Working Paper: CEPR ID: DP5973
Authors: Richard Baldwin; Virginia Di Nino
Abstract: This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.
Keywords: eurozone; trade effects; extensive margin; heterogeneous firms; Melitz model
JEL Codes: F12; F21; F33; F4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| euro adoption (F36) | increased trade activity (F19) |
| euro usage (F36) | trade flows (F10) |
| common usage of the euro (F36) | lower trade costs (F19) |
| lower trade costs (F19) | export of new goods (F10) |
| eurozone countries (O52) | increased bilateral trade (F10) |
| eurozone countries (O52) | increased trade with non-eurozone countries (F49) |
| euro's impact on existing trade flows (F69) | modest (Y20) |