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On the Robustness of the Trade-Inducing Effects of Trade Agreements and Currency Unions

  • Jayjit Roy



Regional trade agreements (RTAs) and currency unions (CUs) share the characteristic of being potentially endogenous trade cost proxies in gravity equations. In both cases, this problem is magnified by the paucity of reliable instruments. Instead of resorting to the often-employed alternative of panel data in order to address selection on just the time-invariant unobservables, this paper provides the first empirical analysis of the extent to which the positive association between CU or RTA membership and bilateral trade can be considered causal. Despite not identifying point estimates, striking results are obtained. Although most cross-sections find both RTAs and CUs to be associated with increased bilateral trade, the evidence in favor of a causal effect is strong only for CUs, and is also witnessed at the extensive margin of trade.

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Paper provided by Southern Methodist University, Department of Economics in its series Departmental Working Papers with number 0906.

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Length: 38 pages
Date of creation: Nov 2009
Date of revision:
Handle: RePEc:smu:ecowpa:0906
Contact details of provider: Postal: Department of Economics, P.O. Box 750496, Southern Methodist University, Dallas, TX 75275-0496
Phone: 214-768-2715
Fax: 214-768-1821
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