When, How Fast and by How Much do Trade Costs change in the Euro Area?

Microfoundations of the euro´s effect on euro area trade hinge on the timing, thespeed and the size of adjustment in trade costs. We estimate timing, speed and sizeof adjustment in trade costs for sectoral trade data. Our approach allows for sectorspecific impacts of trade costs on sectoral trade while controlling for unobserved buttime-variant variables at the sector level. We find that, due to falling trade costs,trade within the euro area increases between the years 2000 and 2003 by 10 to 20percent compared with trade between European countries that are not members ofthe euro area. Adjustment of individual sectors is extremely fast whereas aggregateadjustment spreads out because different sectors adjust at distinct times.