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Estimating the Impact of Currency Unions on Trade: Solving the Glick and Rose Puzzle

Authors


  • Special thanks to Colin Cameron, Robert Feenstra, Gabriel Mathy, Chris Meissner and Kadee Russ for their feedback. I am also indebted to Alan Taylor and Ju Hyun Pyun for commenting on earlier drafts and to an anonymous referee for insightful comments. I would also like to thank Anastasiya Krasnyanska for her excellent research assistantship, Robert Feenstra for providing data, and Andrew Rose and Reuven Glick for making their data available on-line – the mark of true scholars. All errors remain my own.

Abstract

Does leaving a currency union reduce international trade? This paper uses a historical approach to re-examine the puzzling large apparent impact of currency unions on trade. I find that the early time series estimates were driven by the gradual decaying of colonial trade ties and other major geopolitical factors, including warfare, communist takeovers and ethnic cleansing episodes. My methodology, which carries lessons for other uses of gravity equations in policy analysis, yields point estimates of currency unions on trade that are not statistically distinct from zero.

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