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The Currency Union Effect on Trade: Early Evidence from EMU

  • Alejandro Micco
  • Ernesto H. Stein
  • Guillermo Luis Ordoñez

In this paper we estimate the early effect of the European Monetary Union (EMU) on trade. We use a panel data set that includes the most recent information on bilateral trade for 22 developed countries from 1992 through 2002. During this period 12 European countries formally entered into a currency union. This is a unique event that allows us to study the effect of currency union among a relatively homogeneous group of industrial countries. Controlling for a host of other factors, we find that the effect of EMU on bilateral trade between member countries ranges between 5 and 10 percent, when compared to trade between all other pairs of countries, and between 9 and 20 percent, when compared to trade among non-EMU countries. In addition, we find no evidence of trade diversion. If anything, our results suggest that monetary union increases trade not just with EMU countries, but also with the rest of the world.

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Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4339.

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Date of creation: Jul 2003
Date of revision:
Handle: RePEc:idb:wpaper:4339
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  1. Yeyati, Eduardo Levy, 2003. "On the impact of a common currency on bilateral trade," Economics Letters, Elsevier, vol. 79(1), pages 125-129, April.
  2. Alan Deardorff, 1998. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Chapters, in: The Regionalization of the World Economy, pages 7-32 National Bureau of Economic Research, Inc.
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  8. Frankel, Jeffrey A. & Rose, Andrew K., 1997. "Is EMU more justifiable ex post than ex ante?," European Economic Review, Elsevier, vol. 41(3-5), pages 753-760, April.
  9. 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.
  10. Lopez-Cordova, J. Ernesto & Meissner, Chris, 2000. "Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era," Center for International and Development Economics Research, Working Paper Series qt1b04r034, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  11. Andrew K. Rose, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," NBER Working Papers 7432, National Bureau of Economic Research, Inc.
  12. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
  13. McCallum, John, 1995. "National Borders Matter: Canada-U.S. Regional Trade Patterns," American Economic Review, American Economic Association, vol. 85(3), pages 615-23, June.
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  15. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  16. Thierry Mayer & Keith Head, 2002. "Illusory Border Effects: Distance Mismeasurement Inflates Estimates of Home Bias in Trade," Working Papers 2002-01, CEPII research center.
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