This paper has benefited much from the comments of two anonymous referees. We wish to thank Lukas Mohler and Michael Seitz for sharing their data and estimates of the elasticity of substitution for European Union countries at the product level.
Currency Unions, Export Margins, and Product Differentiation: An Empirical Assessment for European Monetary Union
Version of Record online: 13 JAN 2014
© 2014 John Wiley & Sons Ltd
Review of International Economics
Volume 22, Issue 1, pages 13–30, February 2014
How to Cite
Badinger, H. and Türkcan, K. (2014), Currency Unions, Export Margins, and Product Differentiation: An Empirical Assessment for European Monetary Union. Review of International Economics, 22: 13–30. doi: 10.1111/roie.12094
- Issue online: 13 JAN 2014
- Version of Record online: 13 JAN 2014
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.