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Readdressing the trade effect of the Euro: Allowing for currency misalignment

  • Hogrefe, Jan
  • Jung, Benjamin
  • Kohler, Wilhelm K.

We know that euro-area member countries have absorbed asymmetric shocks in ways that are inconsistent with a common nominal anchor. Based on a reformulation of the gravity model that allows for such bilateral misalignment, we disentangle the conventional trade cost channel and trade effects deriving from 'implicit currency misalignment'. Econometric estimation reveals that the currency misalignment channel exerts a significant trade effect on bilateral exports. We retrieve country specific estimates of the euro effect on trade based on misalignment. This reveals asymmetric trade effects and heterogeneous outlooks across countries for the costs and benefits from adopting the euro.

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Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 10-023.

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Date of creation: 2010
Date of revision:
Handle: RePEc:zbw:zewdip:10023
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  1. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 315-356, October.
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  10. Wilhelm Kohler & Gabriel Felbermayr, . "WTO Membership and the Extensive Margin of World Trade: New Evidence," Discussion Papers 09/06, University of Nottingham, GEP.
  11. Baier, Scott L. & Bergstrand, Jeffrey H., 2007. "Do free trade agreements actually increase members' international trade?," Journal of International Economics, Elsevier, vol. 71(1), pages 72-95, March.
  12. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
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