Trade Effects of the Euro: Evidence from Sectoral Data

55 Pages Posted: 6 May 2005

See all articles by Richard E. Baldwin

Richard E. Baldwin

University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Frauke Skudelny

European Central Bank (ECB)

Daria Taglioni

World Bank, Development Economics

Date Written: February 2005

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.

Keywords: Rose effect, exchange rate volatility, monetary union, sectoral trade, gravity

JEL Classification: F12, C33, E0

Suggested Citation

Baldwin, Richard E. and Skudelny, Frauke and Taglioni, Daria, Trade Effects of the Euro: Evidence from Sectoral Data (February 2005). Available at SSRN: https://ssrn.com/abstract=668246

Richard E. Baldwin (Contact Author)

University of Geneva - Graduate Institute of International Studies (HEI) ( email )

PO Box 136
Geneva, CH-1211
Switzerland
+41 22 908 5933 (Phone)
+41 22 733 3049 (Fax)

HOME PAGE: http://www.hei.unige.ch/~baldwin/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Frauke Skudelny

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Daria Taglioni

World Bank, Development Economics ( email )

Washington, DC 20433
United States

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