A Common Currency Can Triple Trade Volume, New Haas/Berkeley Research Shows
BERKELEY, Calif., Jan. 31, 2000 -- What is the impact of a common currency on international trade? Surprisingly large, according to new research by Prof. Andrew Rose at the Haas School of Business, University of California, Berkeley.
Rose, an economist and professor of international trade, shows that the trade volume between two countries sharing a common currency is greater than comparable countries with their own currencies - over three times as high. He says the findings offer a "potent argument in favor of currency unions."
Rose's ideas are already being discussed by the financial architects of the European Monetary Union, where the euro is on course to become the shared currency of 11 countries by 2002. Until now, the consensus among most economists is that trade will rise only a little among EMU countries, which have already opened barriers to free trade among themselves. Rose's research predicts the impact is likely to be much greater than previously estimated.
Rose studied economic data from the more than 90 countries with existing currency unions, looking at evidence across countries to trace the separate effects on trade of currency unions and of exchange rate volatility. Rose was able to quantify, for the first time, the benefit to international trade from using a single currency, which reduces transaction costs. Until now, economists have instead focused solely on the much smaller effect of reducing exchange rate volatility. Rose's research shows that entering a currency union delivers an effect that is 30 times the impact of eliminating exchange rate volatility.
The findings raise important questions of what a common currency would do for other trading partners. Said Rose: "Countries, such as the UK, Sweden and Denmark in Europe, and also Argentina, Mexico, and Canada, among others, may find it worthwhile to join or form currency unions, leading to a further increase in global integration."
In the EMU, Rose expects the triple increase in trade volume to have wide-ranging effects on consumers, business managers, and policy makers alike. While the increased competition will put pressure on business managers, it will also reduce prices for consumers. At the same time, Rose warns, labor representatives may fear for local jobs and demand a greater social net.
Contact: Professor Andrew Rose at 1-510-642-6609 or at [email protected].
View the paper at: http://www.haas.berkeley.edu/~arose/.
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