One Money, One Market: Estimating the Effect of Common Currencies on Trade

48 Pages Posted: 16 Feb 2000 Last revised: 2 Apr 2001

See all articles by Andrew Kenan Rose

Andrew Kenan Rose

University of California - Haas School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 1999

Abstract

A gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade. The panel data set used includes bilateral observations for five years spanning 1970 through 1990 for 186 countries. In this data set, there are over one hundred pairings and three hundred observations, in which both countries use the same currency. I find a large positive effect of a currency union on international trade, and a small negative effect of exchange rate volatility, even after controlling for a host of features, including the endogenous nature of the exchange rate regime. These effects are statistically significant and imply that two countries that share the same currency trade three times as much as they would with different currencies. Currency unions like EMU may thus lead to a large increase in international trade, with all that entails.

Suggested Citation

Rose, Andrew Kenan, One Money, One Market: Estimating the Effect of Common Currencies on Trade (December 1999). NBER Working Paper No. w7432. Available at SSRN: https://ssrn.com/abstract=203156

Andrew Kenan Rose (Contact Author)

University of California - Haas School of Business ( email )

Berkeley, CA 94720
United States
510-642-6609 (Phone)
510-642-4700 (Fax)

HOME PAGE: http://faculty.haas.berkeley.edu/arose

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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