Abstract
This paper explores and quantifies several aspects of the performance of currency unions using an augmented version of the gravity model and focusing on two samples, the world and Africa. Our empirical findings suggest that, in principle, membership in a currency union should benefit Africa as much as it does the rest of the world. In addition, we find evidence from both samples that the effect of currency unions on trade is large, almost a doubling; currency unions are associated with trade creation, increase price co-movements among members, and make trade more stable; and longer duration of currency union membership brings about more benefits, although with some diminishing returns.
I. Introduction
Analogues of Newton’s theory of gravity have been applied in a number of different contexts in attempts to explain interactions with spatial dimensions such as trade or migration. Although gravity models to estimate bilateral trade were originally introduced by Pöyhönen (1963) and Tinbergen (1962) as atheoretical (albeit plausible) empirical models, subsequent work established micro foundations for the basic building blocks that appear in these gravity models.2 Gravity models, shown to be fairly effective in modeling bilateral trading patterns, explain more than half of the variation in trade.
Recent work by Andrew Rose and a number of coauthors (for example, Rose, 2000; Frankel and Rose, 2002; Rose and van Wincoop, 2001; and Glick and Rose, 2002) has used gravity models to investigate, from an empirical point of view, the impact that currency arrangements have on bilateral trade. Frankel and Rose (2002) support the view that the important growth enhancing benefits of currency unions come only through increased trade and not through other channels (such as reduced inflation). Specifically, Frankel and Rose conclude that two countries that share the same currency trade roughly three times as much as they would if they used different currencies.3
From a theoretical standpoint, currency unions reduce transaction costs between trading partners and thus promote trade; they create a larger market in which there are potential gains from economies of scale and production efficiency (assuming factor mobility and flexible wages); they bring macroeconomic stability by signaling the central bank’s commitment to reduce inflation; they enhance the credibility of the monetary authority; and they reduce uncertainty. Less uncertainty about prices can help allocate resources more efficiently in a region, while the absence of exchange rate risk in countries sharing a common currency encourages investment and facilitates capital mobility. These potential gains need to be compared with the potential losses from membership. Potential losses depend on the extent to which countries in the union face asymmetric shocks, and whether countries in the region are sufficiently flexible to absorb or mitigate such shocks, with factor mobility and transfers acting as shock absorbers.
This paper contributes to the ongoing debate about how currency unions affect trade by empirically investigating certain stylized facts of currency unions in Africa, and the world, in general. We choose to focus on Africa because it has had a rich experience with currency unions, although its integration in world trade has remained limited.4 We begin by augmenting the gravity model of Glick and Rose (2002) to investigate some stylized facts about the impact of currency unions on trade, including possible trade diversion effects. Then, we examine the effect of the duration of currency union membership on bilateral trade, and the impact of currency unions on price and output co-movements and trade stability.
Our empirical findings suggest that African countries stand to benefit as much from currency union membership as countries in the rest of the world, and, therefore, currency union benefits are not region specific. Our findings, which are fairly robust to a variety of estimation techniques, can be summarized as follows. First, in investigating the effect of a currency union membership on trade, the results of both samples reveal that countries belonging to the same currency union trade about two times more with each other than do other comparable countries that do not share a currency. Second, for both samples, there is evidence that currency unions are associated with trade creation, trade stability, and increased co-movement of prices, but not with the co-movement of output among members. Third, we show that, for bilateral trade, it matters not only whether countries share a common currency but, if they do, for how long: the longer a country participates in a currency union, the greater the benefit is; however, the relationship is not linear, with some diminishing returns to membership in a currency union. Finally, while the main results hold true for both samples and the marginal effects and the mechanisms of transmission may vary across the regions, we find that currency unions can be an effective tool for stimulating trade. However, given the low trade base and the protracted period necessary following the establishment of a currency union to increase trade significantly, it can be inferred from the results that currency union membership could not be a primary tool to achieve high levels of trade in Africa.
The rest of the paper is organized as follows. Section II provides a short survey of the relevant literature. Section III describes the methodology, presenting the analytical framework, estimation issues, and the data sources. Section IV presents the results of the various estimations, including the benchmark results of the impact of currency unions on trade, the characteristics of Africa trade, the effects of the length of membership in a currency union, and the impact of currency unions on output and price synchronization. Section V provides concluding remarks.
II. Literature Review
Baldwin’s (2005) survey of the evidence on how the volume of trade is affected by currency unions rightly places Andrew Rose’s research at the center of this literature. Rose and his coauthors show that membership in a currency union promotes trade substantially. Rose (2000) shows that trade between countries belonging to the same currency union is over three times greater than trade between comparable countries that do not share the same currency. He also shows that the effect of the decrease in exchange rate volatility is positive, although the coefficient is much smaller than the one associated with the currency union. In fact, the increase in trade associated with a currency union is over an order of magnitude larger than that associated with decreasing exchange rate volatility to zero. In answering the question of why sharing a currency has such a big effect on trade, Rose presents several reasons, including that a common currency can induce financial integration with its subsequent effects on trade and that, by entering a currency union, a government signals its commitment to long-term integration.5
Investigating further the trade generating effect of currency union membership, Rose and van Wincoop (2001) use a structural model developed by Anderson and van Wincoop (2003) to address country-specific idiosyncrasies. This approach, which was applied only to countries with complete bilateral data, reduces the effect of currency unions on trade to about two and a half. Exploring the time-series dimension of the data, Glick and Rose (2002) use a fixed-effects estimator to address the time-series element of the country-specific idiosyncrasies, namely, the pair-specific idiosyncrasies. They find a smaller, yet still large impact of currency unions on trade: joining a currency union almost doubles bilateral trade. In summary, while part of the recent debate (see Baldwin, 2005) has centered around the large magnitude of the estimated currency union effect, there seems to be an agreement in the literature that there is indeed a common-currency effect, which, as suggested by Frankel (2005), “is probably substantially smaller than a tripling.”6
There is a growing literature describing the potential channels through which a currency union affects trade. Alesina and Barro (2002) show that, apart from country size and trade volume with a potential anchor, the characteristics that matter are co-movement of prices, co-movement of outputs, inflation, and the volatility of inflation. They conclude that countries that may gain the most from joining currency unions are those with a history of high and volatile inflation and those having the largest co-movements of outputs and prices with a potential anchor. The predictions of Alesina and Barro (2002) are also tested by Tenreyro (2001). Using a probit model, the determinants of currency union are investigated, taking into account geography, colonial past, and price and output co-movements. Controlling for distance, cultural links, and colonial past, it is shown that countries with higher co-movements of prices have a higher propensity to form a currency union, whereas co-movement of outputs has no effect on countries’ decision.7 Finally, Alesina, Barro, and Tenreyro (2002) and Tenreyro and Barro (2003) analyze the impact of currency union on co-movements of outputs and prices between trading partners and investigate how co-movements of outputs and prices would respond to the formation of a currency union.8
Africa presents an interesting area in which to assess the relative impact of currency unions and free trade agreements on intraregional trade as well as on trade with the rest of the world.9 Currency unions and preferential regional trade agreements have been an important component of trade policy in African countries over the past few decades. However, despite these initiatives, the participation of African countries in world trade remains limited. Various explanations have been given for Africa’s trade marginalization, including slow economic growth, unfavorable geographical and exogenous factors, poor infrastructure and transport policies, poor trade policies, and the poor effectiveness of currency unions restrained by barriers to intraregional trade, and constraints to factor mobility. In addition, the substantial savings on transaction costs and the trade benefits that would accrue from a monetary union may be limited in Africa because of lesser diversification and the asymmetric terms of trade shocks hitting the economies.10 Furthermore, the loss of the nominal exchange rate instrument makes real adjustments to asymmetric shocks more difficult, especially in view of the poor systems of fiscal transfers and the limited development of the banking and financial sectors in Africa.
Looking at the empirical work on Africa, Debrun, Masson, and Pattillo (2005) show that gains from adopting a common currency depend, among other factors, on the correlation of terms of trade shocks. This, in turn, is connected to countries’ dependence on primary commodity prices. In addition, they show how the existence of interest groups affects incentives to join a currency union or accept a new member in a multilateral union. This effect, especially important for Africa, is crucial for gains and losses from participating in a currency union because differences in government spending propensities may be more important than asymmetric shocks. Coe and Hoffmaister (1999) analyze North-South trade and show that, on average, Africa trades more than developing countries in other regions. Subramanian and Tamirisa (2003) highlight the importance of distinguishing between Anglophone and Francophone Africa in assessing the integration of countries in the region with global markets. Finally, Masson and Pattillo (2004) examine the impact of currency unions on trade in Africa using the Glick and Rose (2002) specification. They estimate that the effect of the currency union dummy on African bilateral trade (which includes African countries’ trade with the rest of the world) is almost the same as in their world sample, with currency unions increasing trade by a factor of three for both Africa and the world.11
Our paper contributes to the existing empirical work in the literature in several ways. First, we separate the empirical analysis in two samples, the world and Africa, to investigate whether Africa’s experience is different. Second, we add several modifications to the standard gravity model estimations, including variables for free trade area, trade diversion, and membership duration, as well as extend the sample of coverage and period compared with earlier empirical work. Third, we investigate and quantify a series of “stylized facts” relating to the trade and currency union nexus, including the trade-generating impact of currency union membership, the effect of currency unions on trade stability, and price and output co-movements.
III. Methodology
A. Analytical Framework
Gravity models represent trade between two economies as a function of their respective economic masses, the distance between the two economies, and a variety of other factors. In line with earlier literature, we begin by investigating the effect of currency unions on trade by defining the following augmented gravity model:
where i and j denote the exporting and importing countries, respectively; t denotes time; Xijt denotes the value of bilateral trade between i and j; CUij is a binary variable that is unity if i and j share the same currency;12 γ is the estimate of the currency union trade-generating effect; and Zk is a vector consisting of gravity variables. The Zk vector includes ln (YiYj;), ln
Next, we investigate the possibility that the stimulus to trade among members of a currency union comes at the expense of trade with nonmembers’ diversion. Following Frankel and Rose (2002), we define a dummy variable that is unity if the two countries are not in the same currency union but (at least) one is in a currency union with another country. A negative (and significant) coefficient of this variable would indicate the existence of potentially harmful trade diversion, and could be interpreted as implying that the increased trade among members inside the union comes at the expense of trade with nonmembers.
Then, we investigate the effects of membership duration. We construct another variable of interest – the number of years that a given pair of countries shares a common currency – and we modify equation (1) to include a variable to capture duration in a currency union as follows: 13
In order to investigate the impact of currency unions on co-movements of output and prices, we construct the variables measuring co-movement of prices and output that are used as dependent variables in equation (1), following Alesina, Barro, and Tenreyro (2002). Specifically, the price co-movements are computed as follows: for every pair of countries, we use annual price data to compute residuals from second-order autoregression equation estimated for each pair of countries for which we have more than 20 observations:
Estimated residuals from equation (3) are then used to obtain a measure of co-movement of prices, with higher VPij representing greater synchronization of prices between countries i and j:
In a similar fashion, we construct a measure of co-movement of output, with û denoting estimated residuals from the following autoregressive process:
and
Finally, to assess the currency union impact on trade stability, we follow Rose (2005) and estimate an equation similar to the gravity equation with the coefficient of variation of log of real trade as dependent variable of equation (1). We calculate values for the dependent variable for the periods 1950-1976 and 1976-2003, so we have two observations per pair. In addition, as a robustness check of the dependent variable, we use (i) the maximal absolute value (during the 27-year sample period) of the difference between the log of real trade and the sample average of trade of every country, scaled by the sample average; (ii) the mean absolute value of the difference between exports and their sample average of every country (scaled by average exports); and (iii) the standard deviation of the residual from a conventional gravity equation of exports in levels. All the explanatory variables are averaged over the corresponding time periods.
B. Other Estimation Issues
In this section we discuss several methodological issues before proceeding with the estimations. These issues are derived primarily from various critiques of the gravity equation analyses, including the three “classic gravity model mistakes” Baldwin (2005) labels as gold, silver and bronze medal mistakes.14 To the extent that these critiques relate to our analysis, we discuss our attempts to address them through robustness checks of our results.
First, we begin with the issue of omitted variables and biases stemming from omitted variables that are pro-trade and correlated with the currency union dummy, labeled as the “gold medal mistake” in Baldwin’s (2005) critique. Research following the initial Rose (2000) results attempts to control for the omitted variable bias by introducing country-specific idiosyncrasies in the model, both in the context of cross-section and panel estimations. First, in the context of cross section analysis, country fixed-effects are used to account for the Anderson and van Wincoop “multilateral resistance” factor, according to which trade between two countries does not depend only on the characteristics of those countries but also on the barriers between those countries and the rest of the world.15 However, given that there is a time-series element to the potential bias that is not eliminated with the Anderson and van Wincoop (2003) procedure, a panel data fixed-effects procedure (robust fixed-effects “within” estimator) is employed that adds country-pair specific intercepts to the equation, and thus exploits the time-series dimension of the data around country-pair averages. To address the omitted variable bias issue, we first follow the literature in estimating the gravity equation using ordinary least squares; then we estimate the specifications with fixed-effects as in Glick and Rose (2002); and, finally, we use panel data techniques (the random effects and robust fixed-effects “within” estimator).16
Second, since forming a currency union (or continuing to stay in a currency union) may also be an endogenous choice, some of the large trade-creating effects of currency union may actually be a reflection of reverse causality. The use of instrumental variables could be a solution to the potential endogeneity problem. However, an appropriate instrument for a currency union is hard to find, which is further complicated by the fact that the currency union variable is a dummy variable. Nevertheless, attempts by Alesina, Barro, and Tenreyro (2002) to address the endogeneity problem using an instrumental variable based on client anchor relationship, have shown that the effect of currency union on trade still remains high even after accounting for this potential endogeneity. In addition, Rose and van Wincoop (2001) argue that: “reverse causality also does not explain away the findings; there is little evidence in the political science literature that countries join currency unions to increase trade, and instrumental variables only increase the impact of currency unions on trade.” This political dimension is particularly important for the case of Africa. Masson and Pattillo (2004) underscore the political dimension of the decision to form or participate in a currency union and suggest that the experience of Africa shows that political objectives are important to the formation of monetary unions.17 Based on the arguments above, and because the Alesina, Barro, and Tenreyro (2002) instrument is not designed for multilateral currency unions (which is of special interest to the Africa focus of our paper), in our analysis we choose to treat currency unions as an exogenous variable with respect to trade.
Finally, there are several issues relating to the model misspecification. Some of the criticisms in the literature relate to the aggregation of exports and imports in the estimation, inappropriate deflation of nominal trade values by the U.S. aggregate price index, possible nonlinear effects entering the gravity equation, and the use of zero-trade observations in the sample.18 On the aggregation issue, some critics argue that while theory supports the use of bilateral exports as dependent variable, the use of bilateral trade as the dependent variable without properly aggregating imports and exports can seriously bias the results. In order to address this critique, we check the sensitivity of our results when the dependent variable used is the sum of the logarithm of exports and imports as well as the logarithm of the sums (the “silver medal of classic gravity model mistakes” as defined by Baldwin). Next, to account for the potential bias possibly arising from inappropriate deflation by the aggregate U.S. price index, we add time dummies. This procedure corrects for the global trends in inflation rates, as every bilateral trade flow is divided by the same price index adjusted for time effects (Baldwin’s “bronze medal of classic gravity model mistakes”). Furthermore, in order to address the possibility of non-linear effects operating in the gravity equation estimations (as for example, due to sample non-homogeneity), similarly to Glick and Rose (2002), we add quadratic terms for both output and output per capita. Finally, the treatment of zero-trade observations is an issue, as the log-linear form of the gravity equation (1) requires using observations for which the dependent variable is positive.19 Given that the value of trade flows between some pairs of countries–typically pairs of small countries–may be zero, a sample selection problem may arise, the severity of which depends on the particular characteristics of the sample and model used. In order to address this issue, we use a positive constant that allows the inclusion of the zero-trade observations, namely, using log(cons tan t+Xij) as a dependent variable in order to avoid the truncation; and Tobit estimation to appropriately account for the censored nature of the dependent variable of the model.20
C. Data
We extend Glick and Rose’s data set (2002) to include 217 countries and other political units over the time period 1948-2002.21 The full set of countries represents the world sample in our analysis. The Africa sample consists of 49 countries from the world sample where at least one in the ij pair is an African country. We also investigate intra-Africa and Africa trade with the rest of the world (Africa-ROW). The intra-Africa sample includes countries where both i and j in the pair come from Africa. The Africa-ROW sample includes exactly one country from Africa in each ij pair.22
The data sources for the first part of the paper include annual bilateral trade observations from the IMF’s Direction of Trade Statistics (expressed in real U.S. dollars); GDP data from the University of Pennsylvania World Tables 6.1 and the World Bank’s World Development Report; colonial past, distance, and language are variables from the CIA World Factbook 2004; data on currency unions for the period 1998-2002 are from the IMF’s Exchange Arrangements and Exchange Restrictions Annual Report; and data on free trade agreements and currency unions are from Glick and Rose.23 For the second part of the paper, we use data on prices (purchasing power parity of GDP) from Penn World Tables 6.1; and terms of trade data are from the IMF’s World Economic Outlook 2004. Appendix B provides more details on the data construction and sources. Appendix C presents the countries, currency unions, and free trade agreements used in the study as well as summary statistics for the variables of interest.
IV. Results
A. The Trade-Generating Effect in the World and Africa
We begin by investigating general aspects of bilateral trade with the extended sample and draw comparisons between the world and Africa samples. First, using the gravity equation (1) we establish some benchmark results by extending the results of Glick and Rose (2002) to allow the free trade agreement dummy to include agreements operating in Africa (which Glick and Rose neglect since these were not included in the World Trade Organization database they were using). Then, we estimate the characteristics of bilateral trade in Africa, trade creation, and address robustness issues.
Benchmark results
Table 1 shows the benchmark results of estimating equation (1) using our extended sample. Following the literature, we use simple cross-section estimation (columns 1-3) and then extend the results using panel fixed-effects estimation in order to account for the country-pair specific idiosyncratic effects and address the potential omitted-variable bias (columns 4-6). The specification in the first column uses the world sample and replicates the benchmark cross-section results of Glick and Rose (2002) very closely: countries sharing a common currency trade more than two and a half times more than countries not involved in a currency union. The coefficients on the standard determinants of the gravity models, such as income, population, and distance, have the correct sign, are statistically significant, and yield plausible elasticity estimates broadly in line with those obtained in the literature.24 In column 2, we allow the free trade area dummy to include more agreements, especially those operating in Africa (which is an important point because a major part of currency union operates in this region). The coefficient of currency union decreases slightly to 2.3 compared with the original Glick and Rose specification. The third column presents the estimation of equation (1) for the Africa sample. Interestingly, the currency union trade-generating effect is larger than in the world sample, and the marginal impacts of the other determinants change.25 In terms of the marginal impacts of the other determinants in the Africa sample compared with the world sample, the “common land border” variable becomes much more important, reflecting the poor transportation links between many African countries and the tendency to trade more with neighboring countries; “common language” is less important, since the currency unions in the sample are the Francophone countries of West and Central Africa and the South Africa Common Monetary Area; “ever colony” has a greater impact reflecting the colonial ties in Africa; and there is a reversal of the signs of “number of islands.” Finally, we reestimate the specifications of columns 1-3 as a panel and add a set of country-pair-specific intercepts to the equation.26 As expected, the results in columns 4-6 show that accounting for country fixed-effects does change the results significantly, suggesting that the idiosyncratic effect is important. For both the world and Africa samples (columns 5 and 6), the size of the currency union coefficient falls, with the currency union trade-generating effect now slightly smaller in Africa. With country effects taken into consideration, currency union membership is estimated to boost trade by a factor of 1.8 and 1.7 in the world and Africa, respectively.
Benchmark Results
Dependent variable is log of real trade, log(Xij)
Benchmark Results
Dependent variable is log of real trade, log(Xij)
| Sample: | World | World | Africa | World | World | Africa |
|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) |
| Currency union | 1.00 ** (8.55) | 0.84 ** (7.75) | 0.99 ** (6.57) | 0.54 ** (13.37) | 0.58 ** (14.35) | 0.55 ** (8.18) |
| Log distance | -1.08 ** (52.68) | -1.05 ** (52.08) | -1.06 ** (19.77) | |||
| Log product real GDP | 0.92 ** (104.20) | 0.93 ** (105.38) | 1.01 ** (61.62) | 0.16 ** (24.28) | 0.15 ** (22.52) | -0.10 ** (8.66) |
| Log product real GDP/capita | 0.42 ** (32.28) | 0.44 ** (33.80) | 0.34 ** (14.77) | 0.55 ** -(51.62) | 0.57 ** (53.47) | 0.66 ** (33.23) |
| Common language | 0.36 ** (9.25) | 0.35 ** (9.31) | 0.29 ** (4.66) | |||
| Common land border | 0.52 ** (4.71) | 0.40 ** (3.85) | 1.22 ** (7.30) | |||
| FTA | 1.14 ** (10.40) | 0.64 ** (18.75) | ||||
| FTA (with Africa) | 1.19 ** -14.32 | 0.92 ** -7.46 | 0.30 ** (12.08) | 0.20 ** (4.61) | ||
| Number landlocked in the pair | -0.23 ** (8.17) | -0.25 ** (8.82) | -0.35 ** (8.86) | |||
| Number islands in the pair | 0.03 (0.92) | 0.03 (0.73) | -0.31 ** (5.00) | |||
| Log product of areas | -0.08 ** (10.75) | -0.08 ** (11.26) | -0.18 ** (14.70) | |||
| Common colonizer | 0.55 ** (8.78) | 0.51 ** (8.27) | 0.30 ** (3.48) | |||
| Current colony | 0.95 ** (3.91) | 0.99 ** (4.02) | -0.39 (0.86) | 0.43 (5.42) | 0.41 ** (5.11) | -0.07 (0.49) |
| Ever colony | 1.31 ** (10.75) | 1.32 ** (10.97) | 2.14 ** (14.42) | |||
| Same nation | -0.20 (0.20) | -0.23 (0.22) | 1.63 ** (3.30) | |||
| Observations | 265,262 | 265,262 | 100,597 | 265,262 | 265,262 | 100,597 |
| R-squared (within) | 0.13 | 0.13 | 0.03 | |||
| R-squared (between) | 0.41 | 0.40 | 0.01 | |||
| R-squared (overall) | 0.68 | 0.68 | 0.52 | 0.38 | 0.36 | 0.01 |
| Hausman test (p-value) | 0.00 | 0.00 | 0.00 |
Benchmark Results
Dependent variable is log of real trade, log(Xij)
| Sample: | World | World | Africa | World | World | Africa |
|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) |
| Currency union | 1.00 ** (8.55) | 0.84 ** (7.75) | 0.99 ** (6.57) | 0.54 ** (13.37) | 0.58 ** (14.35) | 0.55 ** (8.18) |
| Log distance | -1.08 ** (52.68) | -1.05 ** (52.08) | -1.06 ** (19.77) | |||
| Log product real GDP | 0.92 ** (104.20) | 0.93 ** (105.38) | 1.01 ** (61.62) | 0.16 ** (24.28) | 0.15 ** (22.52) | -0.10 ** (8.66) |
| Log product real GDP/capita | 0.42 ** (32.28) | 0.44 ** (33.80) | 0.34 ** (14.77) | 0.55 ** -(51.62) | 0.57 ** (53.47) | 0.66 ** (33.23) |
| Common language | 0.36 ** (9.25) | 0.35 ** (9.31) | 0.29 ** (4.66) | |||
| Common land border | 0.52 ** (4.71) | 0.40 ** (3.85) | 1.22 ** (7.30) | |||
| FTA | 1.14 ** (10.40) | 0.64 ** (18.75) | ||||
| FTA (with Africa) | 1.19 ** -14.32 | 0.92 ** -7.46 | 0.30 ** (12.08) | 0.20 ** (4.61) | ||
| Number landlocked in the pair | -0.23 ** (8.17) | -0.25 ** (8.82) | -0.35 ** (8.86) | |||
| Number islands in the pair | 0.03 (0.92) | 0.03 (0.73) | -0.31 ** (5.00) | |||
| Log product of areas | -0.08 ** (10.75) | -0.08 ** (11.26) | -0.18 ** (14.70) | |||
| Common colonizer | 0.55 ** (8.78) | 0.51 ** (8.27) | 0.30 ** (3.48) | |||
| Current colony | 0.95 ** (3.91) | 0.99 ** (4.02) | -0.39 (0.86) | 0.43 (5.42) | 0.41 ** (5.11) | -0.07 (0.49) |
| Ever colony | 1.31 ** (10.75) | 1.32 ** (10.97) | 2.14 ** (14.42) | |||
| Same nation | -0.20 (0.20) | -0.23 (0.22) | 1.63 ** (3.30) | |||
| Observations | 265,262 | 265,262 | 100,597 | 265,262 | 265,262 | 100,597 |
| R-squared (within) | 0.13 | 0.13 | 0.03 | |||
| R-squared (between) | 0.41 | 0.40 | 0.01 | |||
| R-squared (overall) | 0.68 | 0.68 | 0.52 | 0.38 | 0.36 | 0.01 |
| Hausman test (p-value) | 0.00 | 0.00 | 0.00 |
Next, we investigate the characteristics of African trade in more detail. Table 2 presents the results of the relative trade performance of African countries by introducing dummies for intra-Africa trade, and trade between Africa and the rest of the world (ROW).27 We introduce these trade dummies in the baseline specification (shown in column 2 of Table 1). Doing so changes the currency union coefficient only marginally, suggesting that the trade-generating effect of a currency union is now 2.2 times greater than for countries not in a currency union. In addition, both the Africa-ROW and intra-Africa trade dummies are highly significant. In columns 5 and 6 the sample is restricted to examine the Africa-ROW and intra-Africa trade with country-specific effects taken into consideration. The results confirm that currency union participation in Africa has beneficial intraregional trade generating effects as well as Africa-ROW trade-generating effects: the trade-generating effect is 1.8 for intra-Africa and 1.7 for Africa-ROW trade. Finally, following Subramanian and Tamirisa (2003), we also examine the distinction between Anglophone and Francophone countries. We find that the trade-generating effect is still high but, contrary to Subramanian and Tamirisa, we do not find any distinction in the trade patterns of Francophone and Anglophone Africa, since we find no evidence of intra-Francophone and intra-Anglophone undertrading. However, we do find evidence of increasing integration of both Francophone and Anglophone Africa with the rest of the world because the coefficients of global overall trade with the ROW are positive and significant, suggesting that, in Francophone and Anglophone Africa, overall trade was about 22 and 25 percent more than the average, respectively.28
Africa Trade Details
Dependent variable is log of real trade, log(Xij)
Africa Trade Details
Dependent variable is log of real trade, log(Xij)
| Sample: | World | Africa-ROW | Intra-Africa | World | Africa-ROW | Intra-Africa |
|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) |
| Currency union | 0.79 ** (7.03) | 0.53 (1.18) | 0.55 ** (2.69) | 0.58 ** (14.35) | 0.62 ** (4.56) | 0.53 ** (6.35) |
| Africa-ROW | 0.27 ** (7.90) | |||||
| Intra Africa | 0.42 ** (4.58) | |||||
| Log distance | -1.06 ** (52.00) | -0.96 ** (15.64) | -1.29 ** (9.92) | |||
| Log product real GDP | 0.94 ** (104.26) | 1.06 ** (64.47) | 0.62 ** (9.83) | 0.15 ** (22.52) | -0.13 ** (10.37) | -0.07 * (2.56) |
| Log product real GDP/capita | 0.48 ** (35.94) | 0.33 ** (13.95) | 0.50 ** (5.80) | 0.57 ** (53.47) | 0.75 ** (32.71) | 0.37 ** (8.34) |
| Common language | 0.33 ** (8.76) | 0.27 ** (4.26) | 0.40 * (2.01) | |||
| Common land border | 0.43 ** (4.17) | 1.10 ** (3.21) | 0.98 ** (4.27) | |||
| FTA (with Africa) | 1.15 ** (13.08) | 0.78 ** (5.24) | 0.30 ** (12.08) | 0.18 ** (3.39) | ||
| Number landlocked in the pair | -0.28 ** (9.97) | -0.37 ** (8.82) | -0.33 ** (3.07) | |||
| Number islands in the pair | 0.04 (1.09) | -0.39 ** (6.07) | 0.17 (0.83) | |||
| Log product of areas | -0.09 ** (12.35) | -0.20 ** (16.14) | -0.01 (0.15) | |||
| Common colonizer | 0.49 ** (7.91) | 0.32 ** (3.46) | 0.25 (1.09) | |||
| Current colony | 0.98 ** (3.92) | -0.03 (0.06) | 0.41 ** (5.11) | -0.10 (0.65) | ||
| Ever colony | 1.30 ** (11.25) | 2.12 ** (14.08) | ||||
| Same nation | -0.31 (0.31) | 1.47 ** (2.62) | ||||
| Observations | 265,262 | 85,759 | 14,838 | 265,262 | 85,759 | 14,838 |
| R-squared (within) | 0.13 | 0.03 | 0.01 | |||
| R-squared (between) | 0.40 | 0.00 | 0.01 | |||
| R-squared (overall) | 0.68 | 0.54 | 0.40 | 0.36 | 0.00 | 0.01 |
| Hausman test (p-value) | 0.00 | 0.00 | 0.00 |
Africa Trade Details
Dependent variable is log of real trade, log(Xij)
| Sample: | World | Africa-ROW | Intra-Africa | World | Africa-ROW | Intra-Africa |
|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) |
| Currency union | 0.79 ** (7.03) | 0.53 (1.18) | 0.55 ** (2.69) | 0.58 ** (14.35) | 0.62 ** (4.56) | 0.53 ** (6.35) |
| Africa-ROW | 0.27 ** (7.90) | |||||
| Intra Africa | 0.42 ** (4.58) | |||||
| Log distance | -1.06 ** (52.00) | -0.96 ** (15.64) | -1.29 ** (9.92) | |||
| Log product real GDP | 0.94 ** (104.26) | 1.06 ** (64.47) | 0.62 ** (9.83) | 0.15 ** (22.52) | -0.13 ** (10.37) | -0.07 * (2.56) |
| Log product real GDP/capita | 0.48 ** (35.94) | 0.33 ** (13.95) | 0.50 ** (5.80) | 0.57 ** (53.47) | 0.75 ** (32.71) | 0.37 ** (8.34) |
| Common language | 0.33 ** (8.76) | 0.27 ** (4.26) | 0.40 * (2.01) | |||
| Common land border | 0.43 ** (4.17) | 1.10 ** (3.21) | 0.98 ** (4.27) | |||
| FTA (with Africa) | 1.15 ** (13.08) | 0.78 ** (5.24) | 0.30 ** (12.08) | 0.18 ** (3.39) | ||
| Number landlocked in the pair | -0.28 ** (9.97) | -0.37 ** (8.82) | -0.33 ** (3.07) | |||
| Number islands in the pair | 0.04 (1.09) | -0.39 ** (6.07) | 0.17 (0.83) | |||
| Log product of areas | -0.09 ** (12.35) | -0.20 ** (16.14) | -0.01 (0.15) | |||
| Common colonizer | 0.49 ** (7.91) | 0.32 ** (3.46) | 0.25 (1.09) | |||
| Current colony | 0.98 ** (3.92) | -0.03 (0.06) | 0.41 ** (5.11) | -0.10 (0.65) | ||
| Ever colony | 1.30 ** (11.25) | 2.12 ** (14.08) | ||||
| Same nation | -0.31 (0.31) | 1.47 ** (2.62) | ||||
| Observations | 265,262 | 85,759 | 14,838 | 265,262 | 85,759 | 14,838 |
| R-squared (within) | 0.13 | 0.03 | 0.01 | |||
| R-squared (between) | 0.40 | 0.00 | 0.01 | |||
| R-squared (overall) | 0.68 | 0.54 | 0.40 | 0.36 | 0.00 | 0.01 |
| Hausman test (p-value) | 0.00 | 0.00 | 0.00 |
In Table 3, we investigate the possibility that the stimulus to trade among members of a currency union comes at the expense of trade with nonmembers by adding the trade diversion dummy to the specifications of Tables 1 and 2. All the specifications where country-pair specific fixed-effects are properly accounted for show that the coefficients associated with the trade diversion dummy are positive for both the world and Africa samples. This suggests that there is a significant trade creation effect (rather than trade diversion), with Africa’s trade creation effect slightly smaller in magnitude than the world sample. In addition, while there is a significant trade creation effect for both the intra-Africa and Africa-ROW specifications, the intra-Africa trade creation effect is about five times higher, which reflects observed trade patterns in Africa’s trade arrangements. Finally, the overall currency union trade-generating effect still remains about 2.1 and 2.0 for the world and Africa, respectively.
Trade Creation or Diversion?
Dependent variable is log of real trade, log(Xij)
Trade Creation or Diversion?
Dependent variable is log of real trade, log(Xij)
| Sample: | World | Africa | Africa-ROW | Intra-Africa | World | Africa | Africa-ROW | Intra-Africa |
|---|---|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Currency union | 0.97 ** (8.77) | 1.05 ** (6.81) | 0.61 (1.38) | 0.59 ** (2.58) | 0.73 ** (17.74) | 0.70 ** (10.29) | 0.73 ** (5.35) | 1.03 ** (10.80) |
| Trade diversion | 0.23 ** (8.66) | 0.10 * (2.35) | 0.09 (1.92) | 0.09 (0.55) | 0.21 ** (21.18) | 0.18 ** (10.24) | 0.12 ** (6.71) | 0.58 ** (10.75) |
| Log distance | -1.05 ** (52.02) | -1.05 ** (19.62) | -0.96 ** (15.61) | -1.29 ** (9.86) | ||||
| Log product real GDP | 0.93 ** (105.28) | 1.01 ** (61.82) | 1.06 ** (64.45) | 0.63 ** (9.89) | 0.18 ** (26.35) | -0.06 ** (5.35) | -0.11 ** (8.01) | 0.00 (0.09) |
| Log product real GDP/capita | 0.44 ** (33.56) | 0.33 ** (14.46) | 0.32 ** (13.64) | 0.50 ** (5.61) | 0.56 ** (52.34) | 0.64 ** (31.95) | 0.73 ** (31.74) | 0.31 ** (6.94) |
| Common language | 0.33 ** (8.80) | 0.28 ** (4.57) | 0.27 ** (4.20) | 0.40 * (2.00) | ||||
| Common land border | 0.42 ** (4.04) | 1.22 ** (7.29) | 1.11 ** (3.19) | 0.98 ** (4.26) | ||||
| FTA (with Africa) | 1.17 ** (14.03) | 0.93 ** (7.55) | 0.80 ** (5.13) | 0.32 ** (12.74) | 0.22 ** (5.19) | 0.31 ** (5.61) | ||
| Number landlocked in the pair | -0.24 ** (8.38) | -0.35 ** (8.71) | -0.36 ** (8.70) | -0.33 ** (3.03) | ||||
| Number islands in the pair | 0.01 (0.24) | -0.31 ** (5.01) | -0.39 ** (6.07) | 0.17 (0.86) | ||||
| Log product of areas | -0.08 ** (11.48) | -0.18 ** (14.82) | -0.20 ** (16.19) | -0.01 (0.20) | ||||
| Common colonizer | 0.52 ** (8.42) | 0.31 ** (3.60) | 0.33 ** (3.51) | 0.26 (1.15) | ||||
| Current colony | 1.03 ** (4.17) | -0.35 (0.77) | -0.02 (0.03) | 0.44 ** (5.52) | -0.08 (0.53) | -0.11 (0.67) | ||
| Ever colony | 1.25 ** (10.57) | 2.10 ** (13.94) | 2.09 ** (13.65) | |||||
| Same nation | -0.25 (0.24) | 1.60 ** (3.22) | 1.46 ** (2.59) | |||||
| Observations | 265,262 | 100,597 | 85,759 | 14,838 | 265,262 | 100,597 | 85,759 | 14,838 |
| R-squared (within) | 0.13 | 0.03 | 0.03 | 0.02 | ||||
| R-squared (between) | 0.13 | 0.02 | 0.03 | 0.02 | ||||
| R-squared (overall) | 0.68 | 0.52 | 0.54 | 0.40 | 0.43 | 0.03 | 0.00 | 0.04 |
| Hausman test (p-value) | 0.39 | 0.00 | 0.00 | 0.04 |
Trade Creation or Diversion?
Dependent variable is log of real trade, log(Xij)
| Sample: | World | Africa | Africa-ROW | Intra-Africa | World | Africa | Africa-ROW | Intra-Africa |
|---|---|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Currency union | 0.97 ** (8.77) | 1.05 ** (6.81) | 0.61 (1.38) | 0.59 ** (2.58) | 0.73 ** (17.74) | 0.70 ** (10.29) | 0.73 ** (5.35) | 1.03 ** (10.80) |
| Trade diversion | 0.23 ** (8.66) | 0.10 * (2.35) | 0.09 (1.92) | 0.09 (0.55) | 0.21 ** (21.18) | 0.18 ** (10.24) | 0.12 ** (6.71) | 0.58 ** (10.75) |
| Log distance | -1.05 ** (52.02) | -1.05 ** (19.62) | -0.96 ** (15.61) | -1.29 ** (9.86) | ||||
| Log product real GDP | 0.93 ** (105.28) | 1.01 ** (61.82) | 1.06 ** (64.45) | 0.63 ** (9.89) | 0.18 ** (26.35) | -0.06 ** (5.35) | -0.11 ** (8.01) | 0.00 (0.09) |
| Log product real GDP/capita | 0.44 ** (33.56) | 0.33 ** (14.46) | 0.32 ** (13.64) | 0.50 ** (5.61) | 0.56 ** (52.34) | 0.64 ** (31.95) | 0.73 ** (31.74) | 0.31 ** (6.94) |
| Common language | 0.33 ** (8.80) | 0.28 ** (4.57) | 0.27 ** (4.20) | 0.40 * (2.00) | ||||
| Common land border | 0.42 ** (4.04) | 1.22 ** (7.29) | 1.11 ** (3.19) | 0.98 ** (4.26) | ||||
| FTA (with Africa) | 1.17 ** (14.03) | 0.93 ** (7.55) | 0.80 ** (5.13) | 0.32 ** (12.74) | 0.22 ** (5.19) | 0.31 ** (5.61) | ||
| Number landlocked in the pair | -0.24 ** (8.38) | -0.35 ** (8.71) | -0.36 ** (8.70) | -0.33 ** (3.03) | ||||
| Number islands in the pair | 0.01 (0.24) | -0.31 ** (5.01) | -0.39 ** (6.07) | 0.17 (0.86) | ||||
| Log product of areas | -0.08 ** (11.48) | -0.18 ** (14.82) | -0.20 ** (16.19) | -0.01 (0.20) | ||||
| Common colonizer | 0.52 ** (8.42) | 0.31 ** (3.60) | 0.33 ** (3.51) | 0.26 (1.15) | ||||
| Current colony | 1.03 ** (4.17) | -0.35 (0.77) | -0.02 (0.03) | 0.44 ** (5.52) | -0.08 (0.53) | -0.11 (0.67) | ||
| Ever colony | 1.25 ** (10.57) | 2.10 ** (13.94) | 2.09 ** (13.65) | |||||
| Same nation | -0.25 (0.24) | 1.60 ** (3.22) | 1.46 ** (2.59) | |||||
| Observations | 265,262 | 100,597 | 85,759 | 14,838 | 265,262 | 100,597 | 85,759 | 14,838 |
| R-squared (within) | 0.13 | 0.03 | 0.03 | 0.02 | ||||
| R-squared (between) | 0.13 | 0.02 | 0.03 | 0.02 | ||||
| R-squared (overall) | 0.68 | 0.52 | 0.54 | 0.40 | 0.43 | 0.03 | 0.00 | 0.04 |
| Hausman test (p-value) | 0.39 | 0.00 | 0.00 | 0.04 |
Sensitivity analysis
We check the robustness of our results presented in Tables 1 and 2, by changing our methodology in a number of ways (see discussion in Section III.B.) and reporting estimates of the coefficients of interest. In particular, we conduct sensitivity checks of the specification by estimating the dependent variable as the average of the logarithm of exports and imports (rather than the logarithm of the average); adding quadratic terms for output and output per capita to control for possible sample nonlinearities; adding time effects; modifying the dependent variable by adding a small constant to trade before taking logarithm to avoid the truncation issue, essentially estimating log(constant+Xij) as the dependent variable;29 and using Tobit estimation to account for the censored nature of the dependent variable.
The results in Table 4 show that the estimates of the currency union trade-generating effect γ are reasonably insensitive to a number of sensitivity checks of our methodology. First, adding nonlinear terms, time effects, and changing the specification of the dependent variable to one of the average of the logs changes only marginally the magnitudes of the benchmark fixed-effects estimates. Second, adding the zero-trade values can make a difference in the results. It is important to acknowledge, however, that while excluding the zero values eliminates observations for which the currency union elasticity is low in absolute value may drive the overall elasticity upwards (Anderson and van Wincoop, 2003), at the same time, inclusion of the zero values may drive the overall elasticity downward.30 The Tobit estimates, which overcome the bias that may result from the censored nature of the data, are sufficiently close to the cross-section benchmark results obtained in Table 1, but may, however, suffer from the omitted-variable bias resulting from not properly accounting for country-pair specific fixed-effects. In summary, the estimated γ from the fixed-effects estimates lies in the narrow range of about (1.17, 1.89) and (1.03, 1.85) for the world and Africa samples, respectively. When we include only statistically significant estimates and exclude the estimates resulting from corrections relating to zero-trade observations, the range becomes even more tight (1.59, 1.89) and (1.68, 1.85) for the world and Africa samples, respectively.
Sensitivity Analysis of Currency Union Effect
Various estimation methods
Sensitivity Analysis of Currency Union Effect
Various estimation methods
| Sample: | World | Africa | ||
|---|---|---|---|---|
| γ | Effect | γ | Effect | |
| Ordinary Least squares | 0.84 ** (7.75) | 2.3 | 0.99 ** (6.57) | 2.7 |
| Dependent variable is log(100+Xij) | 0.57 ** (4.85) | 1.8 | 0.58 ** (4.05) | 1.8 |
| Fixed Effects | 0.58 ** (14.35) | 1.8 | 0.55 ** (8.18) | 1.7 |
| Fixed effects AND dependent variable calculated as average of logs | 0.64 ** (15.33) | 1.9 | 0.62 ** (9.15) | 1.9 |
| Fixed effects AND non-linearities added | 0.46 ** (11.46) | 1.6 | 0.52 ** (7.82) | 1.7 |
| Fixed effects AND time effects added | 0.60 ** (14.84) | 1.8 | 0.54 ** (8.13) | 1.7 |
| Fixed effects AND dependent variable is log(100+Xij) | 0.16 ** (4.55) | 1.2 | 0.03 (0.59) | 1.0 |
| Tobit estimation | 0.79 ** (20.30) | 2.2 | 0.86 ** (16.09) | 2.4 |
| County-fixed effects | 0.85 ** (7.86) | 2.4 | 1.14 ** (7.82) | 3.1 |
Sensitivity Analysis of Currency Union Effect
Various estimation methods
| Sample: | World | Africa | ||
|---|---|---|---|---|
| γ | Effect | γ | Effect | |
| Ordinary Least squares | 0.84 ** (7.75) | 2.3 | 0.99 ** (6.57) | 2.7 |
| Dependent variable is log(100+Xij) | 0.57 ** (4.85) | 1.8 | 0.58 ** (4.05) | 1.8 |
| Fixed Effects | 0.58 ** (14.35) | 1.8 | 0.55 ** (8.18) | 1.7 |
| Fixed effects AND dependent variable calculated as average of logs | 0.64 ** (15.33) | 1.9 | 0.62 ** (9.15) | 1.9 |
| Fixed effects AND non-linearities added | 0.46 ** (11.46) | 1.6 | 0.52 ** (7.82) | 1.7 |
| Fixed effects AND time effects added | 0.60 ** (14.84) | 1.8 | 0.54 ** (8.13) | 1.7 |
| Fixed effects AND dependent variable is log(100+Xij) | 0.16 ** (4.55) | 1.2 | 0.03 (0.59) | 1.0 |
| Tobit estimation | 0.79 ** (20.30) | 2.2 | 0.86 ** (16.09) | 2.4 |
| County-fixed effects | 0.85 ** (7.86) | 2.4 | 1.14 ** (7.82) | 3.1 |
B. Years of Membership, Co-movements, and Trade Stability
We now turn our attention to three related (but different) issues. We investigate the impact of the duration of currency union membership on bilateral trade, the currency union impact on output and price co-movements, and the effect of currency union membership on trade stability. Finally, similarly to the previous section, we discuss robustness issues.
Benchmark results
Investigating the time-dimension aspect of a currency union, we follow Glick and Rose (2002) to estimate how the effects of leaving a currency union evolve over time. To do so, we define a dummy variable that is equal to unity for the observations associated with the year of a union’s dissolution between a given pair of countries, and equal to zero otherwise.31 More important, we also include lags of this dummy (we add a dummy variable for one year after dissolution, for two years after dissolution, and so on). Figures 1 and 2 plot the coefficients of subsequent lags to trace out the response of bilateral trade to the dissolution of a currency union.32 Because our sample extends the time-dimension of the Glick and Rose data set, we show more convincingly that the exits from a currency union are associated with a decline in bilateral trade. For both samples of our analysis, the effect is not quite visible (and statistically significant) until about 21 years after the country exits the currency union, and some negative effects in absolute terms can be identified only after 30 years.33 For both the Africa and world samples, no statistically significant negative effects are identified in the years immediately after the dissolution of the currency union; statistically significant coefficients for the world and Africa samples, respectively, appear in the periods of 16-27 years and 16-21 years after leaving the currency union. In addition, the adverse effect of exiting from a currency union is smaller for the African sample in the first few years: after ten years of currency union exit, bilateral trade declines by about 35 percent for the Africa and 55 percent for the world. However, 10 years after the exit, the cumulative decline in bilateral trade is greater in Africa than in the world sample. Overall, the results suggest that the impact of leaving a currency union is far from linear, which motivates the inclusion of a quadratic term in the currency union duration effect analysis.
Dissolution of Currency Union World Sample
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Dissolution of Currency Union World Sample
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Dissolution of Currency Union World Sample
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Dissolution of Currency Union Africa Sample
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Notes:1. The horizontal lines in Figures 1 and 2 correspond to the estimate of the coefficient of the currency union dummy (the g coefficient for the gravity equation (1) extended to include the vector of lagged variables described in the text) for the World and Africa samples, respectively.2. The corresponding lag of the dummy variable associated with CU dissolution is statistically significant if the corresponding error bands exclude zero.
Dissolution of Currency Union Africa Sample
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Notes:1. The horizontal lines in Figures 1 and 2 correspond to the estimate of the coefficient of the currency union dummy (the g coefficient for the gravity equation (1) extended to include the vector of lagged variables described in the text) for the World and Africa samples, respectively.2. The corresponding lag of the dummy variable associated with CU dissolution is statistically significant if the corresponding error bands exclude zero.Dissolution of Currency Union Africa Sample
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Notes:1. The horizontal lines in Figures 1 and 2 correspond to the estimate of the coefficient of the currency union dummy (the g coefficient for the gravity equation (1) extended to include the vector of lagged variables described in the text) for the World and Africa samples, respectively.2. The corresponding lag of the dummy variable associated with CU dissolution is statistically significant if the corresponding error bands exclude zero.Next, since it is not possible to determine the effects of joining a currency union in a similar fashion (because there are too few currency union entries in the sample), we take the following approach: instead of measuring the trade effects that occur after a country enters a currency union, we ask how the trade effects of a currency union evolve over membership time. Specifically, we ask whether it matters for how long countries have been sharing the common currency. Table 5 presents the results of estimating equation (2). The length of a country’s membership in a currency union is important, as in both the world and Africa samples, we estimate that one additional year of membership increases trade by 1.4 and 2.0 percent, respectively. Therefore, in the world sample, after a country has been in a currency union for 10 years, the impact on trade would be a 15 percent increase [(1 + 0.014)10], which implies that for a currency union to achieve the Glick and Rose (2002) results (namely, double trade) countries have to “wait” for about 67 years. (For the Africa sample, after 10 years of currency union membership trade increases by an estimated 22 percent, and trade is estimated to take 45 years to double.) Furthermore, as Figures 1 and 2 show, there may be a nonlinear impact of leaving a currency union. Therefore, we add a quadratic term,
Duration of Currency Union Memebership
Dependent variable is log of real trade, log(Xij)
Duration of Currency Union Memebership
Dependent variable is log of real trade, log(Xij)
| Sample: | World | World | Africa | Africa | World | World | Africa | Africa |
|---|---|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Years in currency union | 0.03 ** (7.47) | 0.07 ** (7.49) | 0.03 ** (5.99) | 0.06 ** (5.58) | 0.01 ** (8.35) | 0.05 ** (13.67) | 0.02 ** (8.71) | 0.04 ** (8.05) |
| (Years in currency union)2 | -0.001 ** (4.86) | -0.001 ** (3.26) | -0.001 ** (11.00) | -0.001 ** (4.58) | ||||
| Log distance | -1.05 ** (52.02) | -1.05 ** (52.00) | -1.06 ** (19.88) | -1.06 ** (19.82) | ||||
| Log product real GDP | 0.93 ** (105.60) | 0.93 ** (105.64) | 1.01 ** (61.60) | 1.01 ** (61.70) | 0.15 ** (21.23) | 0.15 ** (22.31) | -0.11 ** (9.91) | -0.10 ** (9.01) |
| Log product real GDP/capita | 0.44 ** (33.88) | 0.44 ** (33.87) | 0.34 ** (14.77) | 0.34 ** (14.72) | 0.58 ** (54.57) | 0.57 ** (53.23) | 0.68 ** (34.18) | 0.67 ** (33.07) |
| Common language | 0.35 ** (9.26) | 0.35 ** (9.22) | 0.29 ** (4.74) | 0.29 ** (4.67) | ||||
| Common land border | 0.41 ** (3.94) | 0.40 ** (3.89) | 1.23 ** (7.29) | 1.23 ** (7.29) | ||||
| FTA (with Africa) | 1.19 ** (14.35) | 1.19 ** (14.41) | 0.91 ** (7.36) | 0.92 ** (7.42) | 0.30 ** (12.13) | 0.32 ** (12.66) | 0.17 ** (4.00) | 0.18 ** (4.18) |
| Number landlocked in the pair | -0.25 ** (8.82) | -0.25 ** (8.82) | -0.36 ** (8.90) | -0.36 ** (8.88) | ||||
| Number islands in the pair | 0.02 (0.67) | 0.02 (0.68) | -0.31 ** (5.00) | -0.31 ** (5.02) | ||||
| Log product of areas | -0.08 ** (11.30) | -0.08 ** (11.38) | -0.18 ** (14.67) | -0.18 ** (14.74) | ||||
| Common colonizer | 0.51 ** (8.24) | 0.50 ** (8.06) | 0.31 ** (3.53) | 0.30 ** (3.41) | ||||
| Current colony | 1.17 ** (4.80) | 1.06 ** (4.49) | -0.04 (0.09) | -0.21 (0.47) | 0.58 ** (7.46) | 0.48 ** (6.10) | 0.11 (0.81) | 0.00 (0.01) |
| Ever colony | 1.34 ** (11.10) | 1.33 ** (11.04) | 2.15 ** (14.69) | 2.14 ** (14.60) | ||||
| Same nation | -0.24 (0.21) | -0.22 (0.19) | 1.62 ** (3.23) | 1.73 ** (3.60) | ||||
| Observations | 265,262 | 265,262 | 100,597 | 100,597 | 265,262 | 265,262 | 100,597 | 100,597 |
| R-squared (within) | 0.13 | 0.13 | 0.03 | 0.03 | ||||
| R-squared (between) | 0.38 | 0.40 | 0.00 | 0.01 | ||||
| R-squared (overall) | 0.68 | 0.68 | 0.52 | 0.52 | 0.35 | 0.36 | 0.01 | 0.01 |
| Hausman test (p-value) | 0.00 | 0.00 | 0.00 | 0.00 |
Duration of Currency Union Memebership
Dependent variable is log of real trade, log(Xij)
| Sample: | World | World | Africa | Africa | World | World | Africa | Africa |
|---|---|---|---|---|---|---|---|---|
| Estimation: | OLS | OLS | OLS | OLS | Fixed effects | Fixed effects | Fixed effects | Fixed effects |
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Years in currency union | 0.03 ** (7.47) | 0.07 ** (7.49) | 0.03 ** (5.99) | 0.06 ** (5.58) | 0.01 ** (8.35) | 0.05 ** (13.67) | 0.02 ** (8.71) | 0.04 ** (8.05) |
| (Years in currency union)2 | -0.001 ** (4.86) | -0.001 ** (3.26) | -0.001 ** (11.00) | -0.001 ** (4.58) | ||||
| Log distance | -1.05 ** (52.02) | -1.05 ** (52.00) | -1.06 ** (19.88) | -1.06 ** (19.82) | ||||
| Log product real GDP | 0.93 ** (105.60) | 0.93 ** (105.64) | 1.01 ** (61.60) | 1.01 ** (61.70) | 0.15 ** (21.23) | 0.15 ** (22.31) | -0.11 ** (9.91) | -0.10 ** (9.01) |
| Log product real GDP/capita | 0.44 ** (33.88) | 0.44 ** (33.87) | 0.34 ** (14.77) | 0.34 ** (14.72) | 0.58 ** (54.57) | 0.57 ** (53.23) | 0.68 ** (34.18) | 0.67 ** (33.07) |
| Common language | 0.35 ** (9.26) | 0.35 ** (9.22) | 0.29 ** (4.74) | 0.29 ** (4.67) | ||||
| Common land border | 0.41 ** (3.94) | 0.40 ** (3.89) | 1.23 ** (7.29) | 1.23 ** (7.29) | ||||
| FTA (with Africa) | 1.19 ** (14.35) | 1.19 ** (14.41) | 0.91 ** (7.36) | 0.92 ** (7.42) | 0.30 ** (12.13) | 0.32 ** (12.66) | 0.17 ** (4.00) | 0.18 ** (4.18) |
| Number landlocked in the pair | -0.25 ** (8.82) | -0.25 ** (8.82) | -0.36 ** (8.90) | -0.36 ** (8.88) | ||||
| Number islands in the pair | 0.02 (0.67) | 0.02 (0.68) | -0.31 ** (5.00) | -0.31 ** (5.02) | ||||
| Log product of areas | -0.08 ** (11.30) | -0.08 ** (11.38) | -0.18 ** (14.67) | -0.18 ** (14.74) | ||||
| Common colonizer | 0.51 ** (8.24) | 0.50 ** (8.06) | 0.31 ** (3.53) | 0.30 ** (3.41) | ||||
| Current colony | 1.17 ** (4.80) | 1.06 ** (4.49) | -0.04 (0.09) | -0.21 (0.47) | 0.58 ** (7.46) | 0.48 ** (6.10) | 0.11 (0.81) | 0.00 (0.01) |
| Ever colony | 1.34 ** (11.10) | 1.33 ** (11.04) | 2.15 ** (14.69) | 2.14 ** (14.60) | ||||
| Same nation | -0.24 (0.21) | -0.22 (0.19) | 1.62 ** (3.23) | 1.73 ** (3.60) | ||||
| Observations | 265,262 | 265,262 | 100,597 | 100,597 | 265,262 | 265,262 | 100,597 | 100,597 |
| R-squared (within) | 0.13 | 0.13 | 0.03 | 0.03 | ||||
| R-squared (between) | 0.38 | 0.40 | 0.00 | 0.01 | ||||
| R-squared (overall) | 0.68 | 0.68 | 0.52 | 0.52 | 0.35 | 0.36 | 0.01 | 0.01 |
| Hausman test (p-value) | 0.00 | 0.00 | 0.00 | 0.00 |
In order to investigate the effects of currency unions on the co-movements of prices and output we follow the approach of Alesina, Barro, and Tenreyro (2002), and Tenreyro and Barro (2003). We test whether their results hold in a bilateral approach to currency unions, especially in the context of Africa and estimate equation (1), sequentially substituting the dependent variable withVPij, and VYij as calculated in equations (4) and (6).34 The results of the estimated impact on co-movements of output and prices are presented in Table 6, columns 1-4 and 5-8, respectively. For both the world and Africa samples, we find that currency unions tend to increase the co-movement of prices but that they are not systematically related to the co-movement of outputs. This also confirms the results of Alesina, Barro, and Tenreyro (2002) for the world sample. In addition, the marginal effect of currency unions on the price co-movements is higher for Africa. This is an important observation, as co-movements are lower in Africa (see summary statistics in Appendix C). The coefficient of currency union for Africa (0.04 with country fixed-effects) is quite high because mean co-movements of prices are equal to −0.15 for that subsample. The fact that the estimated coefficients on the currency union dummy variable are not significantly different from zero in the output co-movement regressions may arise because the theoretical link between currency union and output co-movement is ambiguous, and largely depends on the extend to which trade is intra or inter-industry.35 Also, the positive estimated effect of currency union on price co-movement may emerge because countries that are members of currency unions avoid the inflation and nominal exchange rate volatility that characterizes other regimes.
Currency Union Impact on Comovements of Outputs and Prices
Dependent variables: comovement of outputs (Vyij) for (1)-(4); and comovement of prices (Vpij) for (5)-(8)
Currency Union Impact on Comovements of Outputs and Prices
Dependent variables: comovement of outputs (Vyij) for (1)-(4); and comovement of prices (Vpij) for (5)-(8)
| Sample: | World | Africa | World | Africa | World | Africa | World | Africa |
|---|---|---|---|---|---|---|---|---|
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Currency union | -0.002 (0.61) | 0.002 (0.55) | 0.000 (0.12) | 0.000 (0.25) | 0.06 ** (9.07) | 0.07 ** (9.35) | 0.03 ** (11.19) | 0.04 ** (11.19) |
| Log distance | 0.002 ** (3.56) | 0.008 ** (7.58) | -0.001 ** (3.56) | -0.001 (0.96) | -0.003 (1.79) | 0.001 (0.26) | -0.004 ** (5.33) | -0.003 * (2.23) |
| Log product real GDP | 0.005 ** (22.10) | 0.005 * (14.19) | 0.003 ** (5.21) | 0.000 (0.30) | 0.002 ** (4.18) | -0.003 ** (3.96) | 0.007 ** (3.34) | -0.008 ** (3.57) |
| Log product real GDP/capita | 0.005 ** (16.98) | 0.001 (1.63) | -0.004 ** (4.39) | 0.001 (0.56) | 0.012 ** (14.76) | 0.016* (16.61) | -0.004 (1.17) | 0.011 ** (3.47) |
| Common language | 0.001 (0.65) | -0.002 (1.54) | 0.001 * (2.05) | 0.000 (0.13) | 0.001 (0.42) | 0.000 (0.09) | 0.002 (1.43) | 0.001 (1.15) |
| Common land border | 0.006 * (2.52) | 0.005 (1.44) | 0.003 ** (3.65) | 0.001 (0.82) | -0.005 (0.66) | -0.007 (0.77) | 0.004 (1.46) | 0.004 (1.24) |
| FTA ‘(with Africa) | 0.012 ** (4.59) | 0.010 ** (2.65) | 0.003 * (2.35) | -0.001 (0.60) | 0.018 ** (2.84) | 0.015 (1.89) | 0.007 * (2.50) | -0.007 * (2.21) |
| Number landlocked in the pair | 0.005 ** (8.19) | 0.007 ** (8.65) | 0.007 ** (3.88) | 0.014 ** (7.30) | ||||
| Number islands in the pair | 0.005 ** (7.14) | 0.010 ** (8.08) | 0.012 ** (6.77) | 0.012 ** (5.45) | ||||
| Log product of areas | 0.000 ** (3.07) | 0.000 (0.66) | -0.004 ** (9.62) | -0.001 (1.94) | ||||
| Common colonizer | 0.004 ** (3.14) | 0.009 ** (5.45) | 0.002 ** (3.49) | 0.001 (0.98) | 0.010 ** (3.35) | 0.002 (0.50) | 0.005 ** (4.06) | 0.006 ** (4.48) |
| Current colony | -0.018 (1.70) | -0.044 (1.47) | -0.007 * (2.03) | -0.002 (0.23) | 0.049 (1.90) | -0.040 (0.68) | 0.025 * (2.15) | -0.020 (0.70) |
| Ever colony | 0.004 (1.70) | 0.018 * (2.01) | 0.000 (0.03) | 0.001 (0.55) | 0.007 (0.72) | 0.034 (1.77) | -0.006 (1.40) | 0.005 (0.70) |
| Same nation | ||||||||
| Country fixed effects | No | No | Yes | Yes | No | No | Yes | Yes |
| Observations | 6,992 | 3,793 | 6,992 | 3,793 | 7,000 | 3,796 | 7,000 | 3,796 |
| R-squared | 0.25 | 0.15 | 0.92 | 0.92 | 0.12 | 0.13 | 0.87 | 0.91 |
Currency Union Impact on Comovements of Outputs and Prices
Dependent variables: comovement of outputs (Vyij) for (1)-(4); and comovement of prices (Vpij) for (5)-(8)
| Sample: | World | Africa | World | Africa | World | Africa | World | Africa |
|---|---|---|---|---|---|---|---|---|
| Specification: | (1) | (2) | (3) | (4) | (5) | (6) | (7) | (8) |
| Currency union | -0.002 (0.61) | 0.002 (0.55) | 0.000 (0.12) | 0.000 (0.25) | 0.06 ** (9.07) | 0.07 ** (9.35) | 0.03 ** (11.19) | 0.04 ** (11.19) |
| Log distance | 0.002 ** (3.56) | 0.008 ** (7.58) | -0.001 ** (3.56) | -0.001 (0.96) | -0.003 (1.79) | 0.001 (0.26) | -0.004 ** (5.33) | -0.003 * (2.23) |
| Log product real GDP | 0.005 ** (22.10) | 0.005 * (14.19) | 0.003 ** (5.21) | 0.000 (0.30) | 0.002 ** (4.18) | -0.003 ** (3.96) | 0.007 ** (3.34) | -0.008 ** (3.57) |
| Log product real GDP/capita | 0.005 ** (16.98) | 0.001 (1.63) | -0.004 ** (4.39) | 0.001 (0.56) | 0.012 ** (14.76) | 0.016* (16.61) | -0.004 (1.17) | 0.011 ** (3.47) |
| Common language | 0.001 (0.65) | -0.002 (1.54) | 0.001 * (2.05) | 0.000 (0.13) | 0.001 (0.42) | 0.000 (0.09) | 0.002 (1.43) | 0.001 (1.15) |
| Common land border | 0.006 * (2.52) | 0.005 (1.44) | 0.003 ** (3.65) | 0.001 (0.82) | -0.005 (0.66) | -0.007 (0.77) | 0.004 (1.46) | 0.004 (1.24) |
| FTA ‘(with Africa) | 0.012 ** (4.59) | 0.010 ** (2.65) | 0.003 * (2.35) | -0.001 (0.60) | 0.018 ** (2.84) | 0.015 (1.89) | 0.007 * (2.50) | -0.007 * (2.21) |
| Number landlocked in the pair | 0.005 ** (8.19) | 0.007 ** (8.65) | 0.007 ** (3.88) | 0.014 ** (7.30) | ||||
| Number islands in the pair | 0.005 ** (7.14) | 0.010 ** (8.08) | 0.012 ** (6.77) | 0.012 ** (5.45) | ||||
| Log product of areas | 0.000 ** (3.07) | 0.000 (0.66) | -0.004 ** (9.62) | -0.001 (1.94) | ||||
| Common colonizer | 0.004 ** (3.14) | 0.009 ** (5.45) | 0.002 ** (3.49) | 0.001 (0.98) | 0.010 ** (3.35) | 0.002 (0.50) | 0.005 ** (4.06) | 0.006 ** (4.48) |
| Current colony | -0.018 (1.70) | -0.044 (1.47) | -0.007 * (2.03) | -0.002 (0.23) | 0.049 (1.90) | -0.040 (0.68) | 0.025 * (2.15) | -0.020 (0.70) |
| Ever colony | 0.004 (1.70) | 0.018 * (2.01) | 0.000 (0.03) | 0.001 (0.55) | 0.007 (0.72) | 0.034 (1.77) | -0.006 (1.40) | 0.005 (0.70) |
| Same nation | ||||||||
| Country fixed effects | No | No | Yes | Yes | No | No | Yes | Yes |
| Observations | 6,992 | 3,793 | 6,992 | 3,793 | 7,000 | 3,796 | 7,000 | 3,796 |
| R-squared | 0.25 | 0.15 | 0.92 | 0.92 | 0.12 | 0.13 | 0.87 | 0.91 |
Finally, we examine whether participation in currency unions makes trade more stable by reducing exchange rate volatility. Table 7 shows estimations of the gravity model with the coefficient of variation of log of real trade as dependent variable. Columns 1 and 2 of Table 7 show that currency union does make trade more stable, with the marginal impact slightly higher in Africa than for in the world. However, once country-pair fixed-effects are taken into account (columns 3 and 4), for both the world and Africa samples the currency union coefficient falls and becomes statistically insignificant. Nevertheless, the currency union impact is high as the mean stability for Africa sample is 0.22 (compared to 0.18 for the world).
Currency Union Impact on Trade
Stability Dependent variable is trade variability, the coefficient of variation of log(Xij)
Currency Union Impact on Trade
Stability Dependent variable is trade variability, the coefficient of variation of log(Xij)
| Sample: | World | Africa | World | Africa |
|---|---|---|---|---|
| Estimation: | OLS | OLS | Panel fixed | Panel fixed |
| Specification: | (1) | (2) | (3) | (4) |
| Currency union | -0.05 ** (4.36) | -0.06 ** (4.40) | -0.02 (0.95) | -0.02 (0.64) |
| Log distance | 0.05 ** (22.53) | 0.07 ** (13.09) | ||
| Log product real GDP | -0.03 ** (30.40) | -0.05 ** (19.77) | -0.01 * (2.00) | 0.03 ** (2.63) |
| Log product real GDP/capita | -0.02 ** (9.86) | -0.02 ** (4.08) | -0.04 ** (6.11) | -0.08 ** (6.85) |
| Common language | -0.02 ** (5.46) | -0.03 ** (3.55) | ||
| Common land border | 0.02 * (2.01) | -0.03 * (2.41) | ||
| FTA (with Africa) | -0.06 ** (6.30) | -0.07 ** (4.97) | -0.02 (1.46) | -0.04 * (2.31) |
| Number landlocked in the pair | 0.01 (1.83) | 0.02 * (2.46) | ||
| Number islands in the pair | 0.01 * (2.51) | 0.04 ** (4.90) | ||
| Log product of areas | 0.00 ** (2.77) | 0.01 ** (5.58) | ||
| Common colonizer | -0.02 * (2.15) | 0.00 (0.21) | ||
| Current colony | -0.01 (0.47) | 0.11 ** (3.44) | 0.04 (1.29) | 0.06 (1.24) |
| Ever colony | -0.02 * (2.55) | -0.04 ** (2.65) | ||
| Same nation | -0.03 (1.00) | -0.12 ** (4.10) | ||
| Observations | 18,156 | 7,845 | 18,156 | 7,845 |
| R-squared (within) | 0.05 | 0.10 | ||
| R-squared (between) | 0.06 | 0.11 | ||
| R-squared (overall) | 0.18 | 0.17 | 0.11 | 0.01 |
| Hausman test (p-value) | 0.11 | 0.00 |
Currency Union Impact on Trade
Stability Dependent variable is trade variability, the coefficient of variation of log(Xij)
| Sample: | World | Africa | World | Africa |
|---|---|---|---|---|
| Estimation: | OLS | OLS | Panel fixed | Panel fixed |
| Specification: | (1) | (2) | (3) | (4) |
| Currency union | -0.05 ** (4.36) | -0.06 ** (4.40) | -0.02 (0.95) | -0.02 (0.64) |
| Log distance | 0.05 ** (22.53) | 0.07 ** (13.09) | ||
| Log product real GDP | -0.03 ** (30.40) | -0.05 ** (19.77) | -0.01 * (2.00) | 0.03 ** (2.63) |
| Log product real GDP/capita | -0.02 ** (9.86) | -0.02 ** (4.08) | -0.04 ** (6.11) | -0.08 ** (6.85) |
| Common language | -0.02 ** (5.46) | -0.03 ** (3.55) | ||
| Common land border | 0.02 * (2.01) | -0.03 * (2.41) | ||
| FTA (with Africa) | -0.06 ** (6.30) | -0.07 ** (4.97) | -0.02 (1.46) | -0.04 * (2.31) |
| Number landlocked in the pair | 0.01 (1.83) | 0.02 * (2.46) | ||
| Number islands in the pair | 0.01 * (2.51) | 0.04 ** (4.90) | ||
| Log product of areas | 0.00 ** (2.77) | 0.01 ** (5.58) | ||
| Common colonizer | -0.02 * (2.15) | 0.00 (0.21) | ||
| Current colony | -0.01 (0.47) | 0.11 ** (3.44) | 0.04 (1.29) | 0.06 (1.24) |
| Ever colony | -0.02 * (2.55) | -0.04 ** (2.65) | ||
| Same nation | -0.03 (1.00) | -0.12 ** (4.10) | ||
| Observations | 18,156 | 7,845 | 18,156 | 7,845 |
| R-squared (within) | 0.05 | 0.10 | ||
| R-squared (between) | 0.06 | 0.11 | ||
| R-squared (overall) | 0.18 | 0.17 | 0.11 | 0.01 |
| Hausman test (p-value) | 0.11 | 0.00 |
Sensitivity analysis
Similarly to the previous section, we check the robustness of the results presented in Tables 5, 6, and 7, by conducting sensitivity checks of the specification: estimating the dependent variable as average of the logarithm of exports and imports; adding quadratic terms for output and output per capita to control for possible sample nonlinearities; and adding time effects. Estimates in Table 5 are robust to all the above sensitivity checks: after a country in the world (Africa) has been in a currency union for 10 years, trade increases by 14-22 percent (20-29 percent), and the diminishing returns of currency union membership effect is always significant. The conclusions of Tables 6 and 7 are also insensitive to the perturbations. In particular, for Table 7, we estimate the specification with other techniques and measures of stability. The results are reasonably robust, except in the specifications with zero-trade observations included (which can be explained by the fact that zeros for the extended period of time bias the stability measure).36
V. Conclusions
This paper has provided some insights into several aspects of the performance of currency union using an augmented version of the gravity model and focusing on two samples, the world and Africa. First, we have confirmed the results that the impact of a currency union on trade is large: countries that belong to the same currency union trade about twice as much with each other compared with similar countries that do not share the same currency. Moreover, this increase in trade comes without trade diversion from non-currency-union members. Second, we have found that the duration of a country’s membership in a currency union matters: the longer the duration the more the benefits, with some diminishing returns. Third, we have shown that currency union participation reduces trade volatility, increases price co-movements, but has no significant effect on output co-movements among members. Finally, these results are fairly robust to the estimation methodology employed and, although they hold true for both samples under investigation, the marginal effects and mechanisms of transmission may vary across the two samples.
Although this paper has concluded that several aspects of the performance of currency union operate more or less the same in Africa as elsewhere, the methodology herein does not constitute an explicit investigation into how trade and its underlying determinants are explicitly interconnected, or the extent to which currency unions can promote growth and poverty reduction. Identifying the similarities and some of the differences across the samples only begins to tackle the problem and may, in fact, raise more questions than it answers. More work is required in this direction. Perhaps one avenue might be to look for omitted factors that induce countries to join a currency union and to trade more, as suggested by Rose and van Wincoop (2001). Joining a currency union and opening up to the world are very often political decisions, so that such omitted factors may lie in a set of political and institutional variables. This is not a new realization: in recent papers on “deeper” determinants of economic growth, both institutions and trade openness determine a country’s performance in the long run (see, for example, Acemoglu, Johnson, and Robinson, 2001; and Rodrik, Subramanian, and Trebbi, 2002). In the complicated web of relationships describing income, its determinants, and the linkages between the determinants, the interdependence of trade and institutions is a recurring theme that is difficult to handle, not least because of the issues of causality and construction of proper instruments.
Appendix A
Main African Regional and Sub-regional Economic Intergration Arrangements (as of August 2005)
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Main African Regional and Sub-regional Economic Intergration Arrangements (as of August 2005)
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Main African Regional and Sub-regional Economic Intergration Arrangements (as of August 2005)
Citation: IMF Working Papers 2006, 031; 10.5089/9781451862911.001.A001
Appendix B
Sample Data: Variable Definitions and Sources
Sample Data: Variable Definitions and Sources
| Variable | Description | Source | ||
|---|---|---|---|---|
| Dependent variable | ||||
| Xijt | The average value of real bilateral trade between i and j at time t, | IMF s Direction of Trade (DoT); Average of available values for export from a to b export from b to a, import into a from b, imports into b from a. Deflated by U.S. Consumer Price Index. | ||
| Explanatory variables | ||||
| Yi | Real GDP | World Bank s World Development Indicators | ||
| Popi | Population | World Bank s World Development Indicators, Penn World Tables 6.1;Glick and Rose (2002) data used for 1948-1950 | ||
| Dij | The distance between i and j | CIA’s World Factbook; Great Circle Method used to calculate distance | ||
| Langij | A binary variable which is unity if i and j have a common language | CIA’s World Factbook | ||
| Contij | A binary variable which is unity if i and j share a land border | CIA’s World Factbook | ||
| Landl | The number of landlocked countries in the country-pair (0, 1, or 2) | CIA’s World Factbook | ||
| Island | The number of island nations in the country-pair (0, 1, or 2) | CIA’s World Factbook h | ||
| Area | A land area of country n, n=i,j | CIA’s World Factbook “ | ||
| Com Colij | Binary variable which is unity if i and j were colonies after 1945 with the same colonizer | CIA’s World Factbook | ||
| CurColij | Binary variable which is unity if i and j are colonies at time t | CIA’s World Factbook | ||
| Colonyij | Binary variable which is unity if i colonized j or vice versa | CIA’s World Factbook | ||
| ComNatij | Binary variable which is unity if i and j remained part of the same nation during the sample | CIA’s World Factbook | ||
| FTAij | Binary variable which is unity if i and j belong to the same regional trade agreement | WTO publication [http://www.wto.org/english/tratop e/region e/region e.htm] | ||
| CUij | Binary variable which is unity if i and j use the same currency at time t | Glick and Rose (2002). For 1998-2002: IMF s Annual Report on Exchange Arrangements and Exchange Restrictions | ||
| Pi | PPP of GDP | Penn World Tables 6.1; price level of GDP (P) is the PPP over GDP divided by the exchange rate and multiplied by 100 | ||
| Toti | Terms of trade | IMF s World Economic Outlook 2004 | ||
Sample Data: Variable Definitions and Sources
| Variable | Description | Source | ||
|---|---|---|---|---|
| Dependent variable | ||||
| Xijt | The average value of real bilateral trade between i and j at time t, | IMF s Direction of Trade (DoT); Average of available values for export from a to b export from b to a, import into a from b, imports into b from a. Deflated by U.S. Consumer Price Index. | ||
| Explanatory variables | ||||
| Yi | Real GDP | World Bank s World Development Indicators | ||
| Popi | Population | World Bank s World Development Indicators, Penn World Tables 6.1;Glick and Rose (2002) data used for 1948-1950 | ||
| Dij | The distance between i and j | CIA’s World Factbook; Great Circle Method used to calculate distance | ||
| Langij | A binary variable which is unity if i and j have a common language | CIA’s World Factbook | ||
| Contij | A binary variable which is unity if i and j share a land border | CIA’s World Factbook | ||
| Landl | The number of landlocked countries in the country-pair (0, 1, or 2) | CIA’s World Factbook | ||
| Island | The number of island nations in the country-pair (0, 1, or 2) | CIA’s World Factbook h | ||
| Area | A land area of country n, n=i,j | CIA’s World Factbook “ | ||
| Com Colij | Binary variable which is unity if i and j were colonies after 1945 with the same colonizer | CIA’s World Factbook | ||
| CurColij | Binary variable which is unity if i and j are colonies at time t | CIA’s World Factbook | ||
| Colonyij | Binary variable which is unity if i colonized j or vice versa | CIA’s World Factbook | ||
| ComNatij | Binary variable which is unity if i and j remained part of the same nation during the sample | CIA’s World Factbook | ||
| FTAij | Binary variable which is unity if i and j belong to the same regional trade agreement | WTO publication [http://www.wto.org/english/tratop e/region e/region e.htm] | ||
| CUij | Binary variable which is unity if i and j use the same currency at time t | Glick and Rose (2002). For 1998-2002: IMF s Annual Report on Exchange Arrangements and Exchange Restrictions | ||
| Pi | PPP of GDP | Penn World Tables 6.1; price level of GDP (P) is the PPP over GDP divided by the exchange rate and multiplied by 100 | ||
| Toti | Terms of trade | IMF s World Economic Outlook 2004 | ||
Appendix C
Summary Statistics
One value for country pair (6992/7000 observations for the world for co-movements of outputs/prices and 3,793/3,796 for Africa samples, respectively).
Two values for country pair (18,156 observations for the world and 7,845 for the Africa sample)
Summary Statistics
| World sample | Africa sample | |||
|---|---|---|---|---|
| (265,262 observations) | (100,597 observations) | |||
| Variable | Mean | Sth. Deviation | Mean | Sth. Deviation |
| Log of real trade | 10.020 | 3.246 | 8.813 | 2.951 |
| Currency union | 0.014 | 0.119 | 0.027 | 0.161 |
| Log distance | 8.167 | 0.809 | 8.175 | 0.661 |
| Log product real GDP | 47.974 | 2.662 | 47.075 | 2.193 |
| Log product real GDP/capita | 16.106 | 1.470 | 15.180 | 1.259 |
| Common language | 0.216 | 0.411 | 0.266 | 0.442 |
| Common land border | 0.030 | 0.170 | 0.029 | 0.169 |
| FTA (with Africa) | 0.034 | 0.180 | 0.045 | 0.207 |
| Number landlocked in the pair | 0.262 | 0.479 | 0.402 | 0.553 |
| Number islands in the pair | 0.338 | 0.537 | 0.250 | 0.470 |
| Log product of areas | 24.139 | 3.299 | 24.670 | 2.904 |
| Common colonizer | 0.099 | 0.298 | 0.155 | 0.362 |
| Current colony | 0.002 | 0.041 | 0.002 | 0.043 |
| Ever colony | 0.020 | 0.139 | 0.017 | 0.129 |
| Same nation | 0.000 | 0.016 | 0.000 | 0.017 |
| Years in currency union | 0.359 | 3.481 | 0.705 | 4.840 |
| Comovements of outputs1 | -0.075 | 0.030 | -0.087 | 0.031 |
| Comovements of prices1 | -0.155 | 0.080 | -0.163 | 0.070 |
| Trade volatility2 | 0.181 | 0.258 | 0.224 | 0.294 |
One value for country pair (6992/7000 observations for the world for co-movements of outputs/prices and 3,793/3,796 for Africa samples, respectively).
Two values for country pair (18,156 observations for the world and 7,845 for the Africa sample)
Summary Statistics
| World sample | Africa sample | |||
|---|---|---|---|---|
| (265,262 observations) | (100,597 observations) | |||
| Variable | Mean | Sth. Deviation | Mean | Sth. Deviation |
| Log of real trade | 10.020 | 3.246 | 8.813 | 2.951 |
| Currency union | 0.014 | 0.119 | 0.027 | 0.161 |
| Log distance | 8.167 | 0.809 | 8.175 | 0.661 |
| Log product real GDP | 47.974 | 2.662 | 47.075 | 2.193 |
| Log product real GDP/capita | 16.106 | 1.470 | 15.180 | 1.259 |
| Common language | 0.216 | 0.411 | 0.266 | 0.442 |
| Common land border | 0.030 | 0.170 | 0.029 | 0.169 |
| FTA (with Africa) | 0.034 | 0.180 | 0.045 | 0.207 |
| Number landlocked in the pair | 0.262 | 0.479 | 0.402 | 0.553 |
| Number islands in the pair | 0.338 | 0.537 | 0.250 | 0.470 |
| Log product of areas | 24.139 | 3.299 | 24.670 | 2.904 |
| Common colonizer | 0.099 | 0.298 | 0.155 | 0.362 |
| Current colony | 0.002 | 0.041 | 0.002 | 0.043 |
| Ever colony | 0.020 | 0.139 | 0.017 | 0.129 |
| Same nation | 0.000 | 0.016 | 0.000 | 0.017 |
| Years in currency union | 0.359 | 3.481 | 0.705 | 4.840 |
| Comovements of outputs1 | -0.075 | 0.030 | -0.087 | 0.031 |
| Comovements of prices1 | -0.155 | 0.080 | -0.163 | 0.070 |
| Trade volatility2 | 0.181 | 0.258 | 0.224 | 0.294 |
One value for country pair (6992/7000 observations for the world for co-movements of outputs/prices and 3,793/3,796 for Africa samples, respectively).
Two values for country pair (18,156 observations for the world and 7,845 for the Africa sample)
Free Trade Agreements in the Sample
Free Trade Agreements in the Sample
| Regional agreements | Members (date of entry) |
|---|---|
| Africa: | |
| ECOWAS: Economic Community of West African States | Benin (1975), Ghana (1975), Niger (1975), Burkina Faso (1975), Guinea (1975), Nigeria (1975), Cape Verde (1975), Liberia (1975), Senegal (1975), Cote d Ivoire (1975), Mali (1975), Sierra Leone (1975), Gambia, The (1975), Mauritania (1975), Togo (1975), Guinea-Bissau (1975) |
| COMESA: Common Market for Eastern and Southern Africa | Angola (1981), Malawi (1981), Tanzania (1981), Burundi (1981), Mauritius (1981), Uganda (1981), Comoros (1981), Mozambique (1981), Zambia (1981), Djibouti (1981), Rwanda (1981), Eritrea (1993), Namibia (1993), Zimbabwe (1981), Ethiopia (1981), Somalia (1981), Madagascar (1993), Kenya (1981), Sudan (1981), Seychelles (1993), Lesotho (1981), Swaziland (1981) |
| SADC: Southern African Development Community | Angola (1980), Lesotho (1980), Zimbabwe (1980), Botswana (1980), Swaziland (1980), Namibia (1990), Malawi (1980), Tanzania (1980), Mauritius (1995), Mozambique (1980), Zambia (1980), South Africa (1995) |
| CEMAC: Central African Economic and Monetary Community | Congo, Republic of the (1962), Central African Republic (1962), Gabon (1962), Chad (1962-1968, 1984), Cameroon (1962), Equatorial Guinea (1983) |
| WAEMU: West African Economic and Monetary Union | Benin (1984), Burkina Faso (1962), Cote d Ivoire (1962), Mali (1962), Niger (1962), Senegal (1962), Mauritania (1962 - 1994), Togo (1994) |
| Rest of the World: | |
| ASEAN | Brunei (1984), Cambodia (1999), Indonesia (1967), Lao PDR (1997), Malaysia (1967), Myanmar (1997), Philippines (1967), Singapore (1967), Thailand (1967), Vietnam (1995) |
| EU | Austria (1995), Belgium (1958), Denmark (1973), Finland (1995), France (1958), Germany (1958), Greece (1981), Luxembourg (1958), Ireland (1973), Italy (1958), Netherlands (1958), Portugal (1986), Spain (1986), Sweden (1995), United Kingdom (1973). |
| US-Israel | United States (1985), Israel (1985) |
| NAFTA | Canada (1989), United States (1989), Mexico (1994) |
| CARICOM | Antigua and Barbuda (1974), Bahamas (1983), Barbados (1973), Belize (1974), Dominica (1974), Guyana (1973), Grenada (1974), Jamaica (1973), Montserrat (1974), Saint Kitts and Nevis (1974), Saint Lucia (1974), Saint Vincent and the Grenadines (1974), Suriname (1995), Trinidad and Tobago (1973), Haiti (2002) |
| PATCRA | Australia (1977), Papua New Guinea (1977) |
| ANZCERTA | Australia (1983), New Zealand (1983) |
| CACM | Costa Rica (1963), El Salvador (1961), Guatemala (1961), Honduras (1961), Nicaragua (1961) |
| SPARTECA | Australia (1981), New Zealand (1981), Cook Islands (1981), Micronesia, Federated States of (1986), Fiji (1981), Kiribati (1981), Marshall Islands (1981), Nauru (1981), Niue (1981), Papua New Guinea (1981), Solomon Islands (1981), Tonga (1981), Tuvalu (1981), Vanuatu (1981), Samoa (1981) |
| MERCOSUR | Argentina (1991), Brazil (1991), Paraguay (1991), Uruguay (1991), Chile (1996), Bolivia (1996) |
Free Trade Agreements in the Sample
| Regional agreements | Members (date of entry) |
|---|---|
| Africa: | |
| ECOWAS: Economic Community of West African States | Benin (1975), Ghana (1975), Niger (1975), Burkina Faso (1975), Guinea (1975), Nigeria (1975), Cape Verde (1975), Liberia (1975), Senegal (1975), Cote d Ivoire (1975), Mali (1975), Sierra Leone (1975), Gambia, The (1975), Mauritania (1975), Togo (1975), Guinea-Bissau (1975) |
| COMESA: Common Market for Eastern and Southern Africa | Angola (1981), Malawi (1981), Tanzania (1981), Burundi (1981), Mauritius (1981), Uganda (1981), Comoros (1981), Mozambique (1981), Zambia (1981), Djibouti (1981), Rwanda (1981), Eritrea (1993), Namibia (1993), Zimbabwe (1981), Ethiopia (1981), Somalia (1981), Madagascar (1993), Kenya (1981), Sudan (1981), Seychelles (1993), Lesotho (1981), Swaziland (1981) |
| SADC: Southern African Development Community | Angola (1980), Lesotho (1980), Zimbabwe (1980), Botswana (1980), Swaziland (1980), Namibia (1990), Malawi (1980), Tanzania (1980), Mauritius (1995), Mozambique (1980), Zambia (1980), South Africa (1995) |
| CEMAC: Central African Economic and Monetary Community | Congo, Republic of the (1962), Central African Republic (1962), Gabon (1962), Chad (1962-1968, 1984), Cameroon (1962), Equatorial Guinea (1983) |
| WAEMU: West African Economic and Monetary Union | Benin (1984), Burkina Faso (1962), Cote d Ivoire (1962), Mali (1962), Niger (1962), Senegal (1962), Mauritania (1962 - 1994), Togo (1994) |
| Rest of the World: | |
| ASEAN | Brunei (1984), Cambodia (1999), Indonesia (1967), Lao PDR (1997), Malaysia (1967), Myanmar (1997), Philippines (1967), Singapore (1967), Thailand (1967), Vietnam (1995) |
| EU | Austria (1995), Belgium (1958), Denmark (1973), Finland (1995), France (1958), Germany (1958), Greece (1981), Luxembourg (1958), Ireland (1973), Italy (1958), Netherlands (1958), Portugal (1986), Spain (1986), Sweden (1995), United Kingdom (1973). |
| US-Israel | United States (1985), Israel (1985) |
| NAFTA | Canada (1989), United States (1989), Mexico (1994) |
| CARICOM | Antigua and Barbuda (1974), Bahamas (1983), Barbados (1973), Belize (1974), Dominica (1974), Guyana (1973), Grenada (1974), Jamaica (1973), Montserrat (1974), Saint Kitts and Nevis (1974), Saint Lucia (1974), Saint Vincent and the Grenadines (1974), Suriname (1995), Trinidad and Tobago (1973), Haiti (2002) |
| PATCRA | Australia (1977), Papua New Guinea (1977) |
| ANZCERTA | Australia (1983), New Zealand (1983) |
| CACM | Costa Rica (1963), El Salvador (1961), Guatemala (1961), Honduras (1961), Nicaragua (1961) |
| SPARTECA | Australia (1981), New Zealand (1981), Cook Islands (1981), Micronesia, Federated States of (1986), Fiji (1981), Kiribati (1981), Marshall Islands (1981), Nauru (1981), Niue (1981), Papua New Guinea (1981), Solomon Islands (1981), Tonga (1981), Tuvalu (1981), Vanuatu (1981), Samoa (1981) |
| MERCOSUR | Argentina (1991), Brazil (1991), Paraguay (1991), Uruguay (1991), Chile (1996), Bolivia (1996) |
Currency Unions in the Sample
Currency Unions in the Sample
| Currency union members | End | Currency union members | End | ||
|---|---|---|---|---|---|
| Antigua and Barbuda | Barbados | 1975 | Central African Republic | Congo, Republic of the | ongoing |
| Antigua and Barbuda | Dominica | ongoing | Central African Republic | Côte d Ivoire | ongoing |
| Antigua and Barbuda | Grenada | ongoing | Central African Republic | Equatorial Guinea | ongoing |
| Antigua and Barbuda | Guyana | 1971 | Central African Republic | Gabon | ongoing |
| Antigua and Barbuda | Montserrat | ongoing | Central African Republic | Guinea | 1969 |
| Antigua and Barbuda | Saint Kitts and Nevis | ongoing | Central African Republic | Guinea-Bissau | ongoing |
| Antigua and Barbuda | Saint Lucia | ongoing | Central African Republic | Madagascar | 1982 |
| Antigua and Barbuda | Saint Vincent and the Grenadines | ongoing | Central African Republic | Mali | ongoing |
| Antigua and Barbuda | Trinidad and Tobago | 1976 | Central African Republic | Mauritania | 1974 |
| Aruba | Netherlands Antilles | ongoing | Central African Republic | Niger | ongoing |
| Aruba | Suriname | 1994 | Central African Republic | Reunion | 1976 |
| Australia | Kiribati | ongoing | Central African Republic | Senegal | ongoing |
| Australia | Nauru | ongoing | Central African Republic | Togo | ongoing |
| Australia | Solomon Islands | 1979 | Chad | Benin | ongoing |
| Australia | Tonga | 1991 | Chad | Burkina Faso | ongoing |
| Australia | Tuvalu | ongoing | Chad | Comoros | 1994 |
| Bangladesh | India | 1974 | Chad | Congo, Republic of the | ongoing |
| Barbados | Dominica | 1975 | Chad | Côte d Ivoire | ongoing |
| Barbados | Grenada | 1975 | Chad | Equatorial Guinea | ongoing |
| Barbados | Guyana | 1971 | Chad | Gabon | ongoing |
| Barbados | Montserrat | 1975 | Chad | Guinea | 1969 |
| Barbados | Saint Kitts and Nevis | 1975 | Chad | Guinea-Bissau | ongoing |
| Barbados | Saint Lucia | 1975 | Chad | Madagascar | 1982 |
| Barbados | Saint Vincent and the Grenadines | 1975 | Chad | Mali | ongoing |
| Barbados | Trinidad and Tobago | 1975 | Chad | Mauritania | 1974 |
| Belgium | Burundi | 1964 | Chad | Niger | ongoing |
| Belgium | Congo, Democratic Republic of the | 1961 | Chad | Reunion | 1976 |
| Belgium | Rwanda | 1966 | Chad | Senegal | ongoing |
| Belgium-Luxembourg | Burundi | 1964 | Chad | Togo | ongoing |
| Belgium-Luxembourg | Congo, Democratic Republic of the | 1961 | Comoros | Benin | 1994 |
| Belgium-Luxembourg | Rwanda | 1966 | Comoros | Burkina Faso | 1994 |
| Benin | Burkina Faso | ongoing | Comoros | Congo, Republic of the | 1994 |
| Benin | Cote d’d Ivoire | ongoing | Comoros | Côte d Ivoire | 1994 |
| Benin | Equatorial Guinea | ongoing | Comoros | Equatorial Guinea | 1994 |
| Benin | Gabon | ongoing | Comoros | Gabon | 1994 |
| Benin | Guinea | 1969 | Comoros | Guinea | 1969 |
| Benin | Guinea-Bissau | ongoing | Comoros | Madagascar | 1982 |
| Benin | Madagascar | 1982 | Comoros | Mali | 1994 |
| Benin | Mali | ongoing | Comoros | Mauritania | 1974 |
| Benin | Mauritania | 1974 | Comoros | Niger | 1994 |
| Benin | Niger | ongoing | Comoros | Reunion | 1976 |
| Benin | Reunion | 1976 | Comoros | Senegal | 1994 |
| Benin | Senegal | ongoing | Comoros | Togo | 1994 |
| Benin | Togo | ongoing | Congo, Republic of the | Benin | ongoing |
| Bhutan | India | ongoing | Congo, Republic of the | Burkina Faso | ongoing |
| Bhutan | Pakistan | 1966 | Congo, Republic of the | Côte d Ivoire | ongoing |
| Botswana | Lesotho | 1977 | Congo, Republic of the | Equatorial Guinea | ongoing |
| Botswana | Swaziland | 1977 | Congo, Republic of the | Gabon | ongoing |
| Brunei | Malaysia | 1971 | Congo, Republic of the | Guinea | 1969 |
| Brunei | Singapore | ongoing | Congo, Republic of the | Guinea-Bissau | ongoing |
| Myanma r | India | 1966 | Congo, Republic of the | Madagascar | 1982 |
| Myanma r | Pakistan | 1971 | Congo, Republic of the | Mali | ongoing |
| Cameroon | Benin | ongoing | Congo, Republic of the | Mauritania | 1974 |
| Cameroon | Burkina Faso | ongoing | Congo, Republic of the | Niger | ongoing |
| Cameroon | Central African Republic | ongoing | Congo, Republic of the | Reunion | 1976 |
| Cameroon | Chad | ongoing | Congo, Republic of the | Senegal | ongoing |
| Cameroon | Comoros | 1994 | Congo, Republic of the | Togo | ongoing |
| Cameroon | Congo, Republic of the | ongoing | Côte d’Ivoire | Burkina Faso | ongoing |
| Cameroon | Cote d Ivoire | ongoing | Côte d Ivoire | Madagascar | 1982 |
| Cameroon | Equatorial Guinea | ongoing | Côte d Ivoire | Mali | ongoing |
| Cameroon | Gabon | ongoing | Côte d Ivoire | Mauritania | 1974 |
| Cameroon | Guinea | 1969 | Côte d Ivoire | Niger | ongoing |
| Cameroon | Guinea-Bissau | ongoing | Côte d Ivoire | Reunion | 1976 |
| Cameroon | Madagascar | 1982 | Côte d Ivoire | Senegal | ongoing |
| Cameroon | Mali | ongoing | Côte d Ivoire | Togo | ongoing |
| Cameroon | Mauritania | 1974 | Denmark | Faroe Islands | ongoing |
| Cameroon | Niger | ongoing | Denmark | Greenland | ongoing |
| Cameroon | Reunion | 1976 | Djibouti | Benin | 1949 |
| Cameroon | Senegal | ongoing | Djibouti | Burkina Faso | 1949 |
| Cameroon | Togo | ongoing | Djibouti | Cameroon | 1949 |
| Central African Republic | Benin | ongoing | Djibouti | Central African Republic | 1949 |
| Central African Republic | Burkina Faso | ongoing | Djibouti | Chad | 1949 |
| Central African Republic | Chad | ongoing | Djibouti | Comoros | 1949 |
| Central African Republic | Comoros | 1994 | Djibouti | Congo, Republic of the | 1949 |
| Djibouti | Côte d Ivoire | 1949 | Guyana | Trinidad and Tobago | 1971 |
| Djibouti | Gabon | 1949 | India | Maldives | 1966 |
| Djibouti | Guinea | 1949 | India | Mauritius | 1966 |
| Djibouti | Madagascar | 1949 | India | Pakistan | 1966 |
| Djibouti | Mali | 1949 | India | Seychelles | 1966 |
| Djibouti | Mauritania | 1949 | Kenya | Somalia | 1971 |
| Djibouti | Niger | 1949 | Kenya | Tanzania | 1978 |
| Djibouti | Reunion | 1949 | Kenya | Uganda | 1978 |
| Djibouti | Senegal | 1949 | Kuwait | India | 1961 |
| Djibouti | Togo | 1949 | Lesotho | Swaziland | ongoing |
| Dominica | Grenada | ongoing | Madagascar | Burkina Faso | 1982 |
| Dominica | Guyana | 1971 | Madagascar | Mali | 1960 |
| Dominica | Montserrat | ongoing | Madagascar | Mauritania | 1974 |
| Dominica | Saint Kitts and Nevis | ongoing | Madagascar | Niger | 1982 |
| Dominica | Saint Lucia | ongoing | Madagascar | Reunion | 1976 |
| Dominica | Saint Vincent and the Grenadines | ongoing | Madagascar | Senegal | 1982 |
| Dominica | Trinidad and Tobago | 1976 | Madagascar | Togo | 1982 |
| Equatorial Guinea | Burkina Faso | ongoing | Malawi | Zambia | 1967 |
| Equatorial Guinea | Cote d Ivoire | ongoing | Malawi | Zimbabwe | 1967 |
| Equatorial Guinea | Gabon | ongoing | Malaysia | Singapore | 1971 |
| Equatorial Guinea | Guinea-Bissau | ongoing | Maldives | Mauritius | 1967 |
| Equatorial Guinea | Mali | ongoing | Maldives | Pakistan | 1971 |
| Equatorial Guinea | Niger | ongoing | Mali | Burkina Faso | ongoing |
| Equatorial Guinea | Senegal | ongoing | Mali | Mauritania | 1974 |
| Equatorial Guinea | Togo | ongoing | Mali | Niger | ongoing |
| France | Algeria | 1969 | Mali | Reunion | 1976 |
| France | French Guiana | ongoing | Mali | Senegal | ongoing |
| France | Guadeloupe | ongoing | Mali | Togo | ongoing |
| France | Martinique | ongoing | Mauritania | Burkina Faso | 1974 |
| France | Morocco | 1959 | Mauritania | Niger | 1974 |
| France | Reunion | ongoing | Mauritania | Reunion | 1974 |
| France | Saint Pierre and Miquelon | ongoing | Mauritania | Senegal | 1974 |
| France | Tunisia | 1958 | Mauritania | Togo | 1974 |
| Gabon | Burkina Faso | ongoing | Mauritius | Seychelles | 1976 |
| Gabon | Côte d Ivoire | ongoing | Montserrat | Saint Kitts and Nevis | ongoing |
| Gabon | Guinea | 1969 | Montserrat | Saint Lucia | ongoing |
| Gabon | Guinea-Bissau | ongoing | Montserrat | Saint Vincent and the Grenadines | ongoing |
| Gabon | Madagascar | 1982 | Montserrat | Trinidad and Tobago | 1976 |
| Gabon | Mali | ongoing | Netherlands Antilles | Suriname | 1994 |
| Gabon | Mauritania | 1974 | New Caledonia | French Polynesia | ongoing |
| Gabon | Niger | ongoing | New Caledonia | Vanuatu | 1971 |
| Gabon | Reunion | 1976 | New Caledonia | Wallis and Futuna | ongoing |
| Gabon | Senegal | ongoing | New Zealand | Samoa | 1967 |
| Gabon | Togo | ongoing | Niger | Burkina Faso | ongoing |
| Gambia, The | Ghana | 1965 | Niger | Reunion | 1976 |
| Gambia, The | Nigeria | 1967 | Niger | Senegal | ongoing |
| Gambia, The | Sierra Leone | 1965 | Niger | Togo | ongoing |
| Ghana | Nigeria | 1965 | Nigeria | Sierra Leone | 1965 |
| Ghana | Sierra Leone | 1965 | Oman | India | 1970 |
| Grenada | Guyana | 1971 | Pakistan | Mauritius | 1967 |
| Grenada | Montserrat | ongoing | Pakistan | Seychelles | 1967 |
| Grenada | Saint Kitts and Nevis | ongoing | Portugal | Angola | 1976 |
| Grenada | Saint Lucia | ongoing | Portugal | Cape Verde | 1977 |
| Grenada | Saint Vincent and the Grenadines | ongoing | Portugal | Guinea-Bissau | 1977 |
| Grenada | Trinidad and Tobago | 1976 | Portugal | Mozambique | 1977 |
| Guinea | Burkina Faso | 1969 | Portugal | São Tomé and Príncipe | 1977 |
| Guinea | Côte d Ivoire | 1969 | Qatar | India | 1966 |
| Guinea | Madagascar | 1969 | Qatar | United Arab Emirates | ongoing |
| Guinea | Mali | 1969 | Reunion | Burkina Faso | 1976 |
| Guinea | Mauritania | 1969 | Reunion | Senegal | 1976 |
| Guinea | Niger | 1969 | Reunion | Togo | 1976 |
| Guinea | Reunion | 1969 | Senegal | Burkina Faso | ongoing |
| Guinea | Senegal | 1969 | Senegal | Togo | ongoing |
| Guinea | Togo | 1969 | Somalia | Tanzania | 1971 |
| Guinea-Bissau | Burkina Faso | ongoing | Somalia | Uganda | 1971 |
| Guinea-Bissau | Côte d Ivoire | ongoing | South Africa | Botswana | 1977 |
| Guinea-Bissau | Mali | ongoing | South Africa | Lesotho | ongoing |
| Guinea-Bissau | Niger | ongoing | South Africa | Swaziland | ongoing |
| Guinea-Bissau | Senegal | ongoing | Spain | Equatorial Guinea | 1969 |
| Guinea-Bissau | Togo | ongoing | Sri Lanka | India | 1966 |
| Guyana | Montserrat | 1971 | Sri Lanka | Pakistan | 1967 |
| Guyana | Saint Kitts and Nevis | 1971 | Saint Kitts and Nevis | Saint Lucia | ongoing |
| Guyana | Saint Lucia | 1971 | Saint Kitts and Nevis | Saint Vincent and the Grenadines | ongoing |
| Guyana | Saint Vincent and the Grenadines | 1971 | Saint Kitts and Nevis | Trinidad and Tobago | 1976 |
| Saint Pierre and Miquelon | Benin | 1976 | Yemen | Tanzania | 1972 |
| Saint Pierre and Miquelon | Burkina Faso | 1976 | Yemen | Uganda | 1972 |
| Saint Pierre and Miquelon | Cameroon | 1976 | Zimbabwe | Zambia | 1967 |
| Saint Pierre and Miquelon | Central African Republic | 1976 | |||
| Saint Pierre and Miquelon | Chad | 1976 | Currency unions not covered in Glick and Rose (2002) sample | ||
| Saint Pierre and Miquelon | Comoros | 1976 | United States | Ecuador | ongoing |
| Saint Pierre and Miquelon | Congo, Republic of the | 1976 | United States | El Salvador | ongoing |
| Saint Pierre and Miquelon | Côte d Ivoire | 1976 | Austria | Belgium | ongoing |
| Saint Pierre and Miquelon | Djibouti | 1949 | Austria | France | ongoing |
| Saint Pierre and Miquelon | Gabon | 1976 | Austria | Germany | ongoing |
| Saint Pierre and Miquelon | Guinea | 1969 | Austria | Italy | ongoing |
| Saint Pierre and Miquelon | Madagascar | 1976 | Austria | Luxembourg | ongoing |
| Saint Pierre and Miquelon | Mali | 1960 | Austria | Netherlands | ongoing |
| Saint Pierre and Miquelon | Mauritania | 1974 | Austria | Finland | ongoing |
| Saint Pierre and Miquelon | Niger | 1976 | Austria | Greece | ongoing |
| Saint Pierre and Miquelon | Reunion | 1976 | Austria | Ireland | ongoing |
| Saint Pierre and Miquelon | Senegal | 1976 | Austria | Portugal | ongoing |
| Saint Pierre and Miquelon | Togo | 1976 | Austria | Spain | ongoing |
| Saint Lucia | Saint Vincent and the Grenadines | ongoing | Belgium | France | ongoing |
| Saint Lucia | Trinidad and Tobago | 1976 | Belgium | Germany | ongoing |
| Saint Vincent and the Grenadines | Trinidad and Tobago | 1976 | Belgium | Italy | ongoing |
| Tanzania | Uganda | 1978 | Belgium | Luxembourg | ongoing |
| Togo | Burkina Faso | ongoing | Belgium | Netherlands | ongoing |
| United Kingdom | Bahamas | 1966 | Belgium | Finland | ongoing |
| United Kingdom | Bermuda | 1970 | Belgium | Greece | ongoing |
| United Kingdom | Cyprus | 1972 | Belgium | Ireland | ongoing |
| United Kingdom | Falkland Islands | ongoing | Belgium | Portugal | ongoing |
| United Kingdom | Gambia, The | 1971 | Belgium | Spain | ongoing |
| United Kingdom | Ghana | 1965 | France | Germany | ongoing |
| United Kingdom | Gibraltar | ongoing | France | Italy | ongoing |
| United Kingdom | Iraq | 1967 | France | Luxembourg | ongoing |
| United Kingdom | Ireland | 1979 | France | Netherlands | ongoing |
| United Kingdom | Israel | 1954 | France | Finland | ongoing |
| United Kingdom | Jamaica | 1969 | France | Greece | ongoing |
| United Kingdom | Jordan | 1967 | France | Ireland | ongoing |
| United Kingdom | Kenya | 1967 | France | Portugal | ongoing |
| United Kingdom | Kuwait | 1967 | France | Spain | ongoing |
| United Kingdom | Libya | 1967 | Germany | Italy | ongoing |
| United Kingdom | Malawi | 1971 | Germany | Luxembourg | ongoing |
| United Kingdom | Malta | 1971 | Germany | Netherlands | ongoing |
| United Kingdom | New Zealand | 1967 | Germany | Finland | ongoing |
| United Kingdom | Nigeria | 1967 | Germany | Greece | ongoing |
| United Kingdom | Oman | 1971 | Germany | Ireland | ongoing |
| United Kingdom | Samoa | 1967 | Germany | Portugal | ongoing |
| United Kingdom | Sierra Leone | 1965 | Germany | Spain | ongoing |
| United Kingdom | Somalia | 1967 | Italy | Luxembourg | ongoing |
| United Kingdom | South Africa | 1961 | Italy | Netherlands | ongoing |
| United Kingdom | Saint Helena | ongoing | Italy | Finland | ongoing |
| United Kingdom | Tanzania | 1967 | Italy | Greece | ongoing |
| United Kingdom | Uganda | 1967 | Italy | Ireland | ongoing |
| United Kingdom | Yemen, P.D. Rep. | 1972 | Italy | Portugal | ongoing |
| United Kingdom | Yemen | 1972 | Italy | Spain | ongoing |
| United Kingdom | Zambia | 1967 | Luxembourg | Netherlands | ongoing |
| United Kingdom | Zimbabwe | 1967 | Luxembourg | Finland | ongoing |
| United States | American Samoa | ongoing | Luxembourg | Greece | ongoing |
| United States | Bahamas, The | ongoing | Luxembourg | Ireland | ongoing |
| United States | Belize | 1949 | Luxembourg | Portugal | ongoing |
| United States | Bermuda | ongoing | Luxembourg | Spain | ongoing |
| United States | Dominican Republic | 1985 | Netherlands | Finland | ongoing |
| United States | Guam | ongoing | Netherlands | Greece | ongoing |
| United States | Guatemala | 1986 | Netherlands | Ireland | ongoing |
| United States | Liberia | ongoing | Netherlands | Portugal | ongoing |
| United States | Panama | ongoing | Netherlands | Spain | ongoing |
| Vanuatu | French Polynesia | 1971 | Finland | Greece | ongoing |
| Vanuatu | Wallis and Futuna | 1971 | Finland | Ireland | ongoing |
| Wallis and Futuna | French Polynesia | ongoing | Finland | Portugal | ongoing |
| Yemen, P.D. Rep. | India | 1951 | Finland | Spain | ongoing |
| Yemen, P.D. Rep. | Kenya | 1972 | Greece | Ireland | ongoing |
| Yemen, P.D. Rep. | Somalia | 1971 | Greece | Portugal | ongoing |
| Yemen, P.D. Rep. | Tanzania | 1972 | Greece | Spain | ongoing |
| Yemen, P.D. Rep. | Uganda | 1972 | Ireland | Portugal | ongoing |
| Yemen | India | 1951 | Ireland | Spain | ongoing |
| Yemen | Kenya | 1972 | Portugal | Spain | ongoing |
| Yemen | Somalia | 1971 | |||
Currency Unions in the Sample
| Currency union members | End | Currency union members | End | ||
|---|---|---|---|---|---|
| Antigua and Barbuda | Barbados | 1975 | Central African Republic | Congo, Republic of the | ongoing |
| Antigua and Barbuda | Dominica | ongoing | Central African Republic | Côte d Ivoire | ongoing |
| Antigua and Barbuda | Grenada | ongoing | Central African Republic | Equatorial Guinea | ongoing |
| Antigua and Barbuda | Guyana | 1971 | Central African Republic | Gabon | ongoing |
| Antigua and Barbuda | Montserrat | ongoing | Central African Republic | Guinea | 1969 |
| Antigua and Barbuda | Saint Kitts and Nevis | ongoing | Central African Republic | Guinea-Bissau | ongoing |
| Antigua and Barbuda | Saint Lucia | ongoing | Central African Republic | Madagascar | 1982 |
| Antigua and Barbuda | Saint Vincent and the Grenadines | ongoing | Central African Republic | Mali | ongoing |
| Antigua and Barbuda | Trinidad and Tobago | 1976 | Central African Republic | Mauritania | 1974 |
| Aruba | Netherlands Antilles | ongoing | Central African Republic | Niger | ongoing |
| Aruba | Suriname | 1994 | Central African Republic | Reunion | 1976 |
| Australia | Kiribati | ongoing | Central African Republic | Senegal | ongoing |
| Australia | Nauru | ongoing | Central African Republic | Togo | ongoing |
| Australia | Solomon Islands | 1979 | Chad | Benin | ongoing |
| Australia | Tonga | 1991 | Chad | Burkina Faso | ongoing |
| Australia | Tuvalu | ongoing | Chad | Comoros | 1994 |
| Bangladesh | India | 1974 | Chad | Congo, Republic of the | ongoing |
| Barbados | Dominica | 1975 | Chad | Côte d Ivoire | ongoing |
| Barbados | Grenada | 1975 | Chad | Equatorial Guinea | ongoing |
| Barbados | Guyana | 1971 | Chad | Gabon | ongoing |
| Barbados | Montserrat | 1975 | Chad | Guinea | 1969 |
| Barbados | Saint Kitts and Nevis | 1975 | Chad | Guinea-Bissau | ongoing |
| Barbados | Saint Lucia | 1975 | Chad | Madagascar | 1982 |
| Barbados | Saint Vincent and the Grenadines | 1975 | Chad | Mali | ongoing |
| Barbados | Trinidad and Tobago | 1975 | Chad | Mauritania | 1974 |
| Belgium | Burundi | 1964 | Chad | Niger | ongoing |
| Belgium | Congo, Democratic Republic of the | 1961 | Chad | Reunion | 1976 |
| Belgium | Rwanda | 1966 | Chad | Senegal | ongoing |
| Belgium-Luxembourg | Burundi | 1964 | Chad | Togo | ongoing |
| Belgium-Luxembourg | Congo, Democratic Republic of the | 1961 | Comoros | Benin | 1994 |
| Belgium-Luxembourg | Rwanda | 1966 | Comoros | Burkina Faso | 1994 |
| Benin | Burkina Faso | ongoing | Comoros | Congo, Republic of the | 1994 |
| Benin | Cote d’d Ivoire | ongoing | Comoros | Côte d Ivoire | 1994 |
| Benin | Equatorial Guinea | ongoing | Comoros | Equatorial Guinea | 1994 |
| Benin | Gabon | ongoing | Comoros | Gabon | 1994 |
| Benin | Guinea | 1969 | Comoros | Guinea | 1969 |
| Benin | Guinea-Bissau | ongoing | Comoros | Madagascar | 1982 |
| Benin | Madagascar | 1982 | Comoros | Mali | 1994 |
| Benin | Mali | ongoing | Comoros | Mauritania | 1974 |
| Benin | Mauritania | 1974 | Comoros | Niger | 1994 |
| Benin | Niger | ongoing | Comoros | Reunion | 1976 |
| Benin | Reunion | 1976 | Comoros | Senegal | 1994 |
| Benin | Senegal | ongoing | Comoros | Togo | 1994 |
| Benin | Togo | ongoing | Congo, Republic of the | Benin | ongoing |
| Bhutan | India | ongoing | Congo, Republic of the | Burkina Faso | ongoing |
| Bhutan | Pakistan | 1966 | Congo, Republic of the | Côte d Ivoire | ongoing |
| Botswana | Lesotho | 1977 | Congo, Republic of the | Equatorial Guinea | ongoing |
| Botswana | Swaziland | 1977 | Congo, Republic of the | Gabon | ongoing |
| Brunei | Malaysia | 1971 | Congo, Republic of the | Guinea | 1969 |
| Brunei | Singapore | ongoing | Congo, Republic of the | Guinea-Bissau | ongoing |
| Myanma r | India | 1966 | Congo, Republic of the | Madagascar | 1982 |
| Myanma r | Pakistan | 1971 | Congo, Republic of the | Mali | ongoing |
| Cameroon | Benin | ongoing | Congo, Republic of the | Mauritania | 1974 |
| Cameroon | Burkina Faso | ongoing | Congo, Republic of the | Niger | ongoing |
| Cameroon | Central African Republic | ongoing | Congo, Republic of the | Reunion | 1976 |
| Cameroon | Chad | ongoing | Congo, Republic of the | Senegal | ongoing |
| Cameroon | Comoros | 1994 | Congo, Republic of the | Togo | ongoing |
| Cameroon | Congo, Republic of the | ongoing | Côte d’Ivoire | Burkina Faso | ongoing |
| Cameroon | Cote d Ivoire | ongoing | Côte d Ivoire | Madagascar | 1982 |
| Cameroon | Equatorial Guinea | ongoing | Côte d Ivoire | Mali | ongoing |
| Cameroon | Gabon | ongoing | Côte d Ivoire | Mauritania | 1974 |
| Cameroon | Guinea | 1969 | Côte d Ivoire | Niger | ongoing |
| Cameroon | Guinea-Bissau | ongoing | Côte d Ivoire | Reunion | 1976 |
| Cameroon | Madagascar | 1982 | Côte d Ivoire | Senegal | ongoing |
| Cameroon | Mali | ongoing | Côte d Ivoire | Togo | ongoing |
| Cameroon | Mauritania | 1974 | Denmark | Faroe Islands | ongoing |
| Cameroon | Niger | ongoing | Denmark | Greenland | ongoing |
| Cameroon | Reunion | 1976 | Djibouti | Benin | 1949 |
| Cameroon | Senegal | ongoing | Djibouti | Burkina Faso | 1949 |
| Cameroon | Togo | ongoing | Djibouti | Cameroon | 1949 |
| Central African Republic | Benin | ongoing | Djibouti | Central African Republic | 1949 |
| Central African Republic | Burkina Faso | ongoing | Djibouti | Chad | 1949 |
| Central African Republic | Chad | ongoing | Djibouti | Comoros | 1949 |
| Central African Republic | Comoros | 1994 | Djibouti | Congo, Republic of the | 1949 |
| Djibouti | Côte d Ivoire | 1949 | Guyana | Trinidad and Tobago | 1971 |
| Djibouti | Gabon | 1949 | India | Maldives | 1966 |
| Djibouti | Guinea | 1949 | India | Mauritius | 1966 |
| Djibouti | Madagascar | 1949 | India | Pakistan | 1966 |
| Djibouti | Mali | 1949 | India | Seychelles | 1966 |
| Djibouti | Mauritania | 1949 | Kenya | Somalia | 1971 |
| Djibouti | Niger | 1949 | Kenya | Tanzania | 1978 |
| Djibouti | Reunion | 1949 | Kenya | Uganda | 1978 |
| Djibouti | Senegal | 1949 | Kuwait | India | 1961 |
| Djibouti | Togo | 1949 | Lesotho | Swaziland | ongoing |
| Dominica | Grenada | ongoing | Madagascar | Burkina Faso | 1982 |
| Dominica | Guyana | 1971 | Madagascar | Mali | 1960 |
| Dominica | Montserrat | ongoing | Madagascar | Mauritania | 1974 |
| Dominica | Saint Kitts and Nevis | ongoing | Madagascar | Niger | 1982 |
| Dominica | Saint Lucia | ongoing | Madagascar | Reunion | 1976 |
| Dominica | Saint Vincent and the Grenadines | ongoing | Madagascar | Senegal | 1982 |
| Dominica | Trinidad and Tobago | 1976 | Madagascar | Togo | 1982 |
| Equatorial Guinea | Burkina Faso | ongoing | Malawi | Zambia | 1967 |
| Equatorial Guinea | Cote d Ivoire | ongoing | Malawi | Zimbabwe | 1967 |
| Equatorial Guinea | Gabon | ongoing | Malaysia | Singapore | 1971 |
| Equatorial Guinea | Guinea-Bissau | ongoing | Maldives | Mauritius | 1967 |
| Equatorial Guinea | Mali | ongoing | Maldives | Pakistan | 1971 |
| Equatorial Guinea | Niger | ongoing | Mali | Burkina Faso | ongoing |
| Equatorial Guinea | Senegal | ongoing | Mali | Mauritania | 1974 |
| Equatorial Guinea | Togo | ongoing | Mali | Niger | ongoing |
| France | Algeria | 1969 | Mali | Reunion | 1976 |
| France | French Guiana | ongoing | Mali | Senegal | ongoing |
| France | Guadeloupe | ongoing | Mali | Togo | ongoing |
| France | Martinique | ongoing | Mauritania | Burkina Faso | 1974 |
| France | Morocco | 1959 | Mauritania | Niger | 1974 |
| France | Reunion | ongoing | Mauritania | Reunion | 1974 |
| France | Saint Pierre and Miquelon | ongoing | Mauritania | Senegal | 1974 |
| France | Tunisia | 1958 | Mauritania | Togo | 1974 |
| Gabon | Burkina Faso | ongoing | Mauritius | Seychelles | 1976 |
| Gabon | Côte d Ivoire | ongoing | Montserrat | Saint Kitts and Nevis | ongoing |
| Gabon | Guinea | 1969 | Montserrat | Saint Lucia | ongoing |
| Gabon | Guinea-Bissau | ongoing | Montserrat | Saint Vincent and the Grenadines | ongoing |
| Gabon | Madagascar | 1982 | Montserrat | Trinidad and Tobago | 1976 |
| Gabon | Mali | ongoing | Netherlands Antilles | Suriname | 1994 |
| Gabon | Mauritania | 1974 | New Caledonia | French Polynesia | ongoing |
| Gabon | Niger | ongoing | New Caledonia | Vanuatu | 1971 |
| Gabon | Reunion | 1976 | New Caledonia | Wallis and Futuna | ongoing |
| Gabon | Senegal | ongoing | New Zealand | Samoa | 1967 |
| Gabon | Togo | ongoing | Niger | Burkina Faso | ongoing |
| Gambia, The | Ghana | 1965 | Niger | Reunion | 1976 |
| Gambia, The | Nigeria | 1967 | Niger | Senegal | ongoing |
| Gambia, The | Sierra Leone | 1965 | Niger | Togo | ongoing |
| Ghana | Nigeria | 1965 | Nigeria | Sierra Leone | 1965 |
| Ghana | Sierra Leone | 1965 | Oman | India | 1970 |
| Grenada | Guyana | 1971 | Pakistan | Mauritius | 1967 |
| Grenada | Montserrat | ongoing | Pakistan | Seychelles | 1967 |
| Grenada | Saint Kitts and Nevis | ongoing | Portugal | Angola | 1976 |
| Grenada | Saint Lucia | ongoing | Portugal | Cape Verde | 1977 |
| Grenada | Saint Vincent and the Grenadines | ongoing | Portugal | Guinea-Bissau | 1977 |
| Grenada | Trinidad and Tobago | 1976 | Portugal | Mozambique | 1977 |
| Guinea | Burkina Faso | 1969 | Portugal | São Tomé and Príncipe | 1977 |