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Out in the cold? Iceland’s trade performance outside the EU

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  • Francis Breedon
  • Thórarinn G. Pétursson

Abstract

Although entering a currency union involves both costs and benefits, an increasing body of research is finding that the benefits – in terms of international trade creation – are remarkably large. For example, Rose (2000) suggests that countries can up to triple their trade by joining a currency union. If true the impact on trade, income and welfare should Iceland join EMU could be enormous. However, by focussing simply on EMU rather than the broad range of currency unions studied by Rose, we find that the trade impact of EMU is smaller – but still statistically significant and economically important. Our findings suggest that the Iceland's trade with other EMU countries could increase by about 60% and that the trade-to-GDP ratio could rise by 12 percentage points should Iceland join the EU and EMU. This trade boost could consequently raise GDP per capita by roughly 4%. These effects would be even larger if the three current EMU outs (Denmark, Sweden and the UK) were also to enter EMU.

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Bibliographic Info

Paper provided by Department of Economics, Central bank of Iceland in its series Economics with number wp26_thorarinn.

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Date of creation: Dec 2004
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Handle: RePEc:ice:wpaper:wp26_thorarinn

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  1. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, Elsevier, vol. 41(3-5), pages 753-760, April.
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  3. Andrew K. Rose, 2001. "Currency unions and trade: the effect is large," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 16(33), pages 449-461, October.
  4. Robert J. Barro & Silvana Tenreyro, 2000. "Closed and Open Economy Models of Business Cycles with Marked Up and Sticky Prices," NBER Working Papers 8043, National Bureau of Economic Research, Inc.
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  8. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," Research Department Publications, Inter-American Development Bank, Research Department 4339, Inter-American Development Bank, Research Department.
  9. Thom, Rodney & Walsh, Brendan, 2002. "The effect of a currency union on trade: Lessons from the Irish experience," European Economic Review, Elsevier, Elsevier, vol. 46(6), pages 1111-1123, June.
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  17. Paul Grauwe & Frauke Skudelny, 2000. "The impact of EMU on trade flows," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 136(3), pages 381-402, 09.
  18. 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.
  19. Andrew Berg & Paolo Mauro & Michael Mussa & Alexander K. Swoboda & Esteban Jadresic & Paul R. Masson, 2000. "Exchange Rate Regimes in an Increasingly Integrated World Economy," IMF Occasional Papers 193, International Monetary Fund.
  20. 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.
  21. David Barr & Francis Breedon & David Miles, 2003. "Life on the outside: economic conditions and prospects outside euroland," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 18(37), pages 573-613, October.
  22. Neumeyer, P.A., 1995. "Currencies and the Allocation of Risk: The Welfare Effect of a Monetary Union," DELTA Working Papers, DELTA (Ecole normale supérieure) 95-27, DELTA (Ecole normale supérieure).
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Cited by:
  1. Aleksander Aristovnik & Matevz Meze, 2010. "The Economic and Monetary Union’s Effect on (International) Trade: the Case of Slovenia Before Euro Adoption," William Davidson Institute Working Papers Series wp982, William Davidson Institute at the University of Michigan.
  2. Pınar Kaynak, 2013. "Inflation Targeting: A Comparative Empirical Analysis," EY International Congress on Economics I (EYC2013), October 24-25, 2013, Ankara, Turkey, Ekonomik Yaklasim Association 220, Ekonomik Yaklasim Association.

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