Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/152880
Authors: 
Baldwin, Richard E.
Skudelny, Frauke
Taglioni, Daria
Year of Publication: 
2005
Series/Report no.: 
ECB Working Paper 446
Abstract: 
This paper contributes to the literature on the impact of EMU on trade, adding two new elements. First, we propose a theoretical model for explaining how the euro could have increased trade by the large amounts found in the empirical literature. Second, we propose a sectoral dataset to test the insights from the theory. Our theoretical model shows that in a monopolistic competition set-up, the effect of exchange rate uncertainty on trade has nonlinear features, suggesting that EMU and a standard measure for exchange rate uncertainty should be jointly significant. Our empirical results confirm this finding, with a trade creating effect between 108 and 140% in a pooled regression, and between 54 to 88% when sectors are estimated individually. Importantly, we find evidence for a trade creating effect also for trade with third countries.
Subjects: 
Exchange rate volatility
gravity
monetary union
Rose effect
sectoral trade
JEL: 
F12
C33
E0
Document Type: 
Working Paper

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