How Wide is the Euro?

Abstract

This paper examines the impact of Euro invoicing on Italian exports to non-EU countries. In addition to examining the role of currency invoicing on the intensive and extensive margin of trade, we introduce the ‘entrenched’ margin of trade. We define the entrenched margin of trade as the number of transactions between two countries of a particular good. With highly disaggregated data, we use a two-stage methodology to predict the probability of Euro dominated Italian exports and then use that predicted probability on the intensive, extensive and entrenched margin of trade. Results show that the probability of Euro dominated trade invoicing reduces all three margins of trade. Specifically, a 10% increase in probability of Euro dominated Italian exports has roughly the same impact as additional 1532 km on the intensive margin of trade, 1096 km on the extensive margin of trade and 1314 km on the entrenched margin of trade. The negative effect of Euro invoicing is most consistent with lower-middle income trading partners and more thinly traded goods. We surmise that these results are due to varying access to financial instrumentation among Italian trade partners and a trade diversion effect of Italian exports to EU countries versus non-EU markets.