The Trade and FDI Effects of EMU Enlargement

33 Pages Posted: 18 Oct 2007

See all articles by J. Brouwer

J. Brouwer

University of Amsterdam Business School

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics; Tinbergen Institute; Erasmus Research Institute of Management (ERIM)

Jean-Marie Viaene

Erasmus University

Date Written: October 2007

Abstract

This paper considers the nature and the distribution of trade and FDI effects of a potential enlargement of the European Monetary Union (EMU) to the ten countries that obtained EU membership in 2004. One-way and two-way error component gravity models are estimated using a dataset of unbalanced panel data that combines bilateral trade flows among 29 countries and the distribution of outward FDI stocks among these countries. The results reveal a complementarity between trade and investment and a relationship between trade and exchange rate volatility that depends on the sign of bilateral trade balances. Using a simulation-based technique, we find that estimates of FDI effects of EMU range between 18.5 percent for Poland and 30 percent for Hungary.

Keywords: EMU, exchange rate volatility, foreign investment, trade diversion, vertical integration

JEL Classification: C33, F21, F31, F33, F36

Suggested Citation

Brouwer, J. and Paap, Richard and Viaene, Jean-Marie, The Trade and FDI Effects of EMU Enlargement (October 2007). CESifo Working Paper No. 2123. Available at SSRN: https://ssrn.com/abstract=1022504

J. Brouwer

University of Amsterdam Business School ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

Richard Paap

Erasmus University Rotterdam (EUR) - Department of Econometrics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Tinbergen Institute ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Jean-Marie Viaene (Contact Author)

Erasmus University ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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