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Emerging Currency Blocs

  • Jeffrey A. Frankel and Shang-Jin Wei.

Using the gravity model to examine bilateral trade patterns throughout the world. we find clear evidence of trading blocs in Europe. the Western Hemisphere, East Asia and the Pacific. In Europe, it is the EC that operates as a bloc, not including EFTA. Two EC members trade an extra 55 per cent more with each other. beyond what can be explained by proximity, size. and GNP/capita. We also find slight evidence of trade-diversion in 1990. Even though the blocs fall along natural geographic lines. they may actually be "super-natural." Turning to the possibility of currency blocs, we find a degree of intra-regional stabilization of exchange rates, especially in Europe. Not surprisingly. the European currencies link to the OM. and Western Hemisphere countries peg to the dollar. East Asian countries, however, link to the dollar. not the yen. We also find some tentative cross-section evidence that bilateral exchange rate stability may have a (small) effect on trade. A sample calculation suggests that if real exchange rate variability within Europe were to double, as it would if it returned from the 1990 level to the 1980 level, the volume of intra-regional trade might fall by an estimated 0.7 per cent.

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Paper provided by University of California at Berkeley in its series Center for International and Development Economics Research (CIDER) Working Papers with number C93-026.

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Date of creation: 01 Oct 1993
Date of revision:
Handle: RePEc:ucb:calbcd:c93-026
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  1. Jeffrey A. Frankel, 1992. "Is Japan Creating a Yen Bloc in East Asia and the Pacific?," NBER Working Papers 4050, National Bureau of Economic Research, Inc.
  2. Gabriel Sterne & Tamim Bayoumi, 1993. "Regional Trading Blocs, Mobile Capital and Exchange Rate Co-ordination," Bank of England working papers 12, Bank of England.
  3. Jeffrey A. Frankel & Shang-Jin Wei, 1994. "Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies," NBER Chapters, in: Macroeconomic Linkage: Savings, Exchange Rates, and Capital Flows, NBER-EASE Volume 3, pages 295-333 National Bureau of Economic Research, Inc.
  4. Paul Krugman, 1989. "Is Bilateralism Bad?," NBER Working Papers 2972, National Bureau of Economic Research, Inc.
  5. Helpman, Elhanan, 1987. "Imperfect competition and international trade: Evidence from fourteen industrial countries," Journal of the Japanese and International Economies, Elsevier, vol. 1(1), pages 62-81, March.
  6. Hamilton, C.B. & Winters, L.A., 1992. "Opening Up International Trade in Eastern Europe," Papers 511, Stockholm - International Economic Studies.
  7. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-15, May.
  8. Deardorff, Alan V., 1984. "Testing trade theories and predicting trade flows," Handbook of International Economics, in: R. W. Jones & P. B. Kenen (ed.), Handbook of International Economics, edition 1, volume 1, chapter 10, pages 467-517 Elsevier.
  9. Paul De Grauwe, 1988. "Exchange Rate Variability and the Slowdown in Growth of International Trade," IMF Staff Papers, Palgrave Macmillan, vol. 35(1), pages 63-84, March.
  10. Richard K. Abrams, 1980. "International trade flows under flexible exchange rates," Economic Review, Federal Reserve Bank of Kansas City, issue Mar, pages 3-10.
  11. Brada, Josef C & Mendez, Jose, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-80.
  12. Barry Eichengreen., 1990. "One Money for Europe? Lessons from the US Currency Union," Economics Working Papers 90-132, University of California at Berkeley.
  13. Gagnon, Joseph E., 1993. "Exchange rate variability and the level of international trade," Journal of International Economics, Elsevier, vol. 34(3-4), pages 269-287, May.
  14. repec:clu:wpaper:1988_12 is not listed on IDEAS
  15. Tamim Bayoumi and Barry Eichengreen., 1993. "One Money or Many? On Analyzing the Prospects for Monetary Unification in Various Parts of the World," Center for International and Development Economics Research (CIDER) Working Papers C93-030, University of California at Berkeley.
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