Euro introduction and export behaviour of Italian firms

Recent literature has focused on the importance of extensive and intensive margins of trade in the case of the Euro adoption. Using a unique dataset taken from ISTAT firm level data, we study the effects of euro introduction on Italian manufacturing firms. We focus our analysis on the period 1996-2004, covering three years before and six years after the euro introduction. We estimate a gravity equation using difference-in difference estimation techniques. Firm-level evidence shows that the euro had indeed a positive influence on Italian exports, mainly channelled through the intensive margin, whereas the extensive margin was not significantlyimportant. This result suggests that the positive effect of euro introduction on trade flows is essentially owed to a reduction of variable trade costs. The reduction of fixed-entry costs would have a role, allowing the entry of new exporting firms in foreign markets. However, these latter are smaller and less productive and exporting a small number of products; as a result, their contribution to total export value is quite low. This result seems in line with the well known stylised fact on small average size of Italian firms. The lower is the average firm size, the lower is the probability to benefit of a downward shift of fixed entry costs in foreign markets induced by the common currency.