The impact of EMU on trade flows

In this paper we quantify the impact of exchange rate volatility on trade f lows within the EU with the help of a gravity trade model. We consider bila teral instead of total exports, and we use panel data. Moreover, we introdu ce dynamics into the model, taking lagged exports as explanatory variable. The estimation of this model for the period 1962-1995 leads to significant negative coefficients for the proxy of exchange rate variability. We use th ese estimates to calculate the potential trade-creating effect of a monetar y union, setting the exchange rate volatility equal to zero. JEL no. F15, F 41, F31.