Discussion Paper

No. 2008-1 | January 15, 2008
The Single Currency’s Effects on Eurozone Sectoral Trade: Winners and Losers?


In this paper we study the effect of the single currency across industries for euro area members. This analysis may help to shed light on the main factors influencing the euro effect on trade flows. We intend to verify whether these factors are specific to individual sectors and/or countries or common to the entire euro area. We use a dynamic specification of an augmented gravity equation. Following the most recent econometric literature, we apply a “System GMM” dynamic panel data estimator (Blundell and Bond, 1998) to avoid inconsistency and biases in the estimates, and introduce controls for heterogeneity.
Our preliminary results indicate some heterogeneity at country level. Despite statistically pro-trade effects in the majority of the EMU members, at sectoral level there are some countries in which the impact of the euro has been negative. The pro-trade effects are mainly concentrated in scale intensive industries. Industrial specialization and location of these industries, together with other factors (i.e. differences in factor endowments, product regulations across countries), may have determined “the winners and the losers” in the monetary integration process.
These preliminary findings are in line with those of the few other studies on this issue. In particular, this recent literature seems consistent with Baldwin’s (2006) “new good” hypothesis. However, in our estimates the magnitude of these effects are lower, probably because of our empirical strategy. Moreover, the sector/country analysis points out that other specific factors have been in place in shaping differently the euro effect on trade.

JEL Classification:

C33, F14, F15, F33, F4



Cite As

Sergio de Nardis, Roberta De Santis, and Claudio Vicarelli (2008). The Single Currency’s Effects on Eurozone Sectoral Trade: Winners and Losers? Economics Discussion Papers, No 2008-1, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2008-1

Comments and Questions

Val Samonis - RE: your sectoral approach
January 16, 2008 - 15:00

I believe that your sectoral approach is very good: gives rise to lots of thinking when you consider a comparative value of the analysis.Regards. val samonis.

Albert de Vaal - Two comments
January 28, 2008 - 13:00

As a non-empiriscist I have the following two issues with the paper.

First, the paper is not well motivated and especially the introduction leaves much to be desired in this respect. Perhaps the authors should take elements of section 2 into the introduction to convince readers why this would ...[more]

... be an interesting issue to consider, in light of other literature, highlighting what their novel contribution is. Also the purpose of the paper is not very clear. It deals with the effect of introducing the euro on EU’s sectoral trade flows, but with whom is unclear. Is it intra-EU trade or EU-trade at large? The data set used suggests the latter, but it is not clear explicitly mentioned. The introduction should improve in these and other respects.

Second, the focus of the paper is empirical, but this should not mean that theory should not be treated at some length. It would be useful if the authors would devote a separate section in which they would use theory to formulate expectations and provide underpinnings for their empirical specification. Certain elements of section 2 could be used, but this does not seem enough. Theory could help to determine which variables to include in the specification. The specification now includes the usual suspects and some other variables that are also used in other empirical papers, but a clear theoretically based motivation is lacking. As such it is not clear whether or not the analysis suffers form omitted variable bias. To give an example of the potential usefulness of theory, consider the following. Basic trade theory frameworks establish that lower transaction costs would increase intra-industry trade, leading to bigger exports for all countries involved. At the same time, it would increase inter-industry trade related specialization, implying more trade for those countries exporting these goods. A useful variable to include might thus be the intra-industry index of sectors.

roberta de santis - Reply de Nardis, De Santis, Vicarelli
February 01, 2008 - 16:35

First of all we wish to thank you for your helpful comments. There are some points that require clarification.
1. Just to emphasize, the contribution of the paper lies in:
(i) estimating the trade-consequences of the single currency across industries of Euro Area members; this effort is worthwhile because ...[more]

... it helps give clues on what is behind the (modest) aggregate effect that is detected in literature. Empirical studies that estimate the euro effect at sector level, as underlined in paragraph 2, are still very scarce.
(ii) performing estimates introducing dynamics and using System GMM estimator in accordance with the recent findings in the empirical literature (the reasons of this choice are explained in paragraph 3).
2. As for the countries sample specification:

i) Our estimates, as described in paragraph 4, comprise 23 countries. The pool of the economies consisted of 23 developed countries: 13 EU members, and 10 OECD countries: Korea, Czech Republic, Australia, Canada, Japan, New Zealand, Norway, Mexico, Switzerland and United States. We considered 13 exporting European countries and 23 importing industrialized countries (13 EU + 10 OECD). Therefore we are estimating Eu trade “at large”.

3. As for your suggestion to introduce theory in the paper:

i) in the paper we implicitly refer to the Melitz (2003) model which is basically a Helpman and Krugman (1985) model with two key innovations: fixed cost of entering a new market and differences in firm’s marginal production costs. However, to introduce a separate section in which using theory to formulate expectations and provide underpinnings for the empirical specification seems to us a very good idea that will certainly improve our paper.

Helena Marques - A timely account of the Euro
February 24, 2008 - 22:33

This paper presents two main points of interest:
1) It tries to pinpoint where exactly the Euro effect lies at the sector and country level.
2) It does that by using a technique that has been in focus in recent literature and eliminates the biases of OLS with a lagged ...[more]

... dependent variable.

I agree that it would be useful to add a developed theoretical section to the paper, or at least to explain more carefully which explanatory variables have been used in the published studies cited. An associated important issue is that of the distinction between what is now called "extensive margin" (more goods being taded) and "intensive margin" (a higher quantity of existing goods being traded). This relates to the already mentioned distinction between intra- and inter-industry trade, but does not necessarily overlap. On the other hand, the importance of the degree of product differentiation is also recognised by the authors.

Additionally, it would be useful to make clear how exactly this study differs from Fernandes (2006).

In equation (1), how does the use of the time trend differs from that of year dummies? It would be useful to see the full estimation results, even if only as an appendix. Could the difference between these estimates and those in Flam and Nordstrom (2006) be due to the use of a static model by the latter?

Anonymous - Referee Report
February 28, 2008 - 09:55

see attached file

Ansgar Belke and Julia Spies, IAW Tübingen - Comments
February 29, 2008 - 12:03

see attached file

roberta de santis - Reply to Marques, Belke, Spies
March 07, 2008 - 12:34

Reply de Nardis, De Santis, Vicarelli

roberta de santis - Reply to the referee
March 11, 2008 - 15:42

see the attached file

Alena Kimakova - Invited Reader Report
March 13, 2008 - 16:19

see attached file

Volker Nitsch - Referee Report
March 18, 2008 - 15:41

see attached file

Anonymous - reply to alena kimakova
March 19, 2008 - 16:41

see the attached file

roberta de santis - Reply to Volker Nitsch
March 19, 2008 - 17:58

See attached file