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Estimating the impact of currency unions on trade using a dynamic gravity framework

Campbell, Douglas L. (2011): Estimating the impact of currency unions on trade using a dynamic gravity framework.

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Abstract

This paper revisits the early time series estimates of currency unions on trade from an historical perspective using a dynamic gravity equation and by conducting in-depth case studies of currency union breakups. The early large estimates were driven by omitted variables, as many currency union exits were coterminous with warfare, communist takeovers, coup d'etats, genocide, bloody wars of independence, various other geopolitical travesties, or were predated by trade collapses. Static gravity estimates are found to be sensitive to controlling for these omitted variables, while a dynamic gravity specification implies that currency unions do not increase trade.

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