Comparative Economic Studies in Europe by Unknown

Comparative Economic Studies in Europe by Unknown

Author:Unknown
Language: eng
Format: epub
ISBN: 9783030482954
Publisher: Springer International Publishing


2.2 Empirical Findings in the Literature

Stable exchange rates are usually regarded as important in encouraging trade. This view was based mostly on the correlation between increasing trade and investment flows and adherence to the Gold Standard (Baldwin 2006). However, economists could not find a robust, evidence-based relationship between exchange rate variability and trade. Some researchers found that the relationship is negative, others claimed that it is positive, but most concluded that there is no statistically significant relationship between the two (Sercu and Uppal 2000; Ozturk 2006; Baldwin 2006). However, Rose (2000) found that a common currency boosts bilateral trade by 200% and exchange rate volatility has a large negative impact on trade and investment flows.4 Glick and Rose (2002) also concluded that a Currency Union has a large effect on trade and investment flows—‘a pair of countries that starts to use a common currency experiences a near doubling in bilateral trade’ (p. 1243). Moreover, Frankel and Rose (2002) extended the analysis by including a variable for currency board arrangements and confirmed that ‘important beneficial effects of Currency Union come through the promotion of trade’ (p. 437). Thus, in the pre-Euro literature, the effect of Currency Union membership on trade was found to be large and significant.

There is a substantial empirical literature analysing the trade effects of membership in the Eurozone, which started with the influential paper by Micco et al. (2003). They analysed the early effects of Eurozone membership on trade, using gravity approach and panel data for 22 developed countries from 1992 to 2002, and found a large positive effect on bilateral trade flows of around 25%. Barr et al. (2003) focused on the trade creation between EMU member countries and found the trade effect of the EMU to be positive and significant, around 29%. Faruqee (2004) investigated the effect of EMU on trade within the Eurozone, using a panel data for 22 industrialized countries over the period 1992–2002 and found a positive impact of approximately 10%.5 Flam and Nordström (2006) avoided all the common empirical shortcomings present in some papers of the trade literature and estimated the trade effects of the creation of the EMU using the gravity model. Flam and Nordström (2006) found that the EMU increased trade between Eurozone member states in 1998–2002 compared to 1989–1997 by 15% and trade with outside countries by 8%; they also highlighted that the effect is increasing over time.6 Hence, most of the previous literature on the trade effects of Eurozone membership confirm a positive effect on trade (De Sousa 2012). There is little work yet on the effects of EMU membership on FDI (but see Petroulas 2007; De Sousa and Lochard 2011; Sanso-Navarro 2010); an issue we address in the remainder of the chapter.



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