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Putting currency misalignment into gravity: The currency union effect reconsidered

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  • Hogrefe, Jan
  • Jung, Benjamin
  • Kohler, Wilhelm K.

Abstract

Member countries of a currency union like the euro area have absorbed asymmetric shocks in ways that are inconsistent with a common nominal anchor. Based on a reformulation of the gravity model that allows for such bilateral misalignment, we disentangle the conventional microeconomic trade effect and macroeconomic trade effects deriving from bilateral misalignment within currency unions. Econometric estimation reveals that for the euro area the misalignment channel exerts a significant trade effect on bilateral exports. We retrieve country-specific estimates of the misalignment-induced effect on trade which demonstrate heterogeneous outlooks across countries for the costs and benefits from adopting the euro. --

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Bibliographic Info

Paper provided by University of Tuebingen, Faculty of Economics and Social Sciences in its series University of Tuebingen Working Papers in Economics and Finance with number 32.

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Date of creation: 2012
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Handle: RePEc:zbw:tuewef:32

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Keywords: Euro; gravity model; exchange rates; trade imbalances;

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References

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  1. Santos Silva, Joao & Tenreyro, Silvana, 2005. "The Log of Gravity," CEPR Discussion Papers 5311, C.E.P.R. Discussion Papers.
  2. Keith Head & John Ries & Thierry Mayer, 2008. "The erosion of colonial trade linkages after independence," Sciences Po publications 6951, Sciences Po.
  3. Richard Baldwin & Virginia DiNino & Lionel Fontagn� & Roberto A. De Santis & Daria Taglioni, 2008. "Study on the Impact of the Euro on Trade and Foreign Direct Investment," European Economy - Economic Papers 321, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
  5. Martin, Philippe & Mayer, Thierry & Thoenig, Mathias, 2005. "Make Trade not War?," CEPR Discussion Papers 5218, C.E.P.R. Discussion Papers.
  6. 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.
  7. Egger, Peter, 2008. "De Facto exchange rate arrangement tightness and bilateral trade flows," Economics Letters, Elsevier, vol. 99(2), pages 228-232, May.
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Cited by:
  1. Fritz Breuss, 2013. "The Leverage of the Small Ones in the EU," WIFO Working Papers 452, WIFO.
  2. Kohler, Wilhelm, 2012. "Resolving sovereign debt crises: Opening or closing the tap?," University of Tuebingen Working Papers in Economics and Finance 39, University of Tuebingen, Faculty of Economics and Social Sciences.
  3. Etzel, Daniel & Hauptmann, Andreas & Schmerer, Hans-Jörg, 2013. "Dissecting the German export miracle: Plant-level evidence," Economic Systems, Elsevier, vol. 37(3), pages 387-403.

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