Disaggregated trade and disaggregated currency unions: a ranking of common currency effects

Abstract

Andrew Rose has long argued that a common currency has a large effect on increasing trade. Recently, Rose has called into question the reliability of this conclusion, as new techniques have emerged for estimating gravity equations. This article uses the sector-specific gravity model developed by Anderson and Yotov (2010a) to investigate if disaggregated trade can provide a reliable estimate of a common currency's effect. Disaggregating trade alone is insufficient to obtain a reliable estimate of a currency union, regardless of econometric technique, when the effect of a common currency on trade is uniform across all unions. Disaggregating the universe of currency unions with individual effects provides a reliable ranking of currency unions, independent of estimation method, by the effect that each union's currency has on increasing trade. These rankings differ across sectors.JEL classifications: F14, F15, O19, Q17

Price‐level co‐movements within currency unions: An alternative integration metric

“…Unexpectedly, this history seems to have had no effect on inducing a common pattern of inflation across EMU member countries. The findings in Table are consistent with Whitten () and some results in Whitten () and Glick and Rose (). Using non‐linear estimation techniques, Glick and Rose find that the introduction of the euro led to small, even insignificant effects on intraunion trade, suggesting a low level of economic integration, especially in the first decade of the euro's existence.…”

“…The overall extent of integration suggested by the results in this paper concurs with the extent of integration found in previous work for unions such as the UEMOA and ECCU (Whitten, , ). Other unions (CEMAC and dollarised countries) exhibit a common stochastic trend overall but are poorly integrated through trade (Gulde & Tsangarides, ; Klein, ; Whitten, ).…”

“…Examining price co‐movements as a measure of integration emerges easily from considering trade flows as a measure of integration. Previous work has shown that the extent of trade integration within a currency union varies across the set of unions, depends largely on the tariff structure operating within the currency union countries and is greater for manufacturing goods than for agricultural goods (See Glick & Rose, ; Whitten, , ). More opportunities for trade should permit more opportunities for low‐cost producers in one currency union member country to sell into markets with relatively higher cost producers within the currency union, leading to greater trade.…”