One Money, One Market - A Revised Benchmark

24 Pages Posted: 17 Sep 2009

See all articles by Theo S. Eicher

Theo S. Eicher

University of Washington - Department of Economics

Christian Henn

International Monetary Fund

Date Written: September 2009

Abstract

The introduction of the euro generated substantial interest in measuring the impact of currency unions (CUs) on trade flows. Rose's (2000) initial estimates suggested a tripling of trade and created a literature in search of more reasonable CU effects. A recent meta-analysis of this literature shows that subsequent papers quantify CU trade impacts at 30-90 percent. However, most recent studies use shorter time series and fewer countries than Rose in his original work. We revisit Rose's original benchmark, extend the dataset, and address Baldwin's (2006) critiques regarding the proper specification of gravity models in large panels by simultaneously accounting for multilateral resistance and unobserved bilateral heterogeneity. This produces a robust average CU trade effect of 45 percent. Yet, the trade impacts of individual CUs vary substantially and are generally lower than those of preferential trade agreements (PTAs). Our revised benchmark can be used as a yardstick for future studies to delineate how estimates differ due to new data or differences in econometric specifications.

Keywords: Bilateral trade, Economic models, Markets, Monetary systems, Monetary unions, Trade integration, Trade relations

Suggested Citation

Eicher, Theo S. and Henn, Christian, One Money, One Market - A Revised Benchmark (September 2009). IMF Working Paper No. 09/186, Available at SSRN: https://ssrn.com/abstract=1474594

Theo S. Eicher (Contact Author)

University of Washington - Department of Economics ( email )

Box 353330
Seattle, WA 98195-3330
United States

Christian Henn

International Monetary Fund ( email )

700 19th St NW
Washington, DC 20431
United States