The Dynamic Effects of Currency Union on Trade / Paul Bergin, Ching-Yi Lin.

Format:

Book

Author/Creator:

Bergin, Paul.

Contributor:

National Bureau of Economic Research.

Lin, Ching-Yi.

Series:

Working Paper Series (National Bureau of Economic Research) no. w16259.

NBER working paper series no. w16259

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2010.

Summary:

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.

Notes:

Print version record

August 2010.