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Regional Single Currency Effects on Bilateral Trade with the European Union

  • Joan Costa-i-Font
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    The regional effects of sharing a single currency on bilateral trade with other European Union member states are a contentious question. This paper examines the regional effects on trade of the set up of the euro as a common currency. It takes advantage of a gravity specification of bilateral trade between the seventeen Spanish regions and EU-13 countries over the period 1997-2004 and accounts for two distinct effects depending on the temporal set up of the euro. That is, the exchange rate volatility effect (from exchange rate fixing of national currencies in 1999) is distinguished from the so-called common currency effect (resulting from the issuing of a new currency in 2002). Findings are suggestive of a regional concentration of currency union effects in a few regions, namely those relatively more open to trade, though such effects are found to fade away over time. Trade expansion for the set up of the euro ranges between 45 to 16% depending on the specification, but only the exchange rate volatility effect of a common currency was found significant, pure currency union effects were instead found to be almost negligible.

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    File URL: http://www.lse.ac.uk/europeanInstitute/LEQS/LEQSPaper26.pdf
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    Paper provided by London School of Economics / European Institute in its series Europe in Question Discussion Paper Series of the London School of Economics (LEQs) with number 6.

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    Date of creation: 01 Oct 2010
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    Handle: RePEc:erp:leqsxx:p0026
    Contact details of provider: Web page: http://www2.lse.ac.uk/europeanInstitute

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    1. Bougheas, Spiros & Demetriades, Panicos O. & Morgenroth, Edgar L. W., 1999. "Infrastructure, transport costs and trade," Journal of International Economics, Elsevier, vol. 47(1), pages 169-189, February.
    2. Rodrik, Dani & Subramanian, Arvind & Trebbi, Francesco, 2002. "Institutions Rule: The Primacy of Institutions Over Geography and Integration in Economic Development," CEPR Discussion Papers 3643, C.E.P.R. Discussion Papers.
    3. Frankel, Jeffrey, 2003. "Experience of and Lessons from Exchange Rate Regimes in Emerging Economies," Working Paper Series rwp03-011, Harvard University, John F. Kennedy School of Government.
    4. Catalina Amuedo-Dorantes & Mark Wheeler, 2001. "An empirical analysis of the European Union's impact on Spanish economic performance," Applied Economics, Taylor & Francis Journals, vol. 33(8), pages 1001-1008.
    5. Sergio de Nardis & Claudio Vicarelli, 2003. "The Impact of Euro on Trade: The (Early) Effect is not so Large," ISAE Working Papers 31, ISTAT - Italian National Institute of Statistics - (Rome, ITALY).
    6. Ernst Fehr & Jean-Robert Tyran, 2000. "Does Money Illusion Matter?," IEW - Working Papers 045, Institute for Empirical Research in Economics - University of Zurich.
    7. Fitzsimons, E. & Hogan, V. & Neary, J.P., 1999. "Explaining the volume of North-South Trade in Ireland: a Gravity Model Approach," Papers 99/14, College Dublin, Department of Political Economy-.
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