European Monetary Integration and Average Industry Productivity

Following the financial crises, the macroeconomic effects of EMU have been extensively discussed however research investigating the micro adjustments of entrant countries’ industries is still lacking. This thesis studies the effects of trade liberalisation, namely the European monetary integration has on the industry average productivity. The underlying theoretical model of Melitz (2003) develops a dynamic industry model with heterogeneous firms explaining the impact of trade on intra-industry resource and profit reallocations. The analysis is extended to incorporate Heckshcher-Ohlin model predictions, and hypotheses are drawn from the complementing model conclusions. The empirical model using comprehensive firm level data of 29 Eastern European and Central Asian countries for the time period 2003-2013 validates the models’ hypotheses. Specifically, strong evidence is found to show that trade liberalisation leads to industry average productivity gains. Some evidence is also found for EMU having the same effect, however the results are not robust across specifications. Finally, the results also show some indication of model complementarity as comparative advantage sectors are found to gain proportionately more from trade liberalisation.