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Currency Unions, Trade, and Heterogeneity

Author

Listed:
  • Natalie Chen
  • Dennis Novy
Abstract
How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to the effect of currency unions on international trade. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our framework, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union. Instead, countries need to take into account the distribution of their trade shares to assess the impact of trade costs.

Suggested Citation

  • Natalie Chen & Dennis Novy, 2018. "Currency Unions, Trade, and Heterogeneity," CESifo Working Paper Series 7123, CESifo.
    • Handle: RePEc:ces:ceswps:_7123
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    References listed on IDEAS

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    Cited by:

    1. Jia Hou, 2020. "Revisiting the trade effects of the euro: data sources and various samples," Empirical Economics, Springer, vol. 59(6), pages 2731-2777, December.
    2. Felbermayr Gabriel & Steininger Marina, 2019. "Revisiting the Euro’s Trade Cost and Welfare Effects," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 239(5-6), pages 917-956, October.
    3. Natalie Chen & Dennis Novy, 2022. "Gravity and Heterogeneous Trade Cost Elasticities," The Economic Journal, Royal Economic Society, vol. 132(644), pages 1349-1377.
    4. Dela‐Dem Doe Fiankor & Oliver‐Ken Haase & Bernhard Brümmer, 2021. "The Heterogeneous Effects of Standards on Agricultural Trade Flows," Journal of Agricultural Economics, Wiley Blackwell, vol. 72(1), pages 25-46, February.
    5. Felbermayr Gabriel & Steininger Marina, 2019. "Revisiting the Euro’s Trade Cost and Welfare Effects," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 239(5-6), pages 917-956, October.
    6. Yoto V. Yotov, 2022. "Gravity at Sixty: The Workhorse Model of Trade," CESifo Working Paper Series 9584, CESifo.
    7. Abban, Stanley & Ofori-Abebrese, Grace, 2019. "The Prospect Of ECOWAS Currency Union On Intra-Regional Trade," MPRA Paper 102226, University Library of Munich, Germany.
    8. Daniele Curzi & Martijn Huysmans, 2022. "The Impact of Protecting EU Geographical Indications in Trade Agreements," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(1), pages 364-384, January.
    9. Dąbrowski, Marek A. & Wróblewska, Justyna, 2020. "Insulating property of the flexible exchange rate regime: A case of Central and Eastern European countries," International Economics, Elsevier, vol. 162(C), pages 34-49.
    10. Rodolphe Desbordes & Markus Eberhardt, 2019. "Gravity," Discussion Papers 2019-02, University of Nottingham, GEP.
    11. Donato Masciandaro & Davide Romelli, 2018. "To Be or not to Be a Euro Country? The Behavioural Political Economics of Currency Unions," BAFFI CAREFIN Working Papers 1883, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    12. Silviano Esteve‐Pérez & Salvador Gil‐Pareja & Rafael Llorca‐Vivero & José Antonio Martínez‐Serrano, 2020. "EMU and trade: A PPML re‐assessment with intra‐national trade flows," The World Economy, Wiley Blackwell, vol. 43(10), pages 2574-2599, October.

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    More about this item

    Keywords

    currency unions; euro; gravity; heterogeneity; trade costs; trade elasticity; translog;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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