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One Money, One Market—A Revised Benchmark

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  • Theo S. Eicher
  • Christian Henn

Abstract

The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose's (2000) initial estimates suggested a tripling of trade and created a literature in search of "more reasonable" CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30-90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose's original benchmark, extend the dataset, and address Baldwin's (2006) critiques regarding the proper specification of gravity models in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications.

Suggested Citation

  • Theo S. Eicher & Christian Henn, 2009. "One Money, One Market—A Revised Benchmark," IMF Working Papers 2009/186, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2009/186
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    3. Guo, Yan, 2013. "Strategic trade policy, cost uncertainty and FDI determinants," ISU General Staff Papers 201301010800004464, Iowa State University, Department of Economics.
    4. Chen, Natalie & Novy, Dennis, 2017. "Currency unions, trade and heterogeneity," LSE Research Online Documents on Economics 88487, London School of Economics and Political Science, LSE Library.
    5. Christian Henn & Brad McDonald, 2014. "Crisis Protectionism: The Observed Trade Impact," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(1), pages 77-118, April.
    6. Mundt, Philipp, 2021. "The formation of input–output architecture: Evidence from the European Union," Journal of Economic Behavior & Organization, Elsevier, vol. 183(C), pages 89-104.
    7. Reuven Glick, 2017. "Currency Unions and Regional Trade Agreements: EMU and EU Effects on Trade," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 59(2), pages 194-209, June.
    8. Cecilio R. Tamarit Escalona & Estrella Gómez, 2011. "The euro effect on trade: evidence in gravity equations using panel cointegration techniques," Working Papers. Serie EC 2011-07, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    9. Mariam Camarero & Estrella Gómez-Herrera & Cecilio Tamarit, 2018. "New Evidence on Trade and FDI: how Large is the Euro Effect?," Open Economies Review, Springer, vol. 29(2), pages 451-467, April.
    10. João Sousa Andrade & António Portugal Duarte, 2015. "Optimum Currency Areas, Real and Nominal Convergence in the European Union," Notas Económicas, Faculty of Economics, University of Coimbra, issue 42, pages 8-29, December.
    11. Salvador Gil-Pareja, 2011. "Do nonreciprocal preference regimes increase exports?," ERSA conference papers ersa11p1561, European Regional Science Association.
    12. Glick, Reuven & Rose, Andrew K., 2016. "Currency unions and trade: A post-EMU reassessment," European Economic Review, Elsevier, vol. 87(C), pages 78-91.
    13. Eicher, Theo S. & Helfman, Lindy & Lenkoski, Alex, 2012. "Robust FDI determinants: Bayesian Model Averaging in the presence of selection bias," Journal of Macroeconomics, Elsevier, vol. 34(3), pages 637-651.
    14. Oluwole Owoye & Olugbenga A. Onafowora, 2014. "The Economic Impact Analysis of the Euro Currency on Twelve Member Countries of the European Union," Journal of Empirical Economics, Research Academy of Social Sciences, vol. 2(4), pages 229-244.
    15. Gil-Pareja, Salvador & Llorca-Vivero, Rafael & Martínez-Serrano, José Antonio, 2014. "Do nonreciprocal preferential trade agreements increase beneficiaries' exports?," Journal of Development Economics, Elsevier, vol. 107(C), pages 291-304.
    16. Fabien Candau & G Guepie & R Kouakou, 2021. "In Gravity no Veritas: Dubious Trade Elasticity and Weak Effects of Regional Trade Agreements in Africa," Working Papers hal-03257448, HAL.
    17. Santana-Gallego, Maria & Pérez-Rodríguez, Jorge V., 2019. "International trade, exchange rate regimes, and financial crises," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 85-95.
    18. Davies, E. & Nilsson, L., 2013. "A comparative analysis of EU and US trade preferences for the LDCs and AGOA beneficiaries," DG TRADE Chief Economist Notes 2013-1, Directorate General for Trade, European Commission.
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    20. Alexander Jordan & Alex Lenkoski, 2012. "Tobit Bayesian Model Averaging and the Determinants of Foreign Direct Investment," Papers 1205.2501, arXiv.org.
    21. Magdalena Vlahova-Veleva, 2020. "The Euro‘s effect on trade," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 26-45,46-65.
    22. Martínez-Zarzoso, Inmaculada & Johannsen, Florian, 2017. "Monetary uncertainty and trade in Eastern Europe and Central Asia: A firm-level analysis," International Business Review, Elsevier, vol. 26(3), pages 476-490.
    23. Gil-Pareja, Salvador & Llorca-Vivero, Rafael, 2017. "El comercio exterior de España y el proceso de Integración Europea /The Foreign trade of Spain and the European Integration Process," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 35, pages 63-84, Enero.
    24. Mariko Klasing & Petros Milionis & Robert Zymek, 2015. "Gravity across Space and Time," Edinburgh School of Economics Discussion Paper Series 265, Edinburgh School of Economics, University of Edinburgh.

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