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European Integration and the Regionalization of World Trade and Currencies: The Economics and the Politics

Jeffrey A. Frankel and Shang-Jin Wei.
Authors registered in the RePEc Author Service: Jeffrey Alexander Frankel () and Shang-Jin Wei

No C95-053, Center for International and Development Economics Research (CIDER) Working Papers from University of California at Berkeley

Abstract: Using the gravity model, we find evidence that the EC affects trade flows. A pair of EC members trade with each other 48 percent more than two otherwise similarly-placed countries. We also find that bilateral exchange rate variability fell by half within Europe during the 1980s, and that this stability worked to increase intra-continental trade by an estimated 5.9 percent. If account is taken of the endogeneity of the currency regime, the estimated effect of bilateral exchange rate variability on trade is much smaller. The political economy part of the paper catalogues ways in which regional arrangements undermine political support for multilateral liberalization, and ways in which they can have the opposite effect.

Date: 1995-06-01
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