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Reconsidering the trade-creating effects of a currency union

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  • Michael R. Pakko
  • Howard J. Wall

Abstract

This paper reconsiders recent empirical evidence found by Andrew Rose that countries adopting a common currency will triple their bilateral trade. The authors find that this large estimated effect is due to estimation bias arising from missing and/or misspecified time-variant factors rather than to the adoption of a common currency. The results of this study, obtained with a general specification of time-variant factors, indicate that a common currency actually leads to a small reduction in trade over a 5-year period, although this result is not statistically different from zero. The authors also find that over 10- and 20-year periods, trade volumes are more than halved by the adoption of a common currency.

Suggested Citation

  • Michael R. Pakko & Howard J. Wall, 2001. "Reconsidering the trade-creating effects of a currency union," Review, Federal Reserve Bank of St. Louis, vol. 83(May), pages 37-46.
  • Handle: RePEc:fip:fedlrv:y:2001:i:may:p:37-46:n:v.83no.5
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    References listed on IDEAS

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    Keywords

    International trade; Money;

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