The Importance of Accounting for Time Trends When Estimating the Euro Effect on Trade

Tinbergen Institute Working Paper No. 2003-086/3

16 Pages Posted: 10 Nov 2003

See all articles by Maurice J. G. Bun

Maurice J. G. Bun

University of Amsterdam (UVA) - Department of Quantitative Economics; Tinbergen Institute

Franc Klaassen

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM); Tinbergen Institute

Date Written: October 17, 2003

Abstract

To study the effect of the euro on international goods trade one typically estimates a panel model for the level of trade. Trade levels increase over time, and we show that this is not fully explained by the included regressors. Because the euro is only present at the end of the sample, this may have led to an upward bias in existing euro estimates to help explain the upward trend. To correct for that, we extend the panel model (a gravity model) by including a time trend that may have different effects across country-pairs. Data on industrialized countries over 1967-2002 show the existing euro effects of between 5% and 40% shrink to a statistically insignificant 3%. For comparison, the estimated trade effects of other currency unions are reduced from 90% to 25%. Hence, accounting for time trends matters.

Keywords: currency union, deterministic trend, EMU, fixed effects, gravity model, panel data

JEL Classification: C23, F15, F33

Suggested Citation

Bun, Maurice J. G. and Klaassen, Franc, The Importance of Accounting for Time Trends When Estimating the Euro Effect on Trade (October 17, 2003). Tinbergen Institute Working Paper No. 2003-086/3, Available at SSRN: https://ssrn.com/abstract=460860 or http://dx.doi.org/10.2139/ssrn.460860

Maurice J. G. Bun

University of Amsterdam (UVA) - Department of Quantitative Economics ( email )

Roetersstraat 11
1018 WB Amsterdam
Netherlands
+31-20-5254257 (Phone)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Franc Klaassen (Contact Author)

University of Amsterdam - Research Institute in Economics & Econometrics (RESAM) ( email )

Roetersstraat 11
Amsterdam
Netherlands
+31 20 525 4191 (Phone)
+31 20 525 4254 (Fax)

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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