DP3087 Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe: Just Do It

Author(s): Marc Flandreau, Mathilde Maurel
Publication Date: November 2001
Keyword(s): 19th century, endogeneity, europe, gravity equations, monetary unions, optimum currency area, trade and business cycles correlation
JEL(s): F40, N20
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3087

This Paper seeks to trace the impact of monetary arrangements on trade integration and business cycle correlation, focusing on Europe in the late 19th century period as a guide for modern debates. For this purpose, we first estimate a gravity model and show that monetary arrangements were associated with substantially higher trade. The Austro-Hungarian dual monarchy, by many aspects a forerunner of Euroland, improved trade between member states by a factor of 3. Other arrangements, such as the gold standard and the Scandinavian union also impacted trade favourably. To explain this, we argue that monetary coordination, by fostering the correlation of business cycles compensate the adverse effect that the current account constraint has on trade integration. This is found to vastly compensate the negative consequences that trade integration might have on the symmetry of shocks, of which this Paper finds strong evidence, in contrast with recent empirical work.