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Currency Unions, Trade Flows And Capital Flows

  • James Yetman

Trade within currency unions is much larger than outside of currency unions, even after factoring in many relevant variables. The existing empirical evidence is based on reduced form models of trade, and therefore indicates correlation between but neither causality nor mechanism. This paper argues that the causal relationship runs from currency unions to trade, and then considers two possible mechanisms behind this: currency union membership: reduces trade resistance or reduces investment resistance. We argue that both mechanisms are required to explain the observed economic impact of currency union membership. Copyright 2007 Blackwell Publishing Ltd

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0106.2007.00346.x
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Article provided by Wiley Blackwell in its journal Pacific Economic Review.

Volume (Year): 12 (2007)
Issue (Month): 2 (05)
Pages: 189-204

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Handle: RePEc:bla:pacecr:v:12:y:2007:i:2:p:189-204
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  1. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
  2. Feenstra, Robert C, 2002. "Border Effects and the Gravity Equation: Consistent Methods for Estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 491-506, December.
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  8. Melitz, Jacques, 2001. "Geography, Trade and Currency Union," CEPR Discussion Papers 2987, C.E.P.R. Discussion Papers.
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  13. David C. Parsley & Shang-Jin Wei, 2001. "Limiting Currency Volatility to Stimulate Goods Market Integration: A Price Based Approach," NBER Working Papers 8468, National Bureau of Economic Research, Inc.
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  17. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
  18. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
  19. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
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  25. Dr Peter Kenen, 2002. "Currency Unions and Trade: Variations on Themes by Rose and Persson," Reserve Bank of New Zealand Discussion Paper Series DP2002/08, Reserve Bank of New Zealand.
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