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Currency unions and gravity models revisited

Gravity models have been shown to be fairly effective in modelling bilateral trading patterns, explaining more than 50 per cent of the variation in trade. This paper examines bilateral trade patterns using a data set provided by Rose and van Wincoop (2001). Rose (2000) has suggested that forming a currency union has a dramatic effect on the volume of intra-union trade. A number of econometric issues are identified with respect to this claim. There is some evidence that Rose's (2000) empirical results are not entirely robust to the sample of countries used, and to the estimation method. In particular, some of the regressors may be endogenous, which casts doubt on the magnitude of the parameter estimates.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2002/dp02_07.pdf
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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2002/07.

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Length: 31p
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:nzb:nzbdps:2002/07
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  1. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
  2. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  3. James E. Anderson & Eric van Wincoop, 2001. "Borders, Trade and Welfare," Boston College Working Papers in Economics 508, Boston College Department of Economics.
  4. Robert C. Feenstra & James R. Markusen & Andrew K. Rose, 2001. "Using the gravity equation to differentiate among alternative theories of trade," Canadian Journal of Economics, Canadian Economics Association, vol. 34(2), pages 430-447, May.
  5. David T. Coe & Alexander W. Hoffmaister, 1998. "North-South Trade-Is Africa Unusual?," IMF Working Papers 98/94, International Monetary Fund.
  6. 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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