Estimating the Euro Effect on Swedish Exports - A Comparative Analysis Using Synthetic Difference-in-Differences

Abstract

This thesis examines the impact of Sweden’s decision to retain the krona rather than adopt the euro in 1999 on export performance. Employing the innovative Synthetic Difference-in-Differences method, it analyses 1231 trade routes across seven global markets from 1993 to 2023. Grounded in the gravity model of trade, the study incorporates key variables such as GDP per Capita and Real Effective Exchange Rates. Two synthetic control groups were constructed: one based on trade routes from euro-adopting countries, and another using trade routes from Finland. Our findings suggest that Sweden likely experienced significant export losses compared to the eurozone counterfactual, since 1999, with an average treatment effect of approximately $3222 million USD. Region-specific analyses revealed pronounced negative impacts in highly elastic markets. In contrast, while Finland may provide a culturally and geographically similar comparison to Sweden, its counterfactual results were less consistent with the sole significant Finnish result showing a positive effect of $1163 million USD in Europe & Central Asia. This contrast may highlight both the advantages of monetary independence and the potential limitations of euro adoption for certain countries. The findings underscore the Synthetic Difference-in-Differences method’s ability to effectively capture pre-treatment trends, while also emphasising the importance of robust donor group selection for reliable results. By applying advanced methodologies and addressing these complexities, this study aims to provide nuanced insights into the trade-offs between euro adoption and monetary independence, offering valuable guidance for Swedish policymakers.