Reconsidering the Trade-Creating Effects of a Currency Union

21 Pages Posted: 21 Jul 2001

See all articles by Michael R. Pakko

Michael R. Pakko

Arkansas Economic Development Institute

Howard J. Wall

Lindenwood University - Center for Economics and the Environment

Date Written: June 19, 2001

Abstract

This paper reconsiders recent empirical evidence found by Andrew Rose that countries adopting a common currency will triple their bilateral trade. We find that this large estimated effect is due to estimation bias arising from missing and/or misspecified time-invariant factors, rather than to the adoption of a common currency. Using the most general specification of time-invariant factors, our results indicate that a common currency actually leads to a small reduction in trade over a five-year period, although this result is not statistically different from zero. We also find that over ten- and twenty-year periods, trade volumes are more than halved by the adoption of a common currency.

Keywords: Currency unions, gravity model

JEL Classification: F33, F15

Suggested Citation

Pakko, Michael R. and Wall, Howard J., Reconsidering the Trade-Creating Effects of a Currency Union (June 19, 2001). Available at SSRN: https://ssrn.com/abstract=275248 or http://dx.doi.org/10.2139/ssrn.275248

Michael R. Pakko

Arkansas Economic Development Institute ( email )

2801 South University Avenue
Little Rock, AR 72204
United States
501-569-8541 (Phone)
501-569-8538 (Fax)

HOME PAGE: http://https://ualr.edu/aedi/

Howard J. Wall (Contact Author)

Lindenwood University - Center for Economics and the Environment ( email )

209 S. Kingshighway
St. Charles, MO 63301
United States

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