The Euro Effect on Trade is Not as Large as Commonly Thought
Tinbergen Institute Discussion Papers No. 2003-086/2
20 Pages Posted: 15 Oct 2004
Date Written: October 17, 2003
Abstract
Existing studies on the impact of the euro on goods trade report increments between 5% and 40%. These estimates are based on standard panel gravity models for the level of trade. We show that the residuals from these models exhibit upwards trends over time for the euro countries, and that this leads to an upward bias in the estimated euro effect. To correct for that, we extend the standard model by including a time trend that may have different effects across country-pairs. This shrinks the estimated euro impact to 3%.
Keywords: currency union, dynamic OLS, EMU, robust standard errors, time trend
JEL Classification: C23, F15, F33
Suggested Citation: Suggested Citation
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