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Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It

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  • Marc Flandreau

    (Centre for Finance and Development)

  • Mathilde Maurel

    (Centre d'études et de recherches sur le developpement international)

Abstract

This Paper seeks to trace the impact of monetary arrangements on trade integration and business cycle correlation, focusing on Europe in the late 19th century period as a guide for modern debates. For this purpose, we first estimate a gravity model and show that monetary arrangements were associated with substantially higher trade. The Austro-Hungarian dual monarchy, by many aspects a forerunner of Euroland, improved trade between member states by a factor of 3. Other arrangements, such as the gold standard and the Scandinavian union also impacted trade favourably. To explain this, we argue that monetary coordination, by fostering the correlation of business cycles compensate the adverse effect that the current account constraint has on trade integration. This is found to vastly compensate the negative consequences that trade integration might have on the symmetry of shocks, of which this Paper finds strong evidence, in contrast with recent empirical work.

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Bibliographic Info

Paper provided by Sciences Po in its series Sciences Po publications with number n°3087.

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Date of creation: Nov 2001
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Handle: RePEc:spo:wpmain:info:hdl:2441/607

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Keywords: optimum currency area; endogeneity; trade and business cycles correlation;

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References

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  1. Flandreau, Marc, 2000. "The economics and politics of monetary unions: a reassessment of the Latin Monetary Union, 1865 71," Financial History Review, Cambridge University Press, Cambridge University Press, vol. 7(01), pages 25-44, April.
  2. Andrew K. Rose & Charles Engel, 2000. "Currency Unions and International Integration," NBER Working Papers 7872, National Bureau of Economic Research, Inc.
  3. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 108(449), pages 1009-25, July.
  4. Michael R. Pakko & Howard J. Wall, 2001. "Reconsidering the trade-creating effects of a currency union," Review, Federal Reserve Bank of St. Louis, issue May, pages 37-46.
  5. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Research Working Paper, Federal Reserve Bank of Kansas City 99-07, Federal Reserve Bank of Kansas City.
  6. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
  7. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, Peterson Institute for International Economics, number 72, July.
  8. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade, EconWPA 0012003, EconWPA.
  9. Lopez-Cordova, J. Ernesto & Meissner, Chris, 2000. "Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era," Center for International and Development Economics Research, Working Paper Series, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkele qt1b04r034, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  10. Fatás, Antonio & Rose, Andrew K, 2001. "Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2692, C.E.P.R. Discussion Papers.
  11. Eichengreen, B., 1992. "Should the Maastricht Treaty be Saved?," Princeton Studies in International Economics, International Economics Section, Departement of Economics Princeton University, 74, International Economics Section, Departement of Economics Princeton University,.
  12. Marc Flandreau, 2001. "The Bank, the States, and the Market: an Austro-Hungarian Tale for Euroland, 1867-1914," Sciences Po publications n°43, Sciences Po.
  13. A'Hearn, Brian & Woitek, Ulrich, 2001. "More international evidence on the historical properties of business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 321-346, April.
  14. Flandreau, Marc & Le Cacheux, Jacques & Zumer, Frédéric, 1998. "Stability Without a Pact? Lessons from the European Gold Standard 1880-1914," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1872, C.E.P.R. Discussion Papers.
  15. Georges Ménil & Mathilde Maurel, 1994. "Breaking up a customs union: The case of the Austro-Hungarian Empire in 1919," Review of World Economics (Weltwirtschaftliches Archiv), Springer, Springer, vol. 130(3), pages 553-575, September.
  16. Jacques Melitz, 2003. "Geography, Trade and Currency Union," Working Papers, Centre de Recherche en Economie et Statistique 2003-25, Centre de Recherche en Economie et Statistique.
  17. repec:spo:wpecon:info:hdl:2441/645 is not listed on IDEAS
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