Investigating the Effects of Euro on Bilateral Trade: a Kernel Matching Approach

The aim of this paper is to estimate the effects of the adoption of the Euro on the bilateral trade of European and OECD countries. Using the most recently available data and a more appropriate deflator of bilateral trade, this research tries to assess whether EMU countries trade more than they would have if they had not adopted the Euro. In doing so an augmented ‘difference in differences’ approach is used. The results obtained show that the adoption of the Euro increased trade significantly and that there is also no evidence of trade diversion effects.