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Currency Unions, Trade Flows, and Capital Flows

  • James Yetman

    (The University of Hong Kong)

Trade within currency unions has been shown to be much larger than outside of currency unions, even after factoring in many relevant variables. The existing empirical evidence is based on reduced form models of trade, and therefore indicates that there exists a high correlation between currency union membership and trade, but does not indicate the causality, or the mechanism at work. This paper argues that the balance of evidence points to a large and statistically significant causal relationship from currency unions to trade, and then considers two possible mechanisms behind this: (1) being a member of a currency union reduces trade resistance; and (2) being a member of a currency union reduces investment resistance. Based on a small theoretical model that incorporates both of these, we argue that both mechanisms are important in explaining the economic impact of currency union membership.

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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 182003.

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Length: 22 pages
Date of creation: Sep 2003
Date of revision:
Handle: RePEc:hkm:wpaper:182003
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  1. 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.
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  20. Portes, Richard & Rey, Helene & Oh, Yonghyup, 2001. "Information and capital flows: The determinants of transactions in financial assets," European Economic Review, Elsevier, vol. 45(4-6), pages 783-796, May.
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  22. Thom, Rodney & Walsh, Brendan, 2002. "The effect of a currency union on trade: Lessons from the Irish experience," European Economic Review, Elsevier, vol. 46(6), pages 1111-1123, June.
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