Abstract
AbstractWhen, about twenty years ago, the Euro was created, one objective was to facilitate intra-European trade by reducing transaction costs. Has the Euro delivered? Using sectoral trade data from 1995 to 2014 and applying structural gravity modeling, we conduct anex postevaluation of the European Monetary Union (EMU). In aggregate data, we find a significant average trade effect for goods of almost 8 percent, but a much smaller effect for services trade. Digging deeper, we detect substantial heterogeneity between sectors, as well as between and within country-pairs. Singling out Germany, and embedding the estimation results into a quantitative general equilibrium model of world trade, we find that EMU has increased real incomes in all EMU countries, albeit at different rates. E. g. incomes have increased by 0.3, 0.6, and 2.1 percent in Italy, Germany, and Luxembourg, respectively.
Highlights
The roots for the project ‘European Monetary Union’ (EMU) can at least be traced back to 1970, when the so-called Werner report recommended the introduction of a common European currency
This paper conducts an ex-post analysis of the trade effects of the European Monetary Union and of the welfare effects that these effects entail
In the partial equilibrium gravity analysis, we find that the EMU has been successful in increasing trade between its members, but that effects differ quite a bit across sectors, country pairs, and direction
Summary
The roots for the project ‘European Monetary Union’ (EMU) can at least be traced back to 1970, when the so-called Werner report recommended the introduction of a common European currency. We revisit the trade cost effects of introducing the Euro To this end, we employ a structural gravity model and apply it to bilateral sectoral trade data for about 40 countries, 34 goods and services sectors, and the years 1995–2014. To cope with issues such as heteroscedasticity or zero trade flows, they employ Pseudo-MaximumLikelihood (PPML) estimation as advocated by Santos Silva and Tenreyro (2006) They control for exporter and importer year specific fixed effects to account for changes in multilateral resistance (Feenstra 2015; Baldwin/Taglioni 2007), and time-invariant pair fixed effects that absorb the unobservable barriers to trade (Baier/Bergstrand 2007). Third, from the econometrics, we back out the trade cost effects of the Euro and use a quantitative general equilibrium trade model to simulate the welfare effects of the EMU.
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