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The Effects of the Euro on Intra-Euro Area Exports



Microsoft Word - 3.Bulletin GavinIulia ESRI Research Bulletin 2011/3/3 The Effects of the Euro on Intra­Euro Area Exports *Gavin Murphy and Iulia Siedschlag An important argument for the adoption of the euro was the expectation that it would boost trade. Existing theory suggests several channels through which the euro would enhance trade. First, eliminating exchange rate uncertainty reduces the risks associated with trading when different currencies are in use. Second, eliminating transaction costs related to operations in different currencies is likely to lead to an increased volume of trade. Third, increased price transparency fosters competition among firms and leads to a fall in the mark‐up which in turn is expected to increase the volume of bilateral trade. Fourth, the single currency could improve the ability of euro area countries to hedge against exchange rate risk in their trade with non‐euro area countries. This suggests that the euro might also boost trade with countries outside the euro area. However, existing empirical evidence on euro‐enhanced trade is inconclusive. In a recent paper** we analyse the effects of the euro on Irish exports to euro area countries. Our results indicate that the euro effect on Irish exports to euro area countries relative to the rest of the trading partners of Ireland has been positive, significant and increasing since 2000. Furthermore, we find that the impact of the euro on trade varies across industries. We find consistent significant positive euro effects for industries characterised by increasing returns to scale. We use a panel of annual data on export flows between Ireland and its main trading partners across 21 industries over the period 1993‐2004. We focus in particular on Irish exports to 28 OECD countries. Ireland exported on average approximatel

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