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Euros and zeros: The common currency effect on trade in new goods

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Abstract

This paper tests whether trade in new goods were 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 (about 16 million observations) set 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.

Suggested Citation

  • Richard Baldwin Virginia Di Nino, 2006. "Euros and zeros: The common currency effect on trade in new goods," IHEID Working Papers 21-2006, Economics Section, The Graduate Institute of International Studies, revised 31 Oct 2006.
    • Handle: RePEc:gii:giihei:heiwp21-2006
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    More about this item

    Keywords

    heterogeneous firms; Eurozone trade effects; Melitz model; extensive margin.;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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