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Title: Euros and Zeros: The Common Currency Effect on Trade in New Goods

Author(s): Richard Baldwin and Virginia Di Nino

Publication Date: December 2006

Keyword(s): Eurozone trade effects, extensive margin, heterogenous firms and Melitz model

Programme Area(s): International Macroeconomics and International Trade and Regional Economics

Abstract: This paper tests whether trade in new goods is partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data set (about 16 million observations) covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.

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Bibliographic Reference

Baldwin, R and Di Nino, V. 2006. 'Euros and Zeros: The Common Currency Effect on Trade in New Goods'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5973