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Economic Effects Of Currency Unions

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  • ROBERT BARRO
  • SILVANA TENREYRO

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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Bibliographic 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

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  1. Rose, Andrew, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," Seminar Papers, Stockholm University, Institute for International Economic Studies 678, Stockholm University, Institute for International Economic Studies.
  2. Alberto Alesina & Robert J. Barro, 2000. "Currency Unions," NBER Working Papers 7927, National Bureau of Economic Research, Inc.
  3. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
  4. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  5. Robert J. Barro & Silvana Tenreyro, 2006. "Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 116(511), pages 434-456, 04.
  6. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," Boston College Working Papers in Economics, Boston College Department of Economics 508, Boston College Department of Economics.
  7. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 437-466, May.
  8. Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2631, C.E.P.R. Discussion Papers.
  9. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
  10. 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, American Economic Association, vol. 91(2), pages 386-390, May.
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