Exchange Rates and Trade : The Impacts of the Euro on bilateral Export Flows

The purpose of this paper is to investigate how exports are affected by exchange rate risk, by analyzing the effects of the European monetary union (EMU) on exports. This is achieved by using a gravity model for nine EMU and nine non-EMU countries for the time period from 1996 to 2012. Total export values are first analyzed before the change in exports is investigated. The main finding is that the EMU membership does not affect export flows for the sample countries when time dummies are included in the model. Missing time effects to capture business cycles might be an explanation while previous researches find a positive currency union effect on trade. The variables influencing exports are the size and location of the countries rather than the currency union. The second approach investigates the influence of the currency union on changes in exports. A negative effect for the dummy variables for EU and EMU on changes in exports is found. The negative effect is unexpected and further research is needed to explain this. The time invariant distance measures in this model are not able to explain variation in exports, while the size still has a significant impact. The results suggest that the currency union does not increase export of member countries