Euro Effect on Trade in Final, Intermediate and Capital Goods

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 intensive 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 specialization.