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Geography, Trade and Currency Union

  • Jacques Melitz

    (Crest)

This Paper reports on four basic results of tests of the standard gravity equation. First, geography can serve to reflect comparative advantage as well as transportation costs. Second, the effect of distance on bilateral trade is mostly a substitution effect between closer and more distant trade partners rather than a scale effect on total foreign trade. Third, special political relationships, such as free trade agreements, former colonial attachments, and currency union, do not produce any trade diversion in the aggregate, but increase trade with outsiders as well as among the parties to the relationship. Fourth, Rose’s surprisingly high estimate of the impact of currency union on trade stems partly from a selection bias, but even following a correction for this bias, the estimate remains high.

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Paper provided by Centre de Recherche en Economie et Statistique in its series Working Papers with number 2003-25.

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Date of creation: 2003
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Handle: RePEc:crs:wpaper:2003-25
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  1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  2. 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.
  3. Jonathan Eaton & Samuel Kortum, 1997. "Technology and Bilateral Trade," NBER Working Papers 6253, National Bureau of Economic Research, Inc.
  4. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  5. Frankel, Jeffrey & Stein, Ernesto & Wei, Shang-jin, 1995. "Trading blocs and the Americas: The natural, the unnatural, and the super-natural," Journal of Development Economics, Elsevier, vol. 47(1), pages 61-95, June.
  6. Frankel, Jeffrey A & Rose, Andrew K, 2000. "An Estimate of the Effect of Currency Unions on Trade and Output," CEPR Discussion Papers 2631, C.E.P.R. Discussion Papers.
  7. Boisso, Dale & Ferrantino, Michael, 1997. "Economic Distance, Cultural Distance, and Openness in International Trade : Empirical Puzzles," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 12, pages 456-484.
  8. Jeffrey A. Frankel, 1998. "The Regionalization of the World Economy," NBER Books, National Bureau of Economic Research, Inc, number fran98-1, June.
  9. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, June.
  10. John F. Helliwell & Geneviève Verdier, 2001. "Measuring internal trade distances: a new method applied to estimate provincial border effects in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 34(4), pages 1024-1041, November.
  11. Reuven Glick & Andrew K. Rose, 2001. "Does a Currency Union Affect Trade? The Time Series Evidence," NBER Working Papers 8396, National Bureau of Economic Research, Inc.
  12. Jeffrey A. Frankel & Shang-Jin Wei, 1998. "Regionalization of World Trade and Currencies: Economics and Politics," NBER Chapters, in: The Regionalization of the World Economy, pages 189-226 National Bureau of Economic Research, Inc.
  13. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  14. Eichengreen, Barry & Irwin, Douglas A., 1995. "Trade blocs, currency blocs and the reorientation of world trade in the 1930s," Journal of International Economics, Elsevier, vol. 38(1-2), pages 1-24, February.
  15. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  16. Jeffrey A. Frankel, 1998. "Introduction to "Regionalization of the World Economy, The"," NBER Chapters, in: The Regionalization of the World Economy, pages 1-6 National Bureau of Economic Research, Inc.
  17. Jeffrey A. Frankel & Andrew K. Rose, 2000. "Estimating the Effect of Currency Unions on Trade and Output," NBER Working Papers 7857, National Bureau of Economic Research, Inc.
  18. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72.
  19. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
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