A major economic reason for the introduction of the euro was its supposedly positive effect on intra-EMU trade. Existing studies examine this suspicion indirectly using non-EMU data and report ambiguous results. We estimate the euro-effect directly from data that include EMU observations. Using a dynamic panel model for annual bilateral exports, we find that the euro has significantly increased trade, with an effect of 4% in the first year and cumulating to around 40% in the long-run. These estimates can be useful in the debates on whether to join the euro in countries such as the U.K.
Currency union dynamic panel data model EMU exports imperfect substitutes model.