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Economic effects of currency unions

Barro, Robert and Tenreyro, Silvana (2007) Economic effects of currency unions. Economic Inquiry, 45 (1). pp. 1-23. ISSN 0095-2583

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Identification Number: 10.1111/j.1465-7295.2006.00001.x


We develop a new instrumental-variable (IV) approach to estimate the effects of different exchange rate regimes on bilateral outcomes. The basic idea is that the characteristics of the exchange rate between two countries are partially related to the independent decisions of these countries to peg—explicitly or de facto—to a third currency, notably that of a main anchor. This component of the exchange rate regime can be used as an IV in regressions of bilateral outcomes. We apply the methodology to study the economic effects of currency unions. The likelihood that two countries independently adopt the currency of the same anchor country is used as an instrument for whether they share a common currency. We find that sharing a common currency enhances trade, increases price comovements, and decreases the comovement of real gross domestic product shocks

Item Type: Article
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Additional Information: © 2006 Western Economic Association International
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory
JEL classification: F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance
F - International Economics > F3 - International Finance
C - Mathematical and Quantitative Methods > C3 - Econometric Methods: Multiple; Simultaneous Equation Models; Multiple Variables; Endogenous Regressors
Date Deposited: 22 May 2008 10:37
Last Modified: 20 Aug 2021 00:48

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