Ms. Emine Boz, Ms. Nan Li, Hongrui Zhang, and Mr. Luis M. Cubeddu
(2002; henceforth EK) to data on bilateral trade flows in agriculture, manufacturing, and services. Deriving separate estimates for different years and sectors, we allow the trade costs and their relationship with trade flows to vary over time and across sectors. Such variation is critical for our analysis, which examines a 45-year period characterized by significant improvements in shipping and information technologies for sectors that exhibit heterogeneous tradability.
Our measures of tradecost include nontariff barriers that are difficult to quantify but
Mr. Christian H Ebeke, Jesse Siminitz, Mr. Jeffrey R. Franks, and Mr. Shekhar Aiyar
up to four and five quarters following the shock.
In terms of magnitude, the decline in the investment peaks at 0.8 (1.6) percentage points of GDP, roughly a year after a trade uncertainty shock in countries located at the median (high) level of the trade openness spectrum. These results are robust to a battery of empirical tests.
Our findings highlight that trade barriers not only can reduce trade growth through higher tradecost, but that uncertainty about future trade policy can deter investment, reducing both growth in the near term and the economy’s long
Appendix I–Steady-State Equilibrium
Appendix II–Log-Linearized Version of the Model
A. Household Preferences and Behavior
B. Firm Technology and Production
1. Model Parameter Values
2. Summary of TradeCost Measures
3. Predicted Effects of Trade Costs and Economic Size
4. Effects of Trade Costs on Trade Balance Variability
5. Effects of Trade Costs on Effective Real Exchange Rate Variability
6. Effects of Trade Costs on Income Variability
7. Effects of Trade Costs on Relative Income Variability
8. Effects of Trade Costs on
This paper provides a general equilibrium analysis of the trade effects of the formation of a currency union, and of its subsequent enlargement to include an economically dissimilar country. Furthermore, it investigates how economic dissimilarities among countries affect the magnitude of the trade effects fostered by a common currency. We show that sharing a common currency enhances the volume of bilateral trade among countries. However, the more economically dissimilar is an accession country, compared to the original members of a currency union, the smaller are the gains in trade that would follow the enlargement of a currency union.