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Emerging Currency Blocs

Listed author(s):
  • Frankel, Jeffrey A.
  • Wei, Shang-Jin

Using the gravity model to examine bilateral trade patterns throughout the world, we find clear evidence of trading blocs in Europe, the Western Hemisphere, East Asia, and the Pacific. In Europe, it is the EC that operates as a bloc, not including EFTA. Two EC members trade an extra 55 percent more with each other, beyond what can be explained by proximity, size, and GNP/capita. Turning to the possibility of currency blocs, we find a degree of intra-regional stabilization of exchange rates, especially in Europe. Not surprisingly, the European currencies link to the DM, while Pacific currencies link to the dollar. We also find some cross-section evidence that bilateral exchange rate stability may have had a (small) role in promoting intra-bloc trade during the period 1965-1980. In 1980, lower exchange rate variability within Europe, compared to the worldwide norm, increased trade by 4.4 percent, by one estimate (less, in an estimate that corrects for simultaneity). Even the small negative effects we estimate appear to have disappeared during the course of the 1980s, perhaps due to the proliferation of instruments to hedge exchange risk.

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File URL: http://purl.umn.edu/233209
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Paper provided by University of California-Berkeley, Department of Economics in its series Center for International and Development Economics Research (CIDER) Working Papers with number 233209.

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Date of creation: Oct 1993
Handle: RePEc:ags:ucbewp:233209
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  1. Peree, Eric & Steinherr, Alfred, 1989. "Exchange rate uncertainty and foreign trade," European Economic Review, Elsevier, vol. 33(6), pages 1241-1264, July.
  2. Frankel, Jeff & Phillips, Steve & Chinn, Menzie, 1992. "Financial and Currency Integration in the European Monetary System: The Statistical Record," Center for International and Development Economics Research (CIDER) Working Papers 233177, University of California-Berkeley, Department of Economics.
  3. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-315, May.
  4. Jeffrey A. Frankel, 1993. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Chapters,in: Regionalism and Rivalry: Japan and the United States in Pacific Asia, pages 53-88 National Bureau of Economic Research, Inc.
  5. Tamim Bayoumi and Barry Eichengreen., 1993. "One Money or Many? On Analyzing the Prospects for Monetary Unification in Various Parts of the World," Center for International and Development Economics Research (CIDER) Working Papers C93-030, University of California at Berkeley.
  6. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters,in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  7. Wang, Zhen Kun & Winters, L. Alan, 1991. "The Trading Potential of Eastern Europe," CEPR Discussion Papers 610, C.E.P.R. Discussion Papers.
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  9. O. Cushman, David, 1986. "Has exchange risk depressed international trade? The impact of third-country exchange risk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 361-379, September.
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  11. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
  12. Gabriel Sterne & Tamim Bayoumi, 1993. "Regional Trading Blocs, Mobile Capital and Exchange Rate Co-ordination," Bank of England working papers 12, Bank of England.
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  14. Deardorff, Alan V., 1984. "Testing trade theories and predicting trade flows," Handbook of International Economics,in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 10, pages 467-517 Elsevier.
  15. Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-280.
  16. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
  17. Gary R. Saxonhouse, 1989. "Differentiated Products, Economies of Scale, and Access to the Japanese Market," NBER Chapters,in: Trade Policies for International Competitiveness, pages 145-184 National Bureau of Economic Research, Inc.
  18. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
  19. Paul De Grauwe, 1988. "Exchange Rate Variability and the Slowdown in Growth of International Trade," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 63-84, March.
  20. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
  21. Barry Eichengreen & Charles Wyplosz, 1993. "The Unstable EMS," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 24(1), pages 51-144.
  22. Richard K. Abrams, 1980. "International trade flows under flexible exchange rates," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 3-10.
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