Euros and zeros: The common currency effect on trade in new goods

Abstract

This paper tests whether trade in new goods were partially responsible for the pro-trade effects of the euro and provides a measure of the size of the effect. It works with a very large data (about 16 million observations) set covering twenty countries at the most disaggregated level of trade data that is publicly available. Using predictions from a heterogeneous-firms trade model in a multi-country environment to structure our empirical model, we find that the euro had a positive impact on trade overall. Our findings provide supportive but not conclusive evidence for the new-goods hypothesis. We also determined the pro-trade effect of euro-usage on non-Euroland nations trading with euro-users. We confirmed the absence of trade diversion for non-Eurozone EU members with sizeable overall increase comparable to that of members.heterogeneous firms, Eurozone trade effects, Melitz model, extensive margin.