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The currency union effect on trade and the FDI channel

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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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File URL: ftp://mse.univ-paris1.fr/pub/mse/cahiers2004/J04111.pdf
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Bibliographic Info

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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Keywords: Currency union; trade; FDI.;

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References

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  1. Blomström, Magnus & Kokko, Ari, 1997. "Regional Integration and Foreign Direct Investment," CEPR Discussion Papers 1659, C.E.P.R. Discussion Papers.
  2. Rose, Andrew K, 2003. "A Meta-Analysis of the Effect of Common Currencies on International Trade," CEPR Discussion Papers 4341, C.E.P.R. Discussion Papers.
  3. Head, Keith & Ries, John, 2001. "Overseas Investment and Firm Exports," Review of International Economics, Wiley Blackwell, vol. 9(1), pages 108-22, February.
  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.
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  6. Bruce A. Blonigen, 1999. "In Search of Substitution Between Foreign Production and Exports," NBER Working Papers 7154, National Bureau of Economic Research, Inc.
  7. Stephen S. Golub & Dana Hajkova & Daniel Mirza & Giuseppe Nicoletti & Kwang-Yeol Yoo, 2003. "The Influence of Policies on Trade and Foreign Direct Investment," OECD Economic Studies, OECD Publishing, vol. 2003(1), pages 7-83.
  8. 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 Publishing.
  9. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72, July.
  10. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  11. 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.
  12. Clausing, Kimberly A, 2000. "Does Multinational Activity Displace Trade?," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 38(2), pages 190-205, April.
  13. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
  14. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," IDB Publications 6511, Inter-American Development Bank.
  15. Roger Svensson, 1996. "Effects of overseas production on home country exports: Evidence based on Swedish multinationals," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 132(2), pages 304-329, September.
  16. 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.
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Cited by:
  1. Helge Berger & Volker Nitsch, 2005. "Zooming Out: The Trade Effect of the Euro in Historical Perspective," CESifo Working Paper Series 1435, CESifo Group Munich.
  2. Coeurdacier, Nicolas & De Santis, Roberto A. & Aviat, Antonin, 2009. "Cross-Border Mergers and acquisitions: Financial and institutional forces," Working Paper Series 1018, European Central Bank.
  3. Tomáš Havránek, 2010. "Rose effect and the euro: is the magic gone?," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 146(2), pages 241-261, June.
  4. Cuneyt KILIC & Yýlmaz BAYAR & Feyza ARICA, 2014. "Effects of Currency Unions on Foreign Direct Investment Inflows: The European Economic and Monetary Union Case," International Journal of Economics and Financial Issues, Econjournals, vol. 4(1), pages 8-15.
  5. Atanas Christev & Jacques Melitz, 2012. "EMU, EU, Market Integration and Consumption Smoothing," Heriot-Watt University Economics Discussion Papers 1209, Department of Economics, School of Management and Languages, Heriot Watt University.
  6. 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.
  7. Aristovnik, Aleksander & Matevz, Meze, 2009. "The Economic and Monetary Union’s effect on (international) trade: the case of Slovenia before euro adoption," MPRA Paper 17445, University Library of Munich, Germany.
  8. Julia Kubny & Florian Mölders & Peter Nunnenkamp, 2008. "Regional Integration and FDI in Emerging Markets," Kiel Working Papers 1418, Kiel Institute for the World Economy.
  9. Tomáš Havránek, 2009. "Rose Effect and the Euro: The Magic is Gone," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2009/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2009.
  10. Fabienne Ilzkovitz & Adriaan Dierx & Viktoria Kovacs & Nuno Sousa, 2007. "Steps towards a deeper economic integration: the internal market in the 21st century," European Economy - Economic Papers, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission 271, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.

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