Currency Shocks and Dynamics of Trade Flows in the Euro Area: Evidence from Quarterly and Monthly Data
Confederation of Italian Industries, Research Department
National Institute of Statistics (ISTAT)
This work examines euro area's trade flows over the last two decades, taking jointly into account their long-run determinants and short-run dynamics. This framework builds on a reinterpretation of the long-run structural vector autoregressive approach, drawing from both economic theory and econometric analysis. Generalized impulse response functions are employed to assess the effects of a real exchange rate shock on the trade balance, using different model specifications and frequencies of data. The main findings are: i) euro-area's trade flows are determined in the long-run by non-price competitiveness factors; ii) short-run adjustments follow an S-pattern; iii) a real devaluation produces detrimental effects on the trade balance.
Number of Pages in PDF File: 34
Keywords: Euro area, trade balance, real exchange rate, long-run structural VAR approach, Subset VECM, impulse response analysis, data frequency
JEL Classification: C32, C52, F32, F41working papers series
Date posted: May 27, 2004
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