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The Effect of a Common Currency on the Volatility of the Extensive Margin of Trade

Author

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  • Stéphane Auray

    (EQUIPPE - Economie Quantitative, Intégration, Politiques Publiques et Econométrie - Université de Lille, Sciences et Technologies - Université de Lille, Sciences Humaines et Sociales - PRES Université Lille Nord de France - Université de Lille, Droit et Santé, CREST - Centre de Recherche en Économie et Statistique - ENSAI - Ecole Nationale de la Statistique et de l'Analyse de l'Information [Bruz] - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - X - École polytechnique - IP Paris - Institut Polytechnique de Paris - ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique - Groupe ENSAE-ENSAI - Groupe des Écoles Nationales d'Économie et Statistique - IP Paris - Institut Polytechnique de Paris - CNRS - Centre National de la Recherche Scientifique, CIRPEE - Centre interuniversitaire sur le risque, les politiques économiques et l'emploi - Centre Interuniversitaire sur le Risque, les Politiques Economiques et l'Emploi, GREDI - Groupe de recherche en économie et développement international [Sherbrooke] - École de gestion de l'Université de Sherbrooke - UdeS - Université de Sherbrooke = University of Sherbrooke [Sherbrooke])

  • Aurélien Eyquem

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Jean-Christophe Poutineau

    (CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper studies the effects of the European monetary unification on the volatility of the extensive margin of trade. First, we highlight empirical novel facts about the effects of monetary unification. We build country-level measures of the extensive margin of intra-EMU exports and describe how their volatilities evolved over time. We show that the adoption of a common currency has been associated with an increase of the volatility of the extensive margin of exports for most countries, and a decrease in the volatility of the extensive margin of exports for Germany. Second, we address this question theoretically and build a two-country version of the model of Ghironi and Melitz (2005) with endogenous entry, heterogenous firms, endogenous tradability, endogenous labor supply and sticky prices. We compare the volatility of the extensive margin of trade under fixed exchange rates and in a monetary union. Monetary unification does imply an increase in the volatility of the extensive margin of trade for pre-EMU followers (such as France or the Netherlands) and a decrease in the volatility of the extensive margin of trade for the leader (Germany). This pattern is qualitatively consistent with the data but arises only if monetary policy responds moderately to output.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Stéphane Auray & Aurélien Eyquem & Jean-Christophe Poutineau, 2012. "The Effect of a Common Currency on the Volatility of the Extensive Margin of Trade," Post-Print halshs-00665954, HAL.
    • Handle: RePEc:hal:journl:halshs-00665954
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    Cited by:

    1. Cavallari, Lilia & D׳Addona, Stefano, 2015. "Exchange rates as shock absorbers: The role of export margins," Research in Economics, Elsevier, vol. 69(4), pages 582-602.
    2. Lilia Cavallari & Stefano D’Addona, 2014. "Trade Margins And Exchange Rate Regimes: New Evidence From A Panel Varx Model," Working Papers 0514, CREI Università degli Studi Roma Tre, revised 2014.
    3. Auray, Stéphane & Eyquem, Aurélien & Ma, Xiaofei, 2017. "Competitive tax reforms in a monetary union with endogenous entry and tradability," European Economic Review, Elsevier, vol. 98(C), pages 126-143.
    4. Cavallari, Lilia, 2015. "Entry costs and the dynamics of business formation," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 312-326.
    5. Cavallari, Lilia & D'Addona, Stefano, 2017. "Output stabilization in fixed and floating regimes: Does trade of new products matter?," Economic Modelling, Elsevier, vol. 64(C), pages 365-383.
    6. Luís Alexandre Barbosa Guimarães, 2012. "A comment on "The effect of a common currency on the volatility of the extensive margin of trade"," FEP Working Papers 449, Universidade do Porto, Faculdade de Economia do Porto.
    7. Lilia Cavallari, 2012. "Modelling Entry Costs: Does It Matter For Business Cycle Transmission?," Working Papers 0712, CREI Università degli Studi Roma Tre, revised 2012.
    8. Cavallari, Lilia, 2013. "Firms' entry, monetary policy and the international business cycle," Journal of International Economics, Elsevier, vol. 91(2), pages 263-274.
    9. Cooke, Dudley, 2014. "Monetary shocks, exchange rates, and the extensive margin of exports," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 128-145.
    10. Cavallari, Lilia, 2015. "Entry costs and the dynamics of business formation," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 312-326.
    11. Cavallari, Lilia & D'Addona, Stefano, 2013. "Trade margins and exchange rate regimes: new evidence from a panel VAR," MPRA Paper 51585, University Library of Munich, Germany.
    12. Etro, Federico & Rossi, Lorenza, 2015. "New-Keynesian Phillips curve with Bertrand competition and endogenous entry," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 318-340.
    13. Stefano D’Addona & Lilia Cavallari, 2020. "External Shocks, Trade Margins, and Macroeconomic Dynamics," Economies, MDPI, vol. 8(1), pages 1-26, January.

    More about this item

    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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