Working Papers,
Lund University, Department of Economics

Abstract: This paper investigates trade effects of the euro focusing on the impact on bystanders. A common currency is expected to lower both variable and fixed trade costs, inducing increased trade flows between currency-union members on both intensive and extensive margins of trade. While this trade-creating effect has gained attention in recent work using firm-level data, few studies have looked on the possible trade-diverting effect for firms remaining outside. In this paper, we use data for Swedish manufacturing firms covering the 1997-2006 period in order to assess the potential trade-diverting effects of the euro on Swedish exports. We consider variations in the impact of the euro taking both firm, industry and export-market characteristics into account. Our results suggest that there are some trade-diverting effects on the intensive margin but that these negative effects of the euro on trade flows are asymmetric and only valid for core markets within the Eurozone.

Keywords: euro; trade diversion; exports; heterogeneous firms

JEL-codes: F10

23 pages, September 12, 2014

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