Currency Unions

CEP macro programme member Silvana Tenreyro critically reviews recent literature on currency unions, and discusses the methodological challenges posed by the empirical assessment of their costs and benefits, providing evidence of the economic effects of the euro. In particular, and in contrast with estimates of the trade effect of other currency unions, they find that the impact of the euro on trade has been close to zero, which can be explained by the different characteristics of countries taking part in monetary unions other than the euro, typically very small and low-income economies. These estimates tend to reflect the fact that euro-zone countries historically traded much more intensively than other groups; but there is little evidence that the introduction of the euro had a differential effect on trade among these countries when compared with other developed countries that are not in the euro zone.

She also discusses the various benefits and costs stemming from currency unions, and critically reviews recent empirical developments attempting to quantify them, highlighting some econometric problems in existing empirical work, and proposing solutions where possible. A spin-off of this work is to provide a different assessment of the effect of the euro on different economic outcomes.

To read more about work on Currency Unions see:

• "Currency Unions in Prospect and Retrospect" [Full document in Adobe PDF] (J. M. C. Santos Silva and Silvana Tenreyro), CEP Discussion Paper 0986, June 2010