Jeffrey Frankel – The estimated effects of the Euro on trade

Enormous political, administrative, legal, intellectual efforts of CNB, Croatian government, etc. to negotiate with EU and reach EMU entry criteria

There clearly is a pot of gold at the end of the rainbow.

And says the pot of gold is a lot smaller than they think in Zagreb.

Or is it?

This paper is an econometric detective story to find out?

Use a large panel data set with a standard gravity specification to look at trade between country pairs.

Put in a dummy variable for currency unions and they have an enormous impact.

But, initial studies of the € indicate that it is different. The trade effect is there but much smaller than other currency unions.

Initial studies used 5 years of experience, we now have a few more.

Perhaps, we need to be patient Or it really is different

◦ Is it possible that the most ambitious and successful currency union is less trade inducing

If it is different, WHY?

Maybe standard results is an overestimate rather than € effect an underestimate.◦ A few years ago I went to Curacao after a visit

to nearby Caracas and ran out of toothpaste. Why is Curacaoan Colgate Dutch?

Maybe the long run up to the € meant that all the trade effects occurred in anticipation – long leads instead of lags.

Hard to distinguish EMU effects from EU effects. Are we seeing EMU effects are lagged EU effects now?

Maybe Euroland trade was relatively integrated before the EMU so there was not much way to go.

Maybe there is some hokey econometrics going on.

Lags not the answer - € has been around long enough

All those mini country currency unions may really be ‘out of sample’ but size does not effect results

Endogeneity – currency unions follow trade rather than vice versa. Perhaps, but ‘natural experiments’ do not support this.

Table 5A OLS 92-06 full sample (n=100,747)

◦ Non-EMU union 0.752** 2.1x effect◦ EMU -0.017

Table 6A OLS full sample 48-06(n=166,609)

◦ Non-EMU union 0.309** 1.4x effect◦ EMU 1.005** 2.73x effect

EMU effect (Table 6A 48-06)◦ Disappears in OLS if we move from full sample to

developed countries.◦ Reappears if we move to EU sample but an one-

fourth size◦ Persists with fixed effects but at one-tenth size

Tendency to look at all the results and rationalize the sample that produces ‘nice’ or ‘right’ results

But, perhaps we should conclude that we just don’t know

Unless, we have good reason to choose among approaches.

We need to call in a statistician who does not know an export from an import.

To see how to choose a model and an estimator

And how to interpret coefficients

1. There is a universe of 160,000+ country pairs but the € impact is drawn from a few years in a narrow corner of the world. ◦ How do I know if the sample is homogeneous?◦ What is the correct data universe for looking at

the € experiment?

2. When should I include fixed effects and for what?◦ How do time and/or country fixed effects change

the way I interpret coefficients in the equation?◦ We see that the choice effects estimates. Is one

specification correct? Or does interpretation vary with the specification?

There is no end to what you can do with 160,000 observations.

But, doing econometrics is the easy part. Knowing what to do and how to read the

results is easier…◦ What advice do we give to Zagreb?◦ Take these results back to the econometricians

before you give the acquis back to Brussels.