Euros and Zeros: The Common Currency Effect on Trade in New Goods
Richard E. Baldwin
University of Geneva - Graduate Institute of International Studies (HEI); Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Virginia Di Nino
Graduate Institute of International and Development Studies (HEI)
CEPR Discussion Paper No. 5973
This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.
Number of Pages in PDF File: 27
Keywords: Heterogenous firms, Eurozone trade effects, Melitz model, extensive margin
JEL Classification: F12, F21, F33, F4working papers series
Date posted: January 7, 2007
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