A large literature estimates the determinants of trade with “gravity equations,” in which trade between two countries depends on their size, distance from each other, income, and so on, and whether the countries use a common currency. Using this approach, Rose (2000) famously estimated that a currency union increases trade among its members by 200%. This finding was based on data for small currency unions that predate the euro; some used it to predict the effects of euro adoption.

In recent years, researchers have had enough data to estimate the actual effects of the euro. They report effects that are much smaller than those found by Rose, but non-negligible. A survey by Baldwin (2006) concluded that the euro has raised trade among members by 5–10%. A survey by Frankel (2008) says 10–15%.

One might think the effects of a currency union grow over time as trade patterns adjust to the new regime. But Frankel finds that the effects stop growing after five or so years based on data for both the euro and other currency unions.

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The Performance of Alternative Monetary Regimes
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