Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/181323
Authors: 
Chen, Natalie
Novy, Dennis
Year of Publication: 
2018
Series/Report no.: 
CESifo Working Paper 7123
Abstract: 
How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to the effect of currency unions on international trade. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our framework, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union. Instead, countries need to take into account the distribution of their trade shares to assess the impact of trade costs.
Subjects: 
currency unions
euro
gravity
heterogeneity
trade costs
trade elasticity
translog
JEL: 
F14
F15
F33
Document Type: 
Working Paper
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