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The Euro Effect on Trade is not as Large as Commonly Thought

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  • Maurice J. G. Bun
  • Franc J. G. M. Klaassen

Abstract

Existing studies on the impact of the euro on goods trade report increments between 5% and 40%. These estimates are based on standard panel gravity models for the level of trade. We show that the residuals from these models exhibit upward trends over time for the euro countries, and that this leads to an upward bias in the estimated euro effect. To correct for that, we extend the standard model by including a time trend that may have different effects across country‐pairs. This results in an estimated euro impact of only 3%.

Suggested Citation

  • Maurice J. G. Bun & Franc J. G. M. Klaassen, 2007. "The Euro Effect on Trade is not as Large as Commonly Thought," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 69(4), pages 473-496, August.
    • Handle: RePEc:bla:obuest:v:69:y:2007:i:4:p:473-496
    DOI: 10.1111/j.1468-0084.2007.00448.x
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