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The Common Currency Effect on International Trade: Evidence from an Accidental Monetary Union

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  • Roger Vicquéry

Abstract

I rely on a historical natural experiment to provide, for the first time, a causal estimate of the effect of currency unions on international trade. Since the seminal paper by Rose (2000), a large literature has developed around currencies as a trade cost. However, self-selection and endogeneity bias implied by membership of a currency union are likely to be pervasive and might explain the large pro-trade effect of currency union found in the literature. I offer a quasi-experimental contribution by exploiting an exogenous variation in currency union membership, driven by an unexpected geopolitical shock – the 1861 Italian unification - and involving a French franc pan-European zone that existed throughout the 19th century. I employ original data and structural gravity equations to estimate an effect in the order of 35%, consistent with a large - if heterogenous - effect of common currencies on trade.

Suggested Citation

  • Roger Vicquéry, 2021. "The Common Currency Effect on International Trade: Evidence from an Accidental Monetary Union," Working papers 856, Banque de France.
    • Handle: RePEc:bfr:banfra:856
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    References listed on IDEAS

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    More about this item

    Keywords

    Currency Unions; Common Currency; Trade; Natural Experiment; Gravity Regressions.;
    All these keywords.

    JEL classification:

    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F54 - International Economics - - International Relations, National Security, and International Political Economy - - - Colonialism; Imperialism; Postcolonialism
    • N73 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - Europe: Pre-1913

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