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): heterogenous firms , Eurozone trade effects , Melitz model , extensive margin

JEL(s): F12 , F21 , F33 , F4

Programme Areas: International Macroeconomics , International Trade and Regional Economics

Link to this Page: www.cepr.org/pubs/dps/DP5973.asp.asp

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.