International trade and currency unions

This short article critically reviews the existing empirical literature on the potential trade
benefi ts of currency unions and, more in particular, the EMU. Joining a currency union decreases transaction and information costs associated with international trade. From the existing literature two main conclusions can be drawn. First, analyzing the impact of currency unions on trade panel data should be used. Panel data allow for modelling unobserved heterogeneity avoiding omitted variable bias and endogeneity problems. Second, having panel data careful (mis)specification analysis should be carried out to shed light on the particular model for the unobserved heterogeneity. Regarding empirical trade models existing specifi cations for unobserved heterogeneity are not suffi cient and should be extended.
This article has previously been published in the Medium for Econometric Applications (MET)
13-3, a publication of the Econometrisch Dispuut.