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The Importance of Accounting for Time Trends when Estimating the Euro Effect on Trade

Author

Listed:
  • Maurice J.G. Bun

    (Faculty of Economics and Econometrics, University of Amsterdam)

  • Franc J.G.M. Klaassen

    (Faculty of Economics and Econometrics, University of Amsterdam)

Abstract

To study the effect of the euro on international goods trade one typically estimates a panel model for the level of trade. Trade levels increase over time, and we show that this is not fully explained by the included regressors. Because the euro is only present at the end of the sample, this may have led to an upward bias in existing euro estimates to help explain the upward trend. To correct for that, we extend the panel model (a gravity model) by including a time trend that may have different effects across country-pairs. Data on industrialized countries over 1967-2002 show the existing euro effects of between 5% and 40% shrink to a statistically insignificant 3%. For comparison, the estimated trade effects of other currency unions are reduced from90% to 25%. Hence, accounting for time trends matters.

Suggested Citation

  • Maurice J.G. Bun & Franc J.G.M. Klaassen, 2003. "The Importance of Accounting for Time Trends when Estimating the Euro Effect on Trade," Tinbergen Institute Discussion Papers 03-086/2, Tinbergen Institute, revised 14 Oct 2004.
    • Handle: RePEc:tin:wpaper:20030086
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    More about this item

    Keywords

    currency union; deterministic trend; EMU; fixed effects; gravity model; panel data;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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