Empirical research on the gravity model of international trade in the wake of Rose (2000) affirms that currency union formation doubles or triples trade. Currency unions could, however, also be established precisely because trade among their members was already high. In OLS estimation, this would cause endogeneity bias. The present Paper employs both fixed-effects and binary choice methods to trace endogeneity in the formation of historical currency arrangements. Studying the formation of currency blocs in the 1930s, we find strong evidence of endogeneity. We work with country-group fixed effects and find that already in the 1920s, trade within the later currency blocs was up to three times higher than average. The formal establishment of these blocs had only insignificant or even negative effects on the coefficients. We also employ a probit approach to predict membership in these later arrangements on the basis of data from the 1920s. Results are remarkably robust and again indicate strong self-selection bias. Evaluated against the control groups, treatment effects in the 1930s were mostly absent. Even the post-war currency arrangements are visible in the inter-war data. In line with the theory of optimum currency areas, our results caution against optimism over trade creation by currency unions.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
4112.
Find related papers by JEL classification: F15 - International Economics - - Trade - - - Economic Integration F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions N70 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - General, International, or Comparative
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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.:
Alberto Alesina & Robert J. Barro, 2000.
"Currency Unions,"
NBER Working Papers
7927, National Bureau of Economic Research, Inc.
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Cited by: (explanations, 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.)
James E. Anderson & Eric van Wincoop, 2004.
"Trade Costs,"
Journal of Economic Literature,
American Economic Association, vol. 42(3), pages 691-751, September.
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James E. Anderson & Eric van Wincoop, 2004.
"Trade Costs,"
NBER Working Papers
10480, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)