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Endogenous OCA Theory: Using the Gravity Model to Test Mundell's Intuition

Author

Listed:
  • Thierry Warin

    (Minda de Gunzburg CES (Harvard University), Department of Economics (Middlebury College))

  • Phanindra Wunnava

    (Department of Economics (Middlebury College))

  • Hubert P. Janicki

    (Federal Reserve Bank of Richmond)

Abstract

This paper presents an empirical assessment of the endogenous optimum currency area theory. This study relies on the original intuition developed by Mundell in 1973. The gravity model is used to empirically assess the effectiveness of the convergence criteria by examining location specific advantages that guide multinational investment within the European Union. A fixed effects model based on a panel data of foreign direct investment (FDI) flows within the EU-15 shows that horizontal investment promotes the diffusion of the production process across the national border. Specifically, the examined Maastricht criteria suggest convergence in interest rate, government fiscal policy, and debt play a significant role in attracting multinational investment.

Suggested Citation

  • Thierry Warin & Phanindra Wunnava & Hubert P. Janicki, 2005. "Endogenous OCA Theory: Using the Gravity Model to Test Mundell's Intuition," Economics Bulletin, AccessEcon, vol. 28(6), pages 1.
    • Handle: RePEc:ebl:ecbull:eb-05aa0006
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    Citations

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    Cited by:

    1. Alain Dudoit & Molivann Panot & Thierry Warin, 2021. "Towards a multi-stakeholder Intermodal Trade-Transportation Data-Sharing and Knowledge Exchange Network," CIRANO Project Reports 2021rp-28, CIRANO.
    2. Nevena Stancheva, 2007. "Measurement of the Trade Flows between the EU and Mercosur through Gravitation Analysis," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 66-89.
    3. Marta Bengoa & Blanca Sanchez-Robles & Yochanan Shachmurove, 2020. "Do Trade and Investment Agreements Promote Foreign Direct Investment within Latin America? Evidence from a Structural Gravity Model," Mathematics, MDPI, vol. 8(11), pages 1-32, October.

    More about this item

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • F1 - International Economics - - Trade

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