The Common Currency Effect on International Trade: Evidence from an Accidental Monetary Union

Roger Vicqu Ry
Authors registered in the RePEc Author Service: Roger Henry Vicquéry (roger.vicquery@bankofengland.co.uk)

Working papers from Banque de France

Abstract: I rely on a historical natural experiment to provide, for the first time, a causal estimate of the effect of currency unions on international trade. Since the seminal paper by Rose (2000), a large literature has developed around currencies as a trade cost. However, self-selection and endogeneity bias implied by membership of a currency union are likely to be pervasive and might explain the large pro-trade effect of currency union found in the literature. I offer a quasi-experimental contribution by exploiting an exogenous variation in currency union membership, driven by an unexpected geopolitical shock the 1861 Italian unification - and involving a French franc pan-European zone that existed throughout the 19th century. I employ original data and structural gravity equations to estimate an effect in the order of 35%, consistent with a large - if heterogenous - effect of common currencies on trade.

Keywords: Currency Unions; Common Currency; Trade; Natural Experiment; Gravity Regressions. (search for similar items in EconPapers)
JEL-codes: F15 F33 F54 N73 (search for similar items in EconPapers)
Pages: 60 pages
Date: 2021
New Economics Papers: this item is included in nep-his, nep-int, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:856

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