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Currency Unions and Trade: Variations on Themes by Rose and Persson

Using a gravity equation, Andrew Rose finds that currency-union countries trade more intensively with each other than do other country pairs, and others report same result. Using a nonparametric test, however, Persson finds that trade flows between currency-union countries are not significantly different in size from other bilateral trade flows. Using another way to identify a currency-union country, this paper reproduces Persson's result but also produces an anomaly. When Rose's gravity equation is re-estimated using the data set furnished by the alternative definition of a currency-union country, Rose's result survives, although the currency-union effect is smaller than the effect he reported initially.

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File URL: http://www.rbnz.govt.nz/research_and_publications/discussion_papers/2002/dp02_08.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 DP2002/08.

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Length: 34p
Date of creation: Dec 2002
Date of revision:
Handle: RePEc:nzb:nzbdps:2002/08
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  1. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," IDB Publications (Working Papers) 6511, Inter-American Development Bank.
  2. Engel, C. & Rogers, J.H., 1995. "How Wide is the Border?," Papers 4-95-16, Pennsylvania State - Department of Economics.
  3. David C. Parsley & Shang-Jin Wei, 2000. "Explaining the Border Effect: The Role of Exchange Rate Variability, Shipping Costs, and Geography," NBER Working Papers 7836, National Bureau of Economic Research, Inc.
  4. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
  5. Christie Smith, 2002. "Currency unions and gravity models revisited," Reserve Bank of New Zealand Discussion Paper Series DP2002/07, Reserve Bank of New Zealand.
  6. Alberto Alesina & Robert Barro & Silvana Tenreyro, 2002. "Optimal Currency Areas," Harvard Institute of Economic Research Working Papers 1958, Harvard - Institute of Economic Research.
    • Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
  7. Engel, Charles M & Rose, Andrew K, 2001. "Currency Unions and International Integration," CEPR Discussion Papers 2659, C.E.P.R. Discussion Papers.
  8. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
  9. 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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