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Economic Effects Of Currency Unions

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Author Info
ROBERT BARRO
SILVANA TENREYRO

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Abstract

"We develop a new instrumental-variable (IV) approach to estimate the effects of different exchange rate regimes on bilateral outcomes. The basic idea is that the characteristics of the exchange rate between two countries are partially related to the independent decisions of these countries to peg-explicitly or de facto-to a third currency, notably that of a main anchor. This component of the exchange rate regime can be used as an IV in regressions of bilateral outcomes. We apply the methodology to study the economic effects of currency unions. The likelihood that two countries independently adopt the currency of the same anchor country is used as an instrument for whether they share a common currency. We find that sharing a common currency enhances trade, increases price comovements, and decreases the comovement of real gross domestic product shocks." ("JEL" C3, F3, F4) Copyright 2006 Western Economic Association International.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1465-7295.2006.00001.x
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Publisher Info
Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 45 (2007)
Issue (Month): 1 (01)
Pages: 1-23
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Handle: RePEc:bla:ecinqu:v:45:y:2007:i:1:p:1-23

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alberto Alesina & Robert J. Barro, 2002. "Currency Unions," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 409-436, May. [Downloadable!] (restricted)
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  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121. [Downloadable!] (restricted)
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  3. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," Boston College Working Papers in Economics 508, Boston College Department of Economics. [Downloadable!]
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  4. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July. [Downloadable!] (restricted)
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  5. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May. [Downloadable!] (restricted)
  6. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May. [Downloadable!] (restricted)
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  7. Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers 2631, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  8. Robert J. Barro & Silvana Tenreyro, 2000. "Closed and Open Economy Models of Business Cycles with Marked up and Sticky Prices," NBER Working Papers 8043, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  10. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR, CES, MSH, vol. 16(33), pages 433-462, October. [Downloadable!] (restricted)
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