The impact of EMU on trade flows

Abstract

The Impact of EMU on Trade Flows. — In this paper we quantify the impact of exchange rate volatility on trade flows within the EU with the help of a gravity trade model. We consider bilateral instead of total exports, and we use panel data. Moreover, we introduce dynamics into the model, taking lagged exports as explanatory variable. The estimation of this model for the period 1962–1995 leads to significant negative coefficients for the proxy of exchange rate variability. We use these estimates to calculate the potential trade-creating effect of a monetary union, setting the exchange rate volatility equal to zero.