ECONOMIC EFFECTS OF CURRENCY UNIONS |
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Authors: | ROBERT BARRO SILVANA TENREYRO |
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Institution: | Barro:;Department of Economics, Harvard University, Littauer 218, 1805 Cambridge Street, Cambridge, MA 02138. E-mail Tenreyro:;Department of Economics, London School of Economics, Houghton Street, London WC2A 2AE, United Kingdom. Email |
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Abstract: | 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. ( JEL C3, F3, F4) |
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