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The Euro Effect on Intra-EU Trade: Evidence from the Cross Sectionally Dependent Panel Gravity Models (joint with Laura Serlenga)

Thursday 14 March 2013, 1.15PM to 2.15pm

Speaker(s): Professor Yongcheol Shin, University of York

Abstract: Recently, there has been an intense policy debate on the Euro effects on trade flows. The investigation of unobserved multilateral resistance terms in conjunction with omitted trade determinants has also assumed a prominent role in the literature. Following recent developments in panel data studies, we propose the cross-sectionally dependent panel gravity models. The desirable feature of this approach is to control for time-varying multilateral resistance, trade costs and globalisation trends through the use of both observed and unobserved factors, which are allowed to be cross-sectionally correlated. This approach also enables us to consistently estimate the impacts of (potentially endogenous) bilateral trade barriers. Applying the proposed approach to the dataset over 1960-2008 for 91 country-pairs of 14 EU countries, we find that the Euro impact on trade amounts to 3-4%, far less than those reported by earlier studies. Furthermore, the Euro is found to promote EU integration by eliminating exchange rate-related uncertainties. An obvious policy implication is that countries considering to join the Euro would benefit from the ongoing process of integration, but should also be wary of regarding promises of an imminent acceleration of intra-EU trade.

Paper: The Euro Effect on Intra-EU Trade (PDF , 387kb)

Location: Economics Staff Room (EC/202)

Admission: Economics Thursday Workshop. For Staff and Postgraduate students