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An Estimate of the Effect of Common Currencies on Trade and Income

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  • Frankel, Jeffrey

    (Harvard U)

  • Rose, Andrew K.

    (U of California, Berkeley)

Abstract

Gravity-based cross-sectional evidence indicates that currency unions and currency boards stimulate trade; cross-sectional evidence indicates that trade stimulates income. This paper estimates the effect that common-currency regimes have, via trade, on income per capita. We use economic and geographic data for over 200 countries to quantify the implications of common currencies for trade and income, pursuing a two-stage approach. Our estimates at the first stage suggest that belonging to a currency union more than triples trade with the other members of the zone. Moreover, there is no evidence of trade-diversion. Thus currency unions raise overall trade. Currency boards have similar effects. Our estimates at the second stage suggest that every one percent increase in trade (relative to GDP) raises income per capita by at least one third of a percent over twenty years. We combine the two estimates to quantify the effect of common currencies on output. Our results support the hypothesis that the beneficial effects of such regimes on economic performance come through the promotion of trade, rather than through a commitment to non-inflationary monetary policy, or other macroeconomic influences.

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Bibliographic Info

Paper provided by Harvard University, John F. Kennedy School of Government in its series Working Paper Series with number rwp01-013.

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Date of creation: Apr 2001
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Handle: RePEc:ecl:harjfk:rwp01-013

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  1. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  2. Enrico Spolaore & Alberto Alesina & Romain Wacziarg, 2000. "Economic Integration and Political Disintegration," American Economic Review, American Economic Association, vol. 90(5), pages 1276-1296, December.
  3. Fischer, S., 1991. "Growth, Macroeconomics, and Development," Working papers 580, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  5. Barro, Robert & Alesina, Alberto, 2002. "Currency Unions," Scholarly Articles 4551795, Harvard University Department of Economics.
  6. Irwin, Douglas A. & Tervio, Marko, 2002. "Does trade raise income?: Evidence from the twentieth century," Journal of International Economics, Elsevier, vol. 58(1), pages 1-18, October.
  7. Edwards, Sebastian, 1993. "Openness, Trade Liberalization, and Growth in Developing Countries," Journal of Economic Literature, American Economic Association, vol. 31(3), pages 1358-93, September.
  8. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers C93-026, University of California at Berkeley.
  9. Fischer, Stanley, 1993. "The role of macroeconomic factors in growth," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 485-512, December.
  10. Sebastian Edwards, 1993. "Trade Policy, Exchange Rates and Growth," NBER Working Papers 4511, National Bureau of Economic Research, Inc.
  11. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Chapters, in: NBER Macroeconomics Annual 1991, Volume 6, pages 329-379 National Bureau of Economic Research, Inc.
  12. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
  13. Francisco Rodriguez & Dani Rodrik, 1999. "Trade Policy and Economic Growth: a Skeptic's Guide to the Cross-National Evidence," Working Papers 9912, Economic Research Forum, revised Apr 1999.
  14. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  15. Stanley Fischer, 1991. "Growth, Macroeconomics, and Development," NBER Working Papers 3702, National Bureau of Economic Research, Inc.
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  17. Dani Rodrik, 1994. "Getting Interventions Right: How South Korea and Taiwan Grew Rich," NBER Working Papers 4964, National Bureau of Economic Research, Inc.
  18. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
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  1. Portugal should not abandon the Euro
    by Rui L Castro in The Portuguese Economy on 2010-03-20 22:16:00
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