The euro exchange rate and Germany's trade surplus

In the context of debates about the euro exchange rate's (EXR) impact on Germany's (DE) trade surplus, we estimate a multiregion macroeconomic model (1999–2018) and provide a counterfactual in which we simulate the shocks of the estimated model in an alternative setting with freely floating nominal EXRs. The results suggest a reduction of the DE trade surplus by up to 1.3% of gross domestic product (GDP; around 1/4 of the surplus) during 2010–2015 compared to the data, together with a stronger real effective EXR (REER). The rest of the euro area (REA) net exports are more negative (by up to −0.6% of GDP) in the counterfactual before the EA crisis, but more positive (by up to 0.4% of GDP) in recent years. Overall, the counterfactual DE and REA trade balance and REER trajectories are very similar to the actual paths. Modifying shock processes in the counterfactual would give rise to larger differences.