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The Impact of the E uro on the Quality of Trade: Evidence from the E uropean U nion
Author(s) -
Ito Tadashi,
Okubo Toshihiro
Publication year - 2016
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/manc.12112
Subject(s) - economics , currency , currency union , international economics , quality (philosophy) , monetary economics , common currency , volatility (finance) , exchange rate , single currency , international trade , econometrics , philosophy , epistemology
This paper examines the effects of a common currency on the quality of traded goods. For this purpose, we construct a quality‐based heterogeneous firm trade model to incorporate the formation of currency unions and the ensuing elimination of exchange rate volatility. Our main hypothesis is that a common currency enables low‐quality (low marginal cost) firms to commence exporting to the common currency's member countries, which causes the average export price to fall. We empirically test this hypothesis for the euro and the eurozone using H armonized S ystem 8‐digit traded product data for E uropean U nion countries.