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Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It

  • Marc Flandreau

    (Centre for Finance and Development)

  • Mathilde Maurel

    (Centre d'études et de recherches sur le developpement international)

This Paper seeks to trace the impact of monetary arrangements on trade integration and business cycle correlation, focusing on Europe in the late 19th century period as a guide for modern debates. For this purpose, we first estimate a gravity model and show that monetary arrangements were associated with substantially higher trade. The Austro-Hungarian dual monarchy, by many aspects a forerunner of Euroland, improved trade between member states by a factor of 3. Other arrangements, such as the gold standard and the Scandinavian union also impacted trade favourably. To explain this, we argue that monetary coordination, by fostering the correlation of business cycles compensate the adverse effect that the current account constraint has on trade integration. This is found to vastly compensate the negative consequences that trade integration might have on the symmetry of shocks, of which this Paper finds strong evidence, in contrast with recent empirical work.

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Paper provided by Sciences Po in its series Sciences Po publications with number n°3087.

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Date of creation: Nov 2001
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Handle: RePEc:spo:wpmain:info:hdl:2441/607
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  1. 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.
  2. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
  3. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  4. Flandreau, Marc, 2000. "The economics and politics of monetary unions: a reassessment of the Latin Monetary Union, 1865 71," Financial History Review, Cambridge University Press, vol. 7(01), pages 25-44, April.
  5. Fatás, Antonio & Rose, Andrew K, 2001. "Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes," CEPR Discussion Papers 2692, C.E.P.R. Discussion Papers.
  6. A'Hearn, Brian & Woitek, Ulrich, 2001. "More international evidence on the historical properties of business cycles," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 321-346, April.
  7. Jacques Melitz, 2003. "Geography, Trade and Currency Union," Working Papers 2003-25, Centre de Recherche en Economie et Statistique.
  8. Engel, Charles M & Rose, Andrew K, 2001. "Currency Unions and International Integration," CEPR Discussion Papers 2659, C.E.P.R. Discussion Papers.
  9. Eichengreen, B., 1992. "Should the Maastricht Treaty be Saved?," Princeton Studies in International Economics 74, International Economics Section, Departement of Economics Princeton University,.
  10. Todd E. Clark & Eric van Wincoop, 1999. "Borders and business cycles," Staff Reports 91, Federal Reserve Bank of New York.
  11. Georges Ménil & Mathilde Maurel, 1994. "Breaking up a customs union: The case of the Austro-Hungarian Empire in 1919," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 130(3), pages 553-575, September.
  12. Michael R. Pakko & Howard J. Wall, 2001. "Reconsidering the trade-creating effects of a currency union," Review, Federal Reserve Bank of St. Louis, issue May, pages 37-46.
  13. Marc Flandreau, 2001. "The Bank, the States, and the Market: An Austro-Hungarian Tale for Euroland, 1867-1914," Working Papers 43, Oesterreichische Nationalbank (Austrian Central Bank).
  14. Marc Flandreau & Jacques Le Cacheux & Frédéric Zumer, 1998. "Stability without a pact? Lessons from the European gold standard, 1880-1914," Economic Policy, CEPR;CES;MSH, vol. 13(26), pages 115-162, 04.
  15. repec:spo:wpecon:info:hdl:2441/645 is not listed on IDEAS
  16. Jeffrey A. Frankel, 1997. "Regional Trading Blocs in the World Economic System," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 72, March.
  17. 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.
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