DP5973 Euros and Zeros: The Common Currency Effect on Trade in New Goods

Author(s):	Richard Baldwin, Virginia Di Nino
Publication Date:	December 2006
Keyword(s):	Eurozone trade effects, extensive margin, heterogenous firms, Melitz model
JEL(s):	F12, F21, F33, F4
Programme Areas:	International Macroeconomics, International Trade and Regional Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=5973

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.