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Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It

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  • Flandreau, Marc
  • Maurel, Mathilde

Abstract

This Paper seeks to trace the impact of monetary arrangements on trade integration and business cycle correlation, focusing on Europe in the late 19th century period as a guide for modern debates. For this purpose, we first estimate a gravity model and show that monetary arrangements were associated with substantially higher trade. The Austro-Hungarian dual monarchy, by many aspects a forerunner of Euroland, improved trade between member states by a factor of 3. Other arrangements, such as the gold standard and the Scandinavian union also impacted trade favourably. To explain this, we argue that monetary coordination, by fostering the correlation of business cycles compensate the adverse effect that the current account constraint has on trade integration. This is found to vastly compensate the negative consequences that trade integration might have on the symmetry of shocks, of which this Paper finds strong evidence, in contrast with recent empirical work.

Suggested Citation

  • Flandreau, Marc & Maurel, Mathilde, 2001. "Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It," CEPR Discussion Papers 3087, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:3087
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    Cited by:

    1. Luigi Pascali, 2017. "The Wind of Change: Maritime Technology, Trade, and Economic Development," American Economic Review, American Economic Association, vol. 107(9), pages 2821-2854, September.
    2. Mitchener, Kris James & Weidenmier, Marc, 2015. "Was the Classical Gold Standard Credible on the Periphery? Evidence from Currency Risk," CEPR Discussion Papers 10388, C.E.P.R. Discussion Papers.
    3. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, July.
    4. Reuven Glick & Alan M. Taylor, 2010. "Collateral Damage: Trade Disruption and the Economic Impact of War," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 102-127, February.
    5. Christopher M. Meissner, 2003. "Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era," American Economic Review, American Economic Association, vol. 93(1), pages 344-353, March.
    6. Richard Pomfret, 2005. "Sequencing Trade and Monetary Integration," Others 0502004, EconWPA.
    7. Alho, Kari, 2003. "The Impact of Regionalism on Trade in Europe," Discussion Papers 843, The Research Institute of the Finnish Economy.
    8. Mathilde Maurel, 2004. "Financial Integration, Exchange Rate Regimes in CEECs, and joining the EMU : Just Do It," Working Papers hal-01065481, HAL.
    9. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters,in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
    10. Jacks, David S. & Meissner, Christopher M. & Novy, Dennis, 2010. "Trade costs in the first wave of globalization," Explorations in Economic History, Elsevier, vol. 47(2), pages 127-141, April.
    11. Pomfret, Richard, 2005. "Sequencing trade and monetary integration: issues and application to Asia," Journal of Asian Economics, Elsevier, vol. 16(1), pages 105-124, February.
    12. Clement van de Coevering, 2003. "Structural convergence and monetary integration in Europe," MEB Series (discontinued) 2003-20, Netherlands Central Bank, Monetary and Economic Policy Department.
    13. Maurel, Mathilde, 2002. "On the Way of EMU Enlargement towards CEECs: What is the Appropriate Exchange Rate Regime?," CEPR Discussion Papers 3409, C.E.P.R. Discussion Papers.
    14. Michael D. Bordo & Christopher M. Meissner & Marc D. Weidenmier, 2006. "Currency Mismatches, Default Risk, and Exchange Rate Depreciation: Evidence from the End of Bimetallism," NBER Working Papers 12299, National Bureau of Economic Research, Inc.
    15. Kris James Mitchener & Marc D. Weidenmier, 2005. "Supersanctions and Sovereign Debt Repayment," NBER Working Papers 11472, National Bureau of Economic Research, Inc.
    16. Ritschl, Albrecht & Wolf, Nikolaus, 2003. "Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-war Period," CEPR Discussion Papers 4112, C.E.P.R. Discussion Papers.
    17. James Yetman, 2007. "Currency Unions, Trade Flows And Capital Flows," Pacific Economic Review, Wiley Blackwell, vol. 12(2), pages 189-204, May.
    18. Taylor, Alan M. & Wilson, Janine, 2006. "International Trade and Finance under the Two Hegemons: Complementarities in the United Kingdom (1870-1913) and the United States (1920-30)," CEPR Discussion Papers 5846, C.E.P.R. Discussion Papers.
    19. 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.
    20. Meissner, Christopher M., 2005. "A new world order: explaining the international diffusion of the gold standard, 1870-1913," Journal of International Economics, Elsevier, vol. 66(2), pages 385-406, July.
    21. Lazaretou, Sophia, 2005. "The drachma, foreign creditors, and the international monetary system: tales of a currency during the 19th and the early 20th centuries," Explorations in Economic History, Elsevier, vol. 42(2), pages 202-236, April.
    22. Wolfgang Keller & Carol H. Shiue, 2008. "Institutions, Technology, and Trade," NBER Working Papers 13913, National Bureau of Economic Research, Inc.
    23. Maurel, Mathilde, 2004. "Current account constraint as a barrier to international trade: the evidence from the European enlargement process?," Economic Systems, Elsevier, vol. 28(3), pages 301-317, September.
    24. Kris James Mitchener & Marc Weidenmier, 2008. "Trade and Empire," NBER Working Papers 13765, National Bureau of Economic Research, Inc.
    25. repec:spr:anresc:v:60:y:2018:i:1:d:10.1007_s00168-017-0850-5 is not listed on IDEAS

    More about this item

    Keywords

    19th century; endogeneity; europe; gravity equations; monetary unions; optimum currency area; trade and business cycles correlation;

    JEL classification:

    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

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