Bilateral trade, colonial heritage and common currency arrangement: An Oceanian perspective

We reassess the trade impact of common currency arrangements – the Rose effect – on the basis of new empirical evidence stemming from the Oceanian Island Countries. In particular, we investigate how the conjunction of a common colonial heritage and membership in a common currency arrangement can impact bilateral trade. To do this, we use different specifications of the gravity equation over an original panel dataset covering the period from 1980 to 2009. Our results first show that the trade impact of common currency arrangements is much more prominent and significant for country pairs that share a common colonial heritage than for country pairs with distinct former colonizers. Second, while a common colonial heritage does significantly and positively affect trade, whether the underlying country pair is in a common currency arrangement or not, the pro-trade effect of a common colonial heritage is nonetheless enhanced by the existence of such a common currency arrangement. These results suggest, more generally, that further steps towards monetary integration in the zone could not be contemplated without taking historical factors into account.