Abstract
There are many studies aiming at estimation of aggregate trade effects of the euro adoption by the old EU countries, which are based on the augmented gravity model. In contrast to the existing literature, we investigate whether the adoption of the common currency increases the export activity of individual firms. In particular, we refer to the new strand in the trade theory literature, based on the Melitz (2003) model, in which export performance depends on labor productivity and costs of exporting. There are already many empirical studies, based on firm level data, showing the relevance of the Melitz (2003) model. Most of those studies demonstrate that export performance positively depends on firms’ characteristics such as labor productivity, spending on R&D, age of the firm, the stock of human capital or propensity to innovate, but they do not take into account the impact of the common currency on the cost of exporting. There are only few studies analyzing trade implications of euro adoption for firms’ exports of “old EU” members. In our empirical paper we use the firm level data basis set up by the EBRD and the World Bank for Central and Eastern European Countries. Using the probit model, we analyze whether the accession of Slovenia and Slovakia to the Eurozone did increase the firms’ propensity to export in those countries.
Highlights
The impact of the adoption of a common currency on international trade flows has been one of the hotly debated issues in international economics
Other factors that may affect export activity include the level of innovation proxied by the R&D spending, the stock of human capital proxied by the percentage of employees with university degrees
We investigated the ex post effects of the accession to the Eurozone by two Central European countries that adopted the euro: Slovenia and Slovakia on the export activity of their firms
Summary
The impact of the adoption of a common currency on international trade flows has been one of the hotly debated issues in international economics. It has been frequently argued that the reduction in transaction costs due the elimination of the exchange rate risk should stimulate exports of existing firms and encourage non-exporters that previously limited their operations to their domestic markets to start exporting (Baldwin et al 2005) This effect is perceived to be especially important for countries where forward foreign exchange markets are not very well-developed. A reduction of the transaction cost is argued to be important for countries that are characterized by the strong concentration of their trade with one large trading partner or a group of countries that share a common currency This is the case for many Central and Eastern European (CEE) countries for which Germany is the main trading partner, and more than 50 per cent of their trade takes place with the members of the Eurozone. This issue has become even more important after the Eastern enlargement of the EU in 2004 and 2007
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
