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On the robustness of the trade-inducing effects of trade agreements and currency unions

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  • Jayjit Roy

Abstract

Regional trade agreements (RTAs) and currency unions (CUs) are potentially endogenous trade cost proxies in equations estimating their effects on bilateral trade. In case of both, this problem is magnified by the paucity of reliable instruments. Instead of resorting to the oft-employed alternative of panel data to address selection on just the time-invariant unobservables, this paper assesses the extent to which a positive association between CU or RTA membership and bilateral trade can be considered causal. In addition, it attends to recent concerns over the extensive margin of trade (at the country-level) and the issue of zero trade observations in log-linearized gravity models by relying more on a bivariate probit analysis. Despite not identifying point estimates, striking results are obtained. While most cross-sections exhibit a positive association between both RTAs and CUs and trade, the evidence in favor of a robust causal effect is strong mainly for CUs. However, the magnitude of the CU effect is still sensitive to the amount of selection on unobservables. Moreover, selection into RTAs (CUs) is mostly found to be positive (negative). Finally, the presence of spillovers across the policy regimes is also detected. Copyright Springer-Verlag Berlin Heidelberg 2014

Suggested Citation

  • Jayjit Roy, 2014. "On the robustness of the trade-inducing effects of trade agreements and currency unions," Empirical Economics, Springer, vol. 47(1), pages 253-304, August.
  • Handle: RePEc:spr:empeco:v:47:y:2014:i:1:p:253-304
    DOI: 10.1007/s00181-013-0739-9
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    3. Mohd Hussain Kunroo & Irfan Ahmad Sofi & Naushad Ali Azad, 2016. "Trade implications of the Euro in EMU countries: a panel gravity analysis," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(2), pages 391-413, May.
    4. Pierluigi Montalbano & Silvia Nenci & Laura Dell'Agostino, 2019. "A non-parametric re-assessment of the trade effects of the euro using value added data," Working Papers 9/19, Sapienza University of Rome, DISS.
    5. Kahouli, Bassem & Omri, Anis, 2017. "Foreign direct investment, foreign trade and environment: New evidence from simultaneous-equation system of gravity models," Research in International Business and Finance, Elsevier, vol. 42(C), pages 353-364.
    6. Salvador Gil-Pareja & Rafael Llorca-Vivero & José Antonio Martínez-Serrano, 2018. "The happy few: cross-country evidence of the euro effect on trade," Working Papers 1803, Department of Applied Economics II, Universidad de Valencia.
    7. Silviano Esteve‐Pérez & Salvador Gil‐Pareja & Rafael Llorca‐Vivero & José Antonio Martínez‐Serrano, 2020. "EMU and trade: A PPML re‐assessment with intra‐national trade flows," The World Economy, Wiley Blackwell, vol. 43(10), pages 2574-2599, October.

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    Keywords

    Selection on unobservables; Regional trade agreements; Currency unions; Gravity model; C31; F15;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade

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