To peg or to join - Estimating the effects on bilateral trade of an EMU membership and a direct fixed exchange rate regime.

Abstract

This thesis report examines the impact on trade, within the European Union, of an EMU membership and a direct fixed exchange rate regime during the period 2003-2012. This has been done using the gravity model of trade and three different estimation techniques, the Pooled OLS model, the fixed effects model and the random effects model. Previous research in this area has focused on estimating the trade effects in a global perspective. As far as we are aware, this report is the first to study this topic in a strictly European context. Since the composition of countries using a common currency apart from the Eurozone, to a large extent, consists of small and poor countries our estimated results, from a data set with a high concentration of OECD countries, are an interesting benchmark to earlier studies. Our core result indicates that two members of the EMU trade 9.3 % more between each other than if one of the countries is a member of the EMU and the other has a direct fixed exchange rate to the euro.