DP2891 Does a Currency Union Affect Trade? The Time Series Evidence

Author(s):	Reuven Glick, Andrew K Rose
Publication Date:	July 2001
Keyword(s):	bilateral, common currency, country, effects, empirical, fixed, gravity, international, monetary, random, union, within
JEL(s):	F15, F33
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=2891

Does leaving a currency union reduce international trade? We answer this question using a large annual panel data set covering over 230 countries from 1948-97. During this sample over one hundred pairs of countries had currency union dissolutions; they experienced economically and statistically significant declines in bilateral trade, after accounting for other factors. Assuming symmetry, we estimate that a pair of countries that starts to use a common currency experiences a doubling in bilateral trade.