Journal Article

The Role of Cross-Sectional Heterogeneity for Magnitude and Timing of the Euro's Trade Effect


  • Herwartz
  • H.
  • Weber
  • H.
Publication Date

This paper examines the role of cross-sectional heterogeneity for estimating the euro's effect on euro-area trade. In the empirical analysis, the impact of trade costs on trade and the transition dynamics to the new monetary regime can vary cross-sectionally in trade sectors and country pairs. Unobserved state variables that account for time-varying and omitted trade costs and multilateral resistance terms can also vary cross-sectionally. The results show that cross-sectional heterogeneity is strongly supported by the data and that the average euro effect coincides with consensus estimates. Decomposing the average effect uncovers large cross-sectional heterogeneity in its magnitude. Also, the average trade effect unfolds only gradually over time, since it is composed of many trade sectors that adjust at different dates.


JEL Classification
C31, C33, F13, F15, F33, F42

Key Words

  • coeffi?cient heterogeneity
  • Euro's trade eff?ect
  • smooth transition function