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The currency union effect on trade and the FDI channel

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Author Info
José De Sousa () (LESSOR et ROSES)
Julie Lochard () (ROSES)

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Abstract

The positive effect of a common currency on trade is empirically well-documented, but the reason of this effect remains unclear. In this paper, we argue that part of the currency union effect on trade is indirect. Currency unions foster foreign direct investment (FDI), which promotes trade due to complementary effects between trade and FDI. Using data for 22 OECD countries, we find that half of the euro impact on trade is driven by additional FDI.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number j04111.

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Length: 23 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:mse:wpsorb:j04111

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Related research
Keywords: Currency union; trade; FDI.;

Find related papers by JEL classification:
F15 - International Economics - - Trade - - - Economic Integration
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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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.:
  1. Magnus Blomstrom & Ari Kokko, 1997. "Regional Integration and Foreign Direct Investment," NBER Working Papers 6019, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR, CES, MSH, vol. 18(37), pages 315-356, October. [Downloadable!] (restricted)
    Other versions:
  4. Lipsey, Robert E & Weiss, Merle Yahr, 1984. "Foreign Production and Exports of Individual Firms," The Review of Economics and Statistics, MIT Press, vol. 66(2), pages 304-08, May. [Downloadable!] (restricted)
  5. Douglas Staiger & James H. Stock, 1997. "Instrumental Variables Regression with Weak Instruments," Econometrica, Econometric Society, vol. 65(3), pages 557-586, May.
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  6. Head, Keith & Ries, John, 2001. "Overseas Investment and Firm Exports," Review of International Economics, Blackwell Publishing, vol. 9(1), pages 108-22, February. [Downloadable!] (restricted)
  7. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March. [Downloadable!]
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  8. Clausing, Kimberly A, 2000. "Does Multinational Activity Displace Trade?," Economic Inquiry, Oxford University Press, vol. 38(2), pages 190-205, April.
  9. Andrew Rose, 2004. "A Meta-Analysis of the Effect of Common Currencies on International Trade," NBER Working Papers 10373, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Giuseppe Nicoletti & Andrea Bassanini & Ekkehard Ernst & Sébastien Jean & Paulo Santiago & Paul Swaim, 2001. "Product and Labour Markets Interactions in OECD Countries," OECD Economics Department Working Papers 312, OECD, Economics Department. [Downloadable!]
  11. Blonigen, Bruce A., 2001. "In search of substitution between foreign production and exports," Journal of International Economics, Elsevier, vol. 53(1), pages 81-104, February. [Downloadable!] (restricted)
  12. Rose, Andrew K, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," CEPR Discussion Papers 2329, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  13. Lipsey, Robert E & Weiss, Merle Yahr, 1981. "Foreign Production and Exports in Manufacturing Industries," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 488-94, November. [Downloadable!] (restricted)
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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.)

  1. Julia Kubny & Florian Mölders & Peter Nunnenkamp, 2008. "Regional Integration and FDI in Emerging Markets," Kiel Working Papers 1418, Kiel Institute for the World Economy. [Downloadable!]
  2. Helge Berger & Volker Nitsch, 2005. "Zooming Out: The Trade Effect of the Euro in Historical Perspective," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  3. Miren Lafourcade & Elisenda Paluzie Hernandez, 2005. "European Integration, FDI and the Internal Geography of Trade: Evidence from Western European Border Regions," Working Papers in Economics 145, Universitat de Barcelona. Espai de Recerca en Economia. [Downloadable!]
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