Currency Unions, Trade, and Heterogeneity

Abstract

How do trade costs affect international trade? This paper offers a new approach. We rely on a flexible gravity equation that predicts variable trade cost elasticities, both across and within country pairs. We apply this framework to the effect of currency unions on international trade. While we estimate that currency unions are associated with a trade increase of around 38 percent on average, we find substantial underlying heterogeneity. Consistent with the predictions of our framework, we find effects around three times as strong for country pairs associated with small import shares, and a zero effect for large import shares. Our results imply that conventional homogeneous currency union estimates do not provide helpful guidance for countries considering to join a currency union. Instead, countries need to take into account the distribution of their trade shares to assess the impact of trade costs.

The Significant Consequence of Feds Monetary Policy: Saving, Investment and Exchange Rate

“…With the increased cost of borrowing, consumers may opt to postpone or reduce their expenditures on highvalue items, leading to a deceleration in consumer spending [4]. Similarly, businesses may become disinclined to undertake investments aimed at expanding their production capacity or launching new projects due to the escalated borrowing expenses [5].…”

“…This can benefit domestic consumers, as they can purchase imported goods at lower prices. Cheaper imports can also provide businesses with access to more affordable inputs and raw materials, potentially improving their competitiveness and efficiency [5].…”

“…When interest rates rise, resulting in a stronger domestic currency, it can have adverse effects on a country's export competitiveness. The elevated prices of exported goods in foreign markets may reduce their appeal to international buyers, potentially leading to a decrease in export volumes [5].…”