Modelling Intra- and Extra-Area Trade Substitution and Exchange Rate Pass-Through in the Euro Area

59 Pages Posted: 28 Jun 2007

Date Written: June 2006

Abstract

The paper proposes a modelling approach for euro area goods and services trade volumes and prices on the basis of a break-down of trade data into their intra- and extra-area components. Using the evidence from the newly estimated trade equations, the paper gives new insights into two important issues. The first issue concerns the exchange-rate pass-through (ERPT) to euro area import prices. The second issue relates to substitution effects between intra- and extra-area trade. These issues are further elaborated through simulation analyses using the ECB's area-wide model (AWM). The simulations illustrate the impact of external and domestic shocks to trade in the euro area, in particular on intra- and extra-area trade. The richer dynamics from this disaggregated perspective provide additional insights and elucidate transmission channels of shocks that are not detectable from an aggregate (i.e. total trade) perspective. For instance, one interesting finding is that an appreciation of the euro has a significant downward impact on intra euro area trade.

Keywords: Keywords: Intra-/ extra-area trade, euro area, competitiveness and trade substitution, exchange-rate passthrough

JEL Classification: E31, F17, C5

Suggested Citation

Dieppe, Alistair and Warmedinger, Thomas, Modelling Intra- and Extra-Area Trade Substitution and Exchange Rate Pass-Through in the Euro Area (June 2006). ECB Working Paper No. 760, Available at SSRN: https://ssrn.com/abstract=989724

Alistair Dieppe (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Thomas Warmedinger

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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