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The Dynamic Effects of Currency Union on Trade

Paul Bergin and Ching-Yi Lin

No 16259, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A currency union's ability to increase international trade is one of the most debated questions in international macroeconomics. This paper studies the dynamics of these trade effects. First, an empirical study of the European Monetary Union finds that the extensive margin of trade (entry of new firms or goods) responds several years ahead of overall trade volume. This implies that the intensive margin (previously traded goods) falls in the run-up to EMU. The paper's theoretical contribution is to study the announcement of a future monetary union as a news shock to trade costs in the context of a dynamic stochastic general equilibrium trade model. Early entry of new firms in anticipation is explainable as a rational forward-looking response under certain conditions, where essential elements include sunk costs of exporting and heterogeneity among firms of a type known before entry. The findings help identify which types of trading frictions are reduced by a currency union. The important role of expectations also indicates that continued gains from EMU depend upon long-term credibility of the union.

JEL-codes: F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-int, nep-mon and nep-opm
Date: 2010-08
Note: IFM
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Published as Bergin, Paul R. & Lin, Ching-Yi, 2012. "The dynamic effects of a currency union on trade," Journal of International Economics, Elsevier, vol. 87(2), pages 191-204.

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Journal Article: The dynamic effects of a currency union on trade (2012) Downloads
Working Paper: The Dynamic Effects of Currency Union on Trade (2011)
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