A gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade. The panel data set I use includes bilateral observations for five years spanning 1970 through 1990 for 1986 countires. In this data set, there are over one hundred pairings and three hundred observations, in which both countries use the same currency. I find a large positive effect of a currency union on international trade, and a small negative effect of exchange rate volatility, even after controlling for a host of features, including the endogenuous nature of the exchange rate regime. These effects are statistically significant and imply that two countires that share the same currency trade three times as much as they would with different curencies. EMU may thus lead to a large increase in international trade, with all that entails.
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Paper provided by Stockholm University, Institute for International Economic Studies in its series Seminar Papers with number
678.
Length: 48 pages Date of creation: 01 Oct 1999 Date of revision: Handle: RePEc:hhs:iiessp:0678
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Find related papers by JEL classification: F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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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.:
Engel, Charles & Rogers, John H, 1996.
"How Wide Is the Border?,"
American Economic Review,
American Economic Association, vol. 86(5), pages 1112-25, December.
[Downloadable!] (restricted)
Other versions:
Leamer, Edward E. & Levinsohn, James, 1995.
"International trade theory: The evidence,"
Handbook of International Economics,
in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 26, pages 1339-1394
Elsevier.
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