How Does National Foreign Trade React to the European Central Bank’s Policy?

The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 137-151, 2010

15 Pages Posted: 9 Sep 2010

See all articles by Giovanni Tria

Giovanni Tria

University of Rome Tor Vergata - Faculty of Economics

Giuseppe Galloppo

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS)

Date Written: 2010

Abstract

This paper examines how external foreign trade reacts to the European Central Bank’s (ECB) Official Discount Rate, considering exports to the US and Japan in EU27 and in four European countries. Although many previous studies have measured the cointegration and causality among exchange rate, exports, and imports, to date, no research has considered these relationships while introducing monetary variables into the analysis. The objective of this article is to fill this gap in the literature. We use the bounds testing approach to cointegration and error-correction modelling to test relations between monetary policy, exports, and terms of trade, making the distinction between short and long-run effects possible. Our datasets include quarterly data on exports, imports, income, relative price, and the official ECB discount rate. The quarterly data starts from the first quarter of 1999 and ends in the last quarter of 2008. The results show that a long-run relationship exists between real exports, real foreign income, real bilateral cross rates and interest rates for a large part of these countries. Also long run parameter estimates are consistent with economic theory in most of the cases. More importantly the statistically significant error-correction term corroborates the results of the long-run parameter.

Keywords: Cointegration Analysis, Export, Central Bank Policy

JEL Classification: G11

Suggested Citation

Tria, Giovanni and Galloppo, Giuseppe, How Does National Foreign Trade React to the European Central Bank’s Policy? (2010). The International Journal of Business and Finance Research, Vol. 4, No. 2, pp. 137-151, 2010, Available at SSRN: https://ssrn.com/abstract=1667120

Giovanni Tria (Contact Author)

University of Rome Tor Vergata - Faculty of Economics ( email )

Via Columbia n.2
Rome, rome 00100
Italy

Giuseppe Galloppo

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Rome, I-00133

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