Abstract
In this paper we analyse the effect that the euro has had on trade using a gravity model for 28 countries and covering the period 1990–2013. Our gravity specification includes time-varying fixed effects, correcting any possible bias that may arise from multilateral resistance variables or unobserved time-varying heterogeneity. Additionally, we explore the potential complementarity or substitution relationship between FDI and trade by including FDI inward and outward stocks in the specification. The time period in the dataset covers the creation and evolution of the European Monetary Union (EMU), starting from the introduction of notes and coins and including the recent economic crisis. Overall, our results show a positive effect of the EMU on trade and reveal the existence of a complementary relationship between trade and FDI.
Notes
References
Aizenman J, Ilan N (2006) FDI and trade – two way linkages? The Quarterly Review of Economics and Finance 46:317–337
Albuquerque R, Loayza N, Serven L (2005) World market integration through the lens of foreign direct investors. J Int Econ 66:267–295
Anderson JE, Yotov Y (2012) Gold standard gravity. NBER working papers 7835
Anderson J (1979) A theoretical foundation for the gravity equation. Am Econ Rev 69:106–116
Anderson JE, van Wincoop E (2003) Gravity with gravitas: a solution to the border puzzle. Am Econ Rev 93:170–192
Baier S, Bergstrand J (2001) The growth of world trade: tariffs, transport costs, and income similarity. J Int Econ 53:1–27
Baier S, Kerr A, Yotov Y (2017) Gravity, distance, and international trade. Survey to be published in a book by Edgar Elgar publishing, draft
Baldwin R, Taglioni D, (2006) Gravity for dummies and dummies for gravity equations. NBER working paper no. 12516
Baldwin R, Di Nino V, Lionel Fontagné RADS, Taglioni D (2008) Study on the impact of the euro on trade and foreign direct investment. Econ Pap 321
Bénassy-Quéré A, Coupet M, Mayer T (2007) Institutional determinants of foreign direct investment. World Econ 30:764–782
Bergin PR, Lin CY (2012) The dynamic effects of a currency union on trade. J Int Econ 87:191–204. https://doi.org/10.1016/j.jinteco.2012.01.005
Bergstrand J (1985) The gravity equation in international trade: some microeconomic foundations and empirical evidence. Rev Econ Stat 67:474–481
Brouwer J, Paap R, Viaene JM (2008) The trade and FDI effects of EMU enlargement. J Int Money Financ 27:188–208
Bun MJ, Klaassen FJ (2002) Has the euro increased trade? Tinbergen institute discussion paper no. 02-108/2, University of Amsterdam
Camarero M, Tamarit C (2004) Estimating exports and imports demand for manufactured goods: the role of FDI. Weltwirtsch Archiv 140:347–375
Camarero M, Gómez E, Tamarit C (2013) EMU and trade revisited: long-run evidence using gravity equations. World Econ 36:1146–1164
Camarero M, Gómez E, Tamarit C (2014) Is the ‘euro effect´ on trade so small after all? New evidence using gravity equations with panel cointegration techniques. Econ Lett 124:140–142
Campbell DL (2013) Estimating the impact of currency unions on trade: solving the Glick and rose puzzle. World Econ 36:1278–1293. https://doi.org/10.1111/twec.12062
De Sousa J, Lochard J (2011) Does the single currency affect foreign direct investment?, scan. J Econ 113:553–578
De Sousa J (2012) The currency union effect on trade is decreasing over time. Econ Lett 117:917–920
Devereux MP, Griffith R, Klemm A (2002) Corporate income tax reforms and international tax competition. Econ Policy 17(35):449–495
Eicher TS, Henn C (2011) One money, one market. A revised benchmark. Rev Int Econ 19:419–435
Faruqee H (2004) Measuring the trade effects of EMU. IMF Working Paper No 04/154
Flam H, Nordstrom H (2006) Trade volume effects of the euro: aggregate and sector estimates. Institute for International Economic Studies Seminar Papers no. 746, Stockholm University
Fontagné L (1999) Foreign direct investment and international trade: complements or substitutes?. OECD science, technology and industry working papers 1999/3
Fontagné L, Mayer T, Ottaviano GIP (2009) Of markets, products and prices: the effects of the euro on European firms. Intereconomics 44:149–158. https://doi.org/10.1007/s10272-009-0289-8
Frankel J, Rose AK (1998) The endogeneity of the optimum currency area criteria. Econ J 108:1009–1025
Feenstra R (ed) (2004) Advanced international trade: theory and evidence. Princeton University Press, Princeton
Feenstra R, Markusen J, Rose A (2001) Using the gravity equation to differentiate among alternative theories of trade. Can J Econ 34:430–447
Glick R, Rose AK (2002) Does a currency union affect trade? The time-series evidence. Eur Econ Rev 46:1125–1151
Glick R, Rose AK (2016) Currency unions and trade: a post-EMU reassessment. Eur Econ Rev 87:78–91
Helpman E, Melitz M, Rubinstein Y (2008) Estimating trade flows: trading partners and trading volumes. Q J Econ 123:441–487
Katayama H, Melatos M (2011) The nonlinear impact of currency unions on bilateral trade. Econ Lett 112:94–96
Kelejian H, Tavlas GS, Petroulas P (2012) In the neighborhood: the trade effects of the euro in a spatial framework. Reg Sci Urban Econ 42:314–322
Koike R (2004) Japan's foreign direct investment and structural changes in Japanese and east Asian trade, monetary and economic. Studies 22:145–182
Kreinin M, Plummer M (2008) Effects of regional integration on FDI: an empirical approach. Journal of Asian Economics 19:447–454
Micco A, Stein E, Ordonez G (2003) The currency union effect on trade: early evidence from the European Union. Econ Pol 18:315–356
Mitze T, Bjorn A, Gerhard U (2010) Trade-FDI linkages in a simultaneous equations system of gravity models for German regional data. Economie Internationale 122:121–162
Petroulas P (2007) The effect of the euro on foreign direct investment. Eur Econ Rev 51:1468–1491
Rose AK (2000) One money. One Market: The Effect of Common Currencies on Trade, Econ Pol 15:9–45
Rose AK, Stanley TD (2005) A meta-analysis of the effect of common currencies on international trade. J Econ Surv 19:347–365
Rose A (2017) Why do estimates of the EMU effect on trade vary so much? Open Econ Rev 28:1–18
Santos-Silva JM, Tenreyro S (2006) The log of gravity. Rev Econ Stat 88:641–658
Schiavo S (2007) Common currencies and FDI flows. Oxf Econ Pap 59:536–560
Serlenga L, Shin Y (2007) Gravity models of intra-eu trade: application of the ccep-ht estimation in heterogeneous panels with unobserved common time-specific factors. J Appl Econ 22:361–381
Yotov YV, Piermartini R, Monteiro J-A, Larch M (2016) An advanced guide to trade policy analysis: the structural gravity model. UNCTAD and WTO, Geneva, p 67
Westerlund J, Wilhelmsson F (2009) Estimating the gravity model without gravity using panel data. Appl Econ 43:1–9
Acknowledgments
The authors acknowledge ISCEF Organizing Committee for the opportunity of presenting this article at the 4th International Symposium in Computational Economics and Finance. We also thank the Editor in Chief, the Guest Editor and the anonymous referees for their contribution to the improvement of this paper. Finally, the authors also acknowledge the financing from Spanish MINEIC and FEDER [project ECO2017-83255-C3-3-P].
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Camarero, M., Gómez-Herrera, E. & Tamarit, C. New Evidence on Trade and FDI: how Large is the Euro Effect?. Open Econ Rev 29, 451–467 (2018). https://doi.org/10.1007/s11079-018-9479-y
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11079-018-9479-y