Estimating the Impact of Currency Unions on Trade: Solving the Glick and Rose Puzzle

Douglas L. Campbell

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Global trade and economics Historical Economic and Social Studies Global Financial Crisis and Policies

Abstract

Abstract Does leaving a currency union reduce international trade? This paper uses a historical approach to re‐examine the puzzling large apparent impact of currency unions on trade. I find that the early time series estimates were driven by the gradual decaying of colonial trade ties and other major geopolitical factors, including warfare, communist takeovers and ethnic cleansing episodes. My methodology, which carries lessons for other uses of gravity equations in policy analysis, yields point estimates of currency unions on trade that are not statistically distinct from zero.

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References

1998Initial conditions and moment restrictions in dynamic panel data models 1995Initial conditions and moment restrictions in dynamic panel data models 1981Biases in Dynamic Models with Fixed Effects 2000One money, one market: the effect of common currencies on trade 1985Market Structure and Foreign Trade: Increasing Returns, Imperfect Competition and the International Economy 2006Gravity for Dummies and Dummies for Gravity Equations 2010The erosion of colonial trade linkages after independence 2002Does a currency union affect trade? The time-series evidence

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