This paper examines the effects of a common currency on the quality of traded goods. For this purpose, we construct a quality-based heterogeneous firm trade model to incorporate the formation of currency unions and the ensuing elimination of exchange rate volatility. Our main hypothesis is that a common currency enables low-quality (low marginal cost) firms to commence exporting to the common currency's member countries, which causes the average export price to fall. We empirically test this hypothesis for the euro and the eurozone using Harmonized System 8-digit traded product data for European Union countries.
ASJC Scopus subject areas