Euro Effect on Trade in Final, Intermediate and Capital Goods

• Author: Inmaculada Martínez‐Zarzoso,Florian Johannsen
• DOI: http://doi.org/10.1002/ijfe.1567
• Published date: 01 January 2017
• Date: 01 January 2017

EURO EFFECT ON TRADE IN FINAL, INTERMEDIATE AND CAPITAL

GOODS

INMACULADA MARTÍNEZ-ZARZOSO

1,2,

*

,†

and FLORIAN JOHANNSEN

2

1

Georg-August Universität Göttingen, Germany

2

Universitat Jaume I, Spain

ABSTRACT

The aim of this paper is to provide fresh evidence on the effect of the adoption of the euro on exports of different types of goods.

The novelty with respect to previous research is threefold. First, disaggregated trade data are used to allow for heterogeneous

effects for final intermediate and capital goods. Second, we distinguish between the euro effect on the extensive and the inten-

sive margins of trade. Finally, we estimate the impact of the Euro adoption controlling for exchange rate volatility, exchange rate

movements and EU membership. This allows us to disentangle the effect of a common currency beyond the elimination of trade

barriers and of any variation in the exchange rate. The main results indicate that the impact of the Euro on trade values (intensive

margin) is around 9% for intermediates, 7% for final goods and it is negative for capital goods. Interestingly, the Euro effects on

the extensive margin of trade are found to be negative and significant for the three types of goods, pointing to increasing spe-

cialization. Copyright © 2016 John Wiley & Sons, Ltd.

Received 28 December 2015; Revised 26 July 2016; Accepted 11 September 2016

JEL CODE: F15; F36

KEY WORDS: gravity model; euro effect; intermediate products; capital goods; final goods; bilateral trade

1. INTRODUCTION

The introduction of the Euro and the creation of the Euro zone in the late 1990s, associated with the abolition of

several European currencies, led to an avid debate among economists concerning the effect of the single-currency

adoption on trade. More recently, the global financial crisis, the catalyst of the debt crises and the massive central

bank interventions in Europe and the U.S. increased exchange rate volatility again and brought the topic back on

the agenda.

In light of the recent events, especially the case of the European Union and the Euro adoption is worth a second

glance. The question whether joining a currency union boosts trade significantly is very relevant for many Central

and Eastern European countries. The fact that countries like Poland have postponed their accession to the Euro is

linked to the idea that the expected positive trade effects on of joining a currency union might eventually turn into

negative economic effects.

The new trade theory that incorporates firm heterogeneity into the modelling framework and highlights the

importance of differences in productivity between firms in explaining trade gains (Melitz, 2003), identifies two

channels through with a common currency could increase trade. First, through an increase in the average value

of the transactions, the so-called intensive margin of trade, this is mainly linked to a decrease in variable trade

costs. Second, through an increase in the number of varieties traded, namely the extensive margin of trade related

to a decrease in fixed cost. Both transmission channels could be relevant to explain the Euro effect. However, it

*Correspondence to: Inmaculada Martínez-Zarzoso, Chair of Economic Theory and Development Economics, Platz der Göttinger Sieben 3,

37073 Göttingen, Germany.

†E-mail: imartin@uni-goettingen.de

Copyright © 2016 John Wiley & Sons, Ltd.

International Journal of Finance & Economics

Int. J. Fin. Econ. 22:30–43 (2017)

Published online 13 October 2016 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/ijfe.1567