federal Reserve Bank of Dallas, revised 18 Jul 2016.
    5. Thomas Brand, 2017. "Vitesse et composition des ajustements budgétaires en équilibre général : une analyse appliquée à la zone euro," Revue économique, Presses de Sciences-Po, vol. 68(HS2), pages 159-182.
    6. Warne, Anders & Coenen, Günter & Christoffel, Kai, 2013. "Predictive likelihood comparisons with DSGE and DSGE-VAR models," Working Paper Series 1536, European Central Bank.

    More about this item

    Keywords

    competitiveness and trade substitution; euro area; exchange-rate pass-through; Intra-/ extra-area trade; pricing-to-market.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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