Regional Single Currency Effects on Bilateral Trade with the European Union
34 Pages Posted: 30 Oct 2010 Last revised: 14 Dec 2010
Date Written: October 1, 2010
The regional effects of sharing a single currency on bilateral trade with other European Union member states are a contentious question. This paper examined different definitions along with regional effects of the set of the euro as a common currency by taking advantage of a gravity specification of bilateral trade between the seventeen Spanish regions and EU-13 countries over the period 1997-2004. Our database allows accounting for two distinct definitions of a single currency depending on its temporal set up. That is, the “exchange rate volatility effect” (from exchange rate fixing in 1999) is distinguished from the so-called “common currency effect” (resulting from the issuing of a new currency in 2002). Findings are suggestive of a regional concentration of currency union effects in a few regions, namely those relatively more open to trade, though such effects are found to fade away over time. Trade enhancing effects are found to range between 45 to 16% depending on the specification. Finally, whist the “exchange rate volatility effect” of a common currency was significant, the pure currency union effect was found to be almost negligible.
Keywords: Gravity Models, Trade Flows, Regional Heterogeneity, Monetary Union
JEL Classification: 04, F4, F11, F33
Suggested Citation: Suggested Citation