Gravity-based cross-sectional evidence indicates that currency unions stimulate trade; cross-sectional evidence indicates that trade stimulates output. This paper estimates the effect that currency union has, via trade, on output per capita. We use economic and geographic data for over 200 countries to quantify the implications of currency unions for trade and output, pursuing a two-state 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. Our estimates at the second stage suggest that every one percent increase in trade (relative to GDP) raises income per capita by roughly 1/3 of a percent over twenty years. We combine the two estimates to quantify the effect of currency union on output. Our results support the hypothesis that the beneficial effects of currency unions 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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7857.
Length: Date of creation: Aug 2000 Date of revision: Handle: RePEc:nbr:nberwo:7857
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Find related papers by JEL classification: O4 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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Alberto Alesina & Robert J. Barro, 2000.
"Currency Unions,"
NBER Working Papers
7927, National Bureau of Economic Research, Inc.
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Barro, Robert J & Sala-i-Martin, Xavier, 1992.
"Convergence,"
Journal of Political Economy,
University of Chicago Press, vol. 100(2), pages 223-51, April.
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