Intra- and Extra-Euro Area Import Demand for Manufacturers
36 Pages Posted: 8 Nov 2005
Date Written: October 2005
The aim of this paper is to improve our understanding of the key determinants of intra- and extra-euro area imports. Using a simultaneous equation estimation framework, and pooling the data across nine euro area countries as an approximation of the euro area, we estimate intra- and extra-euro area import demand functions and impose various restrictions within and across equations. We find that there are significant substitution effects between intra- and extra-euro area imports due to changes in their relative prices, while exchange rate volatility decreases trade vis-a-vis regions characterised by volatility and leads to substitution of trade away from higher-volatility regions towards lower-volatility regions.
Keywords: intra- and extra-euro area imports, substitution, trade integration, three stage least squares
JEL Classification: F10, F15
Suggested Citation: Suggested Citation