Measuring the Trade Effects of EMU

Abstract

This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper examines the impact of European Economic and Monetary Union (EMU) on trade within the euro area. Using panel data for 22 industrial countries, the analysis estimates the effect of the euro's arrival on area-wide trade compared to bilateral trade flows between other industrial countries. Controlling for other influences according to the "gravity" model of trade, the panel analysis employs cointegration techniques to obtain reliable point estimates of EMU trade effects. Cross-country differences with respect to EMU trade gains and underlying factors accounting for these differences are also further explored. JEL Classification Numbers: F15, F33, F34

Is the ‘euro effect’ on trade so small after all? New evidence using gravity equations with panel cointegration techniques

“…This result was quite striking, and as quoted by Faruqee (2004), is at odds with the related literature that typically finds very little negative impact of exchange rate volatility on trade.…”

“…However, if the variables are nonstationary, a different statistical setup needs to be used. As Faruqee (2004) claimed, estimating the impact of a monetary union on trade faces several econometric challenges. Recent literature shows that the results of the gravity models are sensitive to their proper specification (Egger and Pfaffermayr, 2003).…”

“…It might be interesting to investigate whether there is an additional benefit of a common currency over (relative) exchange rate stability. As pointed out by Faruqee (2004) the central questions at stake are the following: first, to ascertain the effects of EMU on the area's trade flows; second, to analyze the evolution of the trade effects through time, and finally, to measure the distribution of trade effects among member states.…”

Trade regimes and bilateral trade in the EU enlargement process: Focus on the Western Balkans

“…1 The general finding of the analyses focused on the European monetary union (EMU) is that EMU has a noticeable impact on intra-regional trade even at this early stage, and the effects on the currency union, depending on a sample or methodology, are estimated to range between 5% and 20% (Micco et al 2003;Faruqee 2004).…”

“…Micco et al 2003;Faruqee 2004;Papazoglou et al 2006;Baier -Bergstrand 2007;Bussiere et al 2008). Usually, authors have distinguished two levels of trade integrations: free trade areas and customs unions, as a higher level of integration.…”