nep-mon New Economics Papers
on Monetary Economics
Issue of 2008‒01‒26
29 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Optimal Monetary Policy Rules under Persistent Shocks By Bhattacharya, Joydeep; Singh, Rajesh
  2. Which predictor is the best to predict inflation in Europe: the real money-gap or a nominal money based indicator? By Gilles Dufrénot; Roseline Joyeux; Anne Peguin-Feissolle
  3. Monetary Policy and Learning from the Central Bankfs Forecast By Ichiro Muto
  4. Substitution between domestic and foreign currency loans in Central Europe. Do central banks matter? By Brzoza-Brzezina, Michał; Chmielewski, Tomasz; Niedźwiedzińska, Joanna
  5. Monetary policy implementation frameworks: a comparative analysis By Antoine Martin; Cyril Monnet
  6. The Monetary Transmission Mechanism in Egypt By Andreas Billmeier; Rania Al-Mashat
  7. An Estimated DSGE Model for Monetary Policy analysis in Low-Income Countries By Shanaka J. Peiris; Magnus Saxegaard
  8. The working of the eurosystem - monetary policy preparations and decision-making – selected issues By Philippe Moutot; Alexander Jung; Francesco Paolo Mongelli
  9. Inflation-Gap Persistence in the U.S. By Timothy Cogley; Giorgio E. Primiceri; Thomas J. Sargent
  10. Global Forces and Monetary Policy Effectiveness By Jean Boivin; Marc Giannoni
  11. Monetary Policy and External Shocks in a Dollarized Economy with Credit Market Imperfections By Koray Alper
  12. Revisiting money-output causality from a Bayesian logistic smooth transition VECM perspective By Deborah Gefang
  13. Modeling Inflation for Mali By Mame Astou Diouf
  14. Implementing the Friedman Rule by a Government Loan Program:<br> An Overlapping Generations Model By Benjamin Eden
  15. Admissible Functional Forms in Monetary Economics By Neil Arnwine
  16. The FOMC versus the Staff: Where Can Monetary Policymakers Add Value? By Christina D. Romer; David H. Romer
  17. Phillips curves, monetary policy, and a labor market transmission mechanism By Robert R. Reed; Stacey L. Schreft
  18. The Taylor rule and the transformation of monetary policy By Pier Francesco Asso; George A. Kahn; Robert Leeson
  19. Expectations, Learning and Monetary Policy: An Overview of Recent Research By George Evans; Seppo Honkapohja
  20. Great moderations and U.S. interest rates: unconditional evidence By James M. Nason; Gregor W. Smith
  21. Financial Globalization and Monetary Policy By Michael B. Devereux; Alan Sutherland
  22. Inflation Targeting, the Natural Rate and Expectations By David Kiefer
  23. The Demand for Currency Substitution By Seater, John J.
  24. Is Brazil Different? Risk, Dollarization, and Interest Rates in Emerging Markets By Fernando M. Goncalves; Edmar L. Bacha; Marcio Holland
  25. Price determinacy under non-Ricardian fiscal strategies By Óscar J. Arce
  26. Pro-Growth Alternatives for Monetary and Financial Policies in Sub-Saharan Africa By Robert Pollin; Gerald Epstein; James Heintz
  27. Sui Generis EMU By Barry Eichengreen
  28. Can We Rule Out Speculative Hyperinflations in Maximising Models? Yes, We Can. By William Coleman
  29. The Single Currency's Effects on Eurozone Sectoral Trade: Winners and Losers? By de Nardis, Sergio; De Santis, Roberta; Vicarelli, Claudio

  1. By: Bhattacharya, Joydeep; Singh, Rajesh
    Abstract: The tug-o-war for supremacy between inflation targeting and monetary targeting is a classic yet timely topic in monetary economics. In this paper, we revisit this question within the context of a pure-exchange overlapping generations model of money where spatial separation and random relocation create an endogenous demand for money. We distinguish between shocks to real output and shocks to the real interest rate. Both shocks are assumed to follow AR(1) processes. Irrespective of the nature of shocks, the optimal inflation target is always positive. Under monetary targeting, shocks to endowment require negative money growth rates, while under shocks to real interest rates it may be either positive or negative depending on the elasticity of consumption substitution. Also, monetary targeting welfare-dominates inflation targeting but the gap between the two vanishes as the shock process approaches a random walk. In sharp contrast, for shocks to the real interest rate, we prove that monetary targeting and inflation targeting are welfare-equivalent only in the limit when the shocks become i.i.d.! The upshot is that persistence of the underlying fundamental uncertainty matters: depending on the nature of the shock, policy responses can either be more or less aggressive as persistence increases.
    Keywords: real shocks, persistence, overlapping generations, random relocation model, monetary targeting, inflation targeting
    JEL: E3 E4 E6
    Date: 2008–01–14
  2. By: Gilles Dufrénot (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579); Roseline Joyeux (Macquarie University - Macquarie University); Anne Peguin-Feissolle (GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille - Université de la Méditerranée - Aix-Marseille II - Université Paul Cézanne - Aix-Marseille III - Ecole des Hautes Etudes en Sciences Sociales - CNRS : UMR6579)
    Abstract: In the literature, two important views concerning the conduct of monetary policy are construed. One view is that the central banks’ monetary policy must be credible if the authorities want to curb inflation. A second view is that central banks set their monetary policy by using all the information relevant for inflation and output projections. In Europe, a controversy has emerged about the role of monetary aggregates as useful indicators of future inflation and output. On one hand, evidence in favour of the usefulness of nominal monetary aggregates as good predictors is provided by the literature. On the other hand, empirical evidence in favour of real money indicators is found. The purpose of this paper is to contribute to the ongoing debate on the role of money aggregates in the setting of monetary policy. The question we are interested in is whether the real money gap contains more information about future inflation in Europe, than an indicator based on the growth rate of nominal money. We use a panel data framework instead of the usual time series methods on aggregate Euro data.
    Keywords: monetary policy ; inflation ; panel data
    Date: 2008–01–18
  3. By: Ichiro Muto (Institute for Monetary and Economic Studies, Bank of Japan (E-mail:
    Abstract: We examine the expectational stability (E-stability) of the rational expectations equilibrium (REE) in a simple New Keynesian model in which private agents engage in adaptive learning by referring to the central bank's forecast. In this environment, to satisfy the E-stability condition, the central bank must respond more strongly to the expected inflation rate than the so-called Taylor principle suggests. On the other hand, the central bank's strong reaction to the expected inflation rate raises the possibility of indeterminacy of the REE. In considering these problems, a robust policy is to respond to the current inflation rate to a certain degree.
    Keywords: Adaptive Learning, E-stability, New Keynesian Model, Monetary Policy, Taylor principle
    JEL: E52 D84
    Date: 2008–01
  4. By: Brzoza-Brzezina, Michał; Chmielewski, Tomasz; Niedźwiedzińska, Joanna
    Abstract: In this paper we ask a question about the impact of monetary policy on total bank lending in the presence of a developed market for foreign currency denominated loans and potential substitutability between domestic and foreign currency loans. Our results, based on a panel of three biggest Central European countries (the Czech Republic, Hungary and Poland) confirm the existence of the substitution effect between these loans. Restrictive monetary policy leads to a decrease in domestic currency lending but simultaneously accelerates foreign currency denominated loans. This makes the central bank's job harder with respect to providing both, monetary and financial stability.
    Keywords: domestic and foreign currency loans; substitution; monetary policy; financial stability; Central Europe
    JEL: E58 E52 E44
    Date: 2007
  5. By: Antoine Martin; Cyril Monnet
    Abstract: We compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. We show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, we show that the first framework unambiguously achieves higher welfare than the second one. We conclude that an optimal system of monetary policy implementation should contain elements of both frameworks. Our results also suggest that any such system should pay interest on both required and excess reserves.
    Keywords: Monetary policy ; Open market operations ; Friedman, Milton ; Banks and banking, Central
    Date: 2008
  6. By: Andreas Billmeier; Rania Al-Mashat
    Abstract: This paper examines the monetary transmission mechanism in Egypt against the background of the central bank's intention to shift to inflation targeting. It first describes the changing transmission channels over the last decade. Second, the channels are evaluated in a VAR model. The exchange rate channel plays a strong role in propagating monetary shocks to output and prices. Most other channels (bank lending, asset price) are rather weak. The interest rate channel is underdeveloped but appears to be strengthening since the introduction of the interest corridor in 2005, which bodes well for adopting inflation targeting over the medium term.
    Keywords: Monetary policy , Egypt, Arab Republic of , Inflation targeting , Exchange rates ,
    Date: 2007–12–19
  7. By: Shanaka J. Peiris; Magnus Saxegaard
    Abstract: This paper evaluates monetary policy-tradeoffs in low-income countries using a dynamic stochastic general equilibrium (DSGE) model estimated on data for Mozambique taking into account the sources of major exogenous shocks, and level of financial development. To our knowledge this is a first attempt at estimating a DSGE model for Sub-Saharan Africa excluding South Africa. Our simulations suggests that a exchange rate peg is significantly less successful than inflation targeting at stabilizing the real economy due to higher interest rate volatility, as in the literature for industrial countries and emerging markets.
    Keywords: Monetary policy , Africa , Currency pegs , Inflation targeting , Low-income developing countries ,
    Date: 2007–12–19
  8. By: Philippe Moutot (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Alexander Jung (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Francesco Paolo Mongelli (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: The ECB’s monetary policy has received considerable attention in recent years. This is less the case, however, for its regular monetary policy preparation and decision-making process. This paper reviews how the factors usually considered as critical for the success of a central banking system and the federal nature of the Eurosystem are intertwined with its overall design and the functioning of its committee architecture. In particular, it examines the procedures for preparing monetary policy decisions and the role of the decision-making bodies and the committees therein. We suggest that technical committees, involving all national central banks (NCBs), usefully contribute to the regular processing of a vast amount of economic, financial and monetary data, as well as to the consensus building at the level of the Governing Council. A federal organisational structure, including a two-tier committee structure with the Executive Board taking the lead in preparing the monetary policy decisions and the Governing Council in charge of the decisions with collective responsibility for them, as well as committee work at the various hierarchical levels, contributes to the efficiency of the ECB’s monetary policy decision-making, and thereby facilitates the maintenance of price stability in the euro area. A fully-fledged committee structure has also contributed to the smooth integration of non-euro area Member States into the Eurosystem’s monetary policy decision-making process. JEL Classification: E42, E58, F33, F42.
    Keywords: European economic and monetary integration, monetary arrangements, central banks and their policies.
    Date: 2008–01
  9. By: Timothy Cogley; Giorgio E. Primiceri; Thomas J. Sargent
    Abstract: We use Bayesian methods to estimate two models of post WWII U.S. inflation rates with drifting stochastic volatility and drifting coefficients. One model is univariate, the other a multivariate autoregression. We define the inflation gap as the deviation of inflation from a pure random walk component of inflation and use both of our models to study changes over time in the persistence of the inflation gap measured in terms of short- to medium-term predicability. We present evidence that our measure of the inflation-gap persistence increased until Volcker brought mean inflation down in the early 1980s and that it then fell during the chairmanships of Volcker and Greenspan. Stronger evidence for movements in inflation gap persistence emerges from the VAR than from the univariate model. We interpret these changes in terms of a simple dynamic new Keynesian model that allows us to distinguish altered monetary policy rules and altered private sector parameters.
    JEL: C11 C15 C32 E3 E52
    Date: 2008–01
  10. By: Jean Boivin; Marc Giannoni
    Abstract: In this paper, we quantify the changes in the relationship between international forces and many key US macroeconomic variables over the 1984-2005 period, and analyze changes in the monetary policy transmission mechanism. We do so by estimating a Factor-Augmented VAR on a large set of US and international data series. We find that the role of international factors in explaining US variables has been changing over the 1984-2005 period. However, while some US series have become more correlated with global factors, there is little evidence suggesting that these factors have become systematically more important. We don't find strong evidence of a change in the transmission mechanism of monetary policy due to global forces. Taking our point estimates literally, global forces do not seem to have played an important role in the US monetary transmission mechanism between 1984 and 1999. In addition, since the year 2000, the initial response of the US economy following a monetary policy shock --- the first 6 to 8 quarters --- is essentially the same as the one that has been observed in the 1984-1999 period. However, point estimates suggest that the growing importance of global forces might have contributed to reducing some of the persistence in the responses, two or more years after the shocks. Overall, we conclude that if global forces have had an effect on the monetary transmission mechanism, this is a recent phenomenon.
    JEL: C32 C53 E31 E32 E40 F41
    Date: 2008–01
  11. By: Koray Alper
    Date: 2007
  12. By: Deborah Gefang
    Abstract: This paper proposes a Baysian approach to explore money-output causality within a logistic smooth transition VECM framework. Our empirical results provide substantial evidence that the postwar US money-output relationship is nonlinear, with regime changes mainly governed by the lagged inflation rates. More importantly, we obtain strong support for long-run non-causality and nonlinear Grangercausality from money to output. Furthermore, our impulse response analysis reveals that a shock to money appears to have negative accumulative impact on real output over the next fifty years, which calls for more caution when using money as a policy instrument.
    Date: 2008–01
  13. By: Mame Astou Diouf
    Abstract: This paper investigates how consumer price inflation is determined in Mali for 1979-2006 along three macroeconomic explanations: (1) monetarist theories, emphasizing the impact of excess money supply, (2) the structuralist hypothesis, stressing the impact of supply-side constraints, and (3) external theories, describing the effects of foreign transmission mechanisms on a small open economy. The analysis makes use of cointegration techniques and general-to-specific modeling. Average national rainfall, and to a lesser extent deviations from monetary and external sector equilibrium are found to be the main long-run determinants of inflation. The paper offers policy recommendations for controlling inflation in Mali.
    Keywords: Inflation , Mali , Real effective exchange rates , Demand for money ,
    Date: 2008–01–02
  14. By: Benjamin Eden (Department of Economics, Vanderbilt University)
    Abstract: The welfare gains from adopting a zero nominal interest policy depend on the implementation details. Here I argue that implementing the Friedman rule by a government loan program may be better than implementing it by collecting taxes, even when lump sum taxes are possible. The government loan program will crowd out lending and borrowing and other money substitutes. Since money can be costlessly created the resources spent on creating money substitutes are a "social waste". Moving from an economy with strictly positive nominal interest rate to an economy with zero nominal interest rate will increase consumption by the amount of resources spent on lending and borrowing. But in general welfare will increase by more than that because consumption smoothing is better under zero nominal interest rate.
    Keywords: Government loans, welfare cost of inflation, money substitutes, wealth redistribution, Friedman rule
    JEL: E42 E52 E51 E58 H20 H21 H26
    Date: 2008–01
  15. By: Neil Arnwine
    Date: 2007
  16. By: Christina D. Romer; David H. Romer
    Abstract: Should monetary policymakers take the staff forecast of the effects of policy actions as given, or should they attempt to include additional information? This paper seeks to shed light on this question by testing the usefulness of the FOMC's own forecasts. Twice a year, the FOMC makes forecasts of major macroeconomic variables. FOMC members have access to the staff forecasts when they prepare their forecasts. We find that the optimal combination of the FOMC and staff forecasts in predicting inflation and unemployment puts a weight of essentially zero on the FOMC forecast and essentially one on the staff forecast: the FOMC appears to have no value added in forecasting. The results for predicting real growth are less clear-cut. We also find statistical and narrative evidence that differences between the FOMC and staff forecasts help predict monetary policy shocks, suggesting that policymakers act in part on the basis of their apparently misguided information.
    JEL: E37 E52 E58
    Date: 2008–01
  17. By: Robert R. Reed; Stacey L. Schreft
    Abstract: This paper develops a general equilibrium monetary model with performance incentives to study the inflation-unemployment relationship. A long-run downward-sloping Phillips curve can exist with perfectly anticipated inflation because workers’ incentive to exert effort depend on financial market returns. Consequently, higher inflation rates can reduce wages and stimulate employment. An upward-sloping or vertical Phillips Curve can arise instead, depending on agents’ risk aversion and the possibility of capital formation. Welfare might be higher away from the Friedman rule and with a central bank putting some weight on employment.
    Date: 2007
  18. By: Pier Francesco Asso; George A. Kahn; Robert Leeson
    Abstract: This paper examines the intellectual history of the Taylor Rule and its considerable influence on macroeconomic research and monetary policy. The paper traces the historical antecedents to the Taylor rule, emphasizing the contributions of three prominent advocates of rules--Henry Simons, A.W. H. Phillips, and Milton Friedman. The paper then examines the evolution of John Taylor's thinking as an academic and policy advisor leading up to his formulation of the Taylor rule. Finally, the paper documents the influence of the Taylor rule on macroeconomic research and the Federal Reserve's conduct of monetary policy.
    Date: 2007
  19. By: George Evans; Seppo Honkapohja
    Abstract: Expectations about the future are central for determination of current macroeconomic outcomes and the formulation of monetary policy. Recent literature has explored ways for supplementing the benchmark of rational expectations with explicit models of expectations formation that rely on econometric learning. Some apparently natural policy rules turn out to imply expectational instability of private agents’ learning. We use the standard New Keynesian model to illustrate this problem and survey the key results about interest-rate rules that deliver both uniqueness and stability of equilibrium under econometric learning. We then consider some practical concerns such as measurement errors in private expectations, observability of variables and learning of structural parameters required for policy. We also discuss some recent applications including policy design under perpetual learning, estimated models with learning, recurrent hyperinflations, and macroeconomic policy to combat liquidity traps and deflation.
    Keywords: Imperfect knowledge, learning, interest-rate setting, fluctuations, stability, determinacy.
    JEL: E52 E31 D84
    Date: 2008–01
  20. By: James M. Nason; Gregor W. Smith
    Abstract: The Great Moderation refers to the fall in U.S. output growth volatility in the mid-1980s. At the same time, the United States experienced a moderation in inflation and lower average inflation. Using annual data since 1890, we find that an earlier, 1946 moderation in output and consumption growth was comparable to that of 1984. Using quarterly data since 1947, we also isolate the 1969–83 Great Inflation to refine the asset pricing implications of the moderations. Asset pricing theory predicts that moderations—real or nominal—influence interest rates. We examine the quantitative predictions of a consumption-based asset pricing model for shifts in the unconditional average of U.S. interest rates. A central finding is that such shifts probably were related to changes in average inflation rather than to moderations in inflation and consumption growth.
    Date: 2008
  21. By: Michael B. Devereux; Alan Sutherland
    Abstract: What does financial globalization imply for the design of monetary policy? Does the case for price stability change in an environment of large cross country gross asset holdings?. This paper is concerned with the effects of monetary policy under endogenous international portfolio choice and incomplete markets. With endogenous portfolios, monetary policy takes on new importance due to its impact on the distribution of returns on nominal assets. Surprisingly, we find an even stronger case for price stability in this environment. Even without nominal rigidities, price stability has a welfare benefit by enhancing the risk sharing capacity of nominal bond returns.
    Keywords: Globalization , Monetary policy , Capital flows , Exchange rate instability , International capital markets ,
    Date: 2007–12–19
  22. By: David Kiefer
    Abstract: In the new Keynesian model of endogenous stabilization governments have objectives with respect to macroeconomic performance, but are constrained by an augmented Phillips curve. Because they react quickly to inflation shocks, governments can lean against the macroeconomic wind. We develop an econometric test of this characterization of the political-economic equilibrium using the Kalman filter. Applying this methodology to a variety of quadratic social welfare functions, we find that an inflation target functional form is consistent with US history. We also find it more likely that expectations of inflation are adaptive, rather than rational.
    Keywords: endogenous stabilization, policy objectives, adaptive expectations
    JEL: E61 E63
    Date: 2008–03
  23. By: Seater, John J.
    Abstract: A transactions model of the demand for multiple media of exchange is developed. Some results are expected, and others are both new and surprising. There are both extensive and intensive margins to currency substitution, and inflation may affect the two margins differently, leading to subtle incentives to adopt or abandon a substitute currency. Variables not previously considered in the literature affect currency substitution in complex and somewhat unexpected ways. In particular, the level of income and the composition of consumption expenditures are important, and they interact with the other variables in the model. Independent empirical work provides support for the theory.
    Keywords: Currency substitution, Dollarization
    JEL: E31 E41 E42
    Date: 2008
  24. By: Fernando M. Goncalves; Edmar L. Bacha; Marcio Holland
    Abstract: We investigate the role of financial dollarization in the determination of real interest rates in emerging economies. In a simple analytical model, we show that a strategy of "dedollarizing" the economy, if it fails to address fundamental macroeconomic risks, leads to higher domestic real interest rates. We confirm this prediction in an empirical model, but find that the effect is small after controlling for the risks of dilution and default. Brazil provides a natural case study given its low degree of financial dollarization and very high real interest rates. The estimated model is unable to explain the high interest rate levels in the aftermath of Brazil's 1994 inflation stabilization. However, since the adoption in 1999 of inflation targeting and floating exchange rates, Brazil's real interest rates are gradually converging to the model's predicted values. The estimation also shows that further drops in Brazil's real interest rates could be achieved more effectively through improvements in fundamentals that lead to investment-grade status rather than through financial dollarization.
    Keywords: Dollarization , Brazil , Interest rates , Emerging markets ,
    Date: 2008–01–02
  25. By: Óscar J. Arce (Banco de España)
    Abstract: This paper shows that there exist fiscal strategies that deliver equilibrium uniqueness in a monetary economy in which the central bank follows an interest rate peg. In contrast to the fiscal theory of the price level (FTPL), such strategies always satisfy a government intertemporal budget constraint. The government is able to rule out most prices using strategically its fiscal instruments, undercutting the private-market price whenever it is inconsistent with the fiscal targets. In the spirit of the FTPL, along the fiscal strategies of this paper the government does not follow a rule that mechanically links the fiscal surplus to the real value of its outstanding nominal debt. Like in the monetarist paradigm, the fiscal authority is forced to blink in face of an independent monetary policy, although in equilibrium the former achieves its own targets.
    Keywords: Fiscal-monetary interactions, Fiscal Theory of the Price Level, interest rate peg, equilibrium (in)determinacy
    JEL: E31 E42 E61
    Date: 2007–12
  26. By: Robert Pollin (Univ. of Massachusetts); Gerald Epstein (Univ. of Massachusetts); James Heintz (Univ. of Massachusetts)
    Keywords: Pro-Growth Alternatives for Monetary and Financial Policies in Sub-Saharan Africa
    Date: 2008–01
  27. By: Barry Eichengreen
    Abstract: The thesis of this paper is that there is no historical precedent for Europe's monetary union (EMU). While it is possible to point to similar historical experiences, the most obvious of which were in the 19th century, occurred in Europe, and had "union" as part of their names, EMU differs from these earlier monetary unions. The closer one looks the more uncomfortable one becomes with the effort to draw parallels on the basis of historical experience. It is argued that efforts to draw parallels between EMU and monetary unions past are more likely to mislead than to offer useful insights. Where history is useful is not in drawing parallels but in pinpointing differences. It is useful for highlighting what is distinctive about EMU.
    JEL: F15 N14
    Date: 2008–01
  28. By: William Coleman
    Abstract: A critique is advanced of the contention of Obstfeld and Rogoff (1983) that in a fiat money regime, 'speculative hyperinflations can be excluded only through severe restrictions' on preferences. It is maintained here, in contrast, that no more than the infinity of the marginal utility of real balances at zero real balances is sufficient to rule out speculative hyperinflations. What Obstfeld and Rogoff have successfully drawn attention to is the theoretical possibility of money having strictly zero purchasing power. But the phenomenon of zero purchasing power has no explanatory power for historically observed hyperinflations, or any historically observed modern economy.
    JEL: E31 E41
    Date: 2008–01
  29. By: de Nardis, Sergio; De Santis, Roberta; Vicarelli, Claudio
    Abstract: In this paper we study the effect of the single currency across industries for euro area members. This analysis may help to shed light on the main factors influencing the euro effect on trade flows. We intend to verify whether these factors are specific to individual sectors and/or countries or common to the entire euro area. We use a dynamic specification of an augmented gravity equation. Following the most recent econometric literature, we apply a “System GMM” dynamic panel data estimator (Blundell and Bond, 1998) to avoid inconsistency and biases in the estimates, and introduce controls for heterogeneity. Our preliminary results indicate some heterogeneity at country level. Despite statistically pro-trade effects in the majority of the EMU members, at sectoral level there are some countries in which the impact of the euro has been negative. The pro-trade effects are mainly concentrated in scale intensive industries. Industrial specialization and location of these industries, together with other factors (i.e. differences in factor endowments, product regulations across countries), may have determined “the winners and the losers” in the monetary integration process. These preliminary findings are in line with those of the few other studies on this issue. In particular, this recent literature seems consistent with Baldwin’s (2006) “new good” hypothesis. However, in our estimates the magnitude of these effects are lower, probably because of our empirical strategy. Moreover, the sector/country analysis points out that other specific factors have been in place in shaping differently the euro effect on trade.
    Keywords: International trade, currency unions, gravity models, dynamic panel data, Blundell-Bond estimates
    JEL: C33 F14 F15 F33 F4
    Date: 2008

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