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Currency Unions, Export Margins, and Product Differentiation: An Empirical Assessment for E uropean M onetary U nion
Author(s) -
Badinger Harald,
Türkcan Kemal
Publication year - 2014
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12094
Subject(s) - margin (machine learning) , economics , elasticity (physics) , elasticity of substitution , monetary economics , product (mathematics) , product differentiation , currency , exchange rate , econometrics , international trade , international economics , microeconomics , production (economics) , computer science , mathematics , composite material , materials science , geometry , machine learning , cournot competition
This paper reconsiders the trade effects of the euro, providing a decomposition into its effects on the extensive margin and intensive margin. Furthermore, it relates the more disaggregated estimates for 93 two‐digit HS product groups to the elasticity of substitution, thereby testing a key hypothesis of heterogenous firm trade theory. The estimates for the period 1996–2011 suggest a trade effect of the euro of some 28%, which has mainly materialized through the intensive margin. A negative net effect of the euro on the extensive margin is found for several product groups, supporting anecdotal evidence that firms have consolidated their product varieties in response to the elimination of exchange rate variability. Finally, the disaggregated estimates are in line with heterogenous firm trade theory models, suggesting that a large elasticity of substitution dampens the effect of a trade cost reduction on the extensive margin and amplifies its effect on the intensive margin.