Breaking Badly: The Currency Union Effect on Trade

Campbell, Douglas L. and Chentsov, Aleksandr (2017): Breaking Badly: The Currency Union Effect on Trade.

Abstract

As several European countries debate entering, or exiting, the Euro, a key policy question is how much currency unions (CUs) affect trade. Recently, Glick and Rose (2016) confirmed that currency unions increase trade on average by 100%, and that the Euro has increased trade by a still-large 50%. In this paper, we find that the apparent large impact of CUs on trade is driven by other major geopolitical events correlated with CU switches, including communist takeovers, decolonization, warfare, ethnic cleansing episodes, the fall of the Berlin Wall and the whole history of European integration. We find that moving from robust standard errors to multi-way clustered errors alone reduces the t-score of the Euro impact by 75%. Looking at individual CUs, we find that in no cases does the time series evidence support a large trade effect, and that the effect breaks particularly badly once we find suitable control groups. Overall, we find that intuitive controls and omitting the CU switches coterminous with war and missing data render the trade impact of the Euro and all CUs together statistically insignificant.

• Item Type: MPRA Paper
• Language: English
• Keywords: The Euro, Currency Unions and Trade, Gravity Regressions for Policy Analysis
• Subjects: F - International Economics > F1 - Trade > F15 - Economic Integration; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; F - International Economics > F5 - International Relations, National Security, and International Political Economy > F54 - Colonialism ; Imperialism ; Postcolonialism

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