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Faculty Research Working Paper Series
Jeffrey A. Frankel
James W. Harpel Professor of Capital Formation and Growth
phone: (617)496-3834
fax: (617)496-5747
Should Eastern European Countries Join the Euro? A Review and Update of Trade Estimates and Consideration of Endogenous OCA Criteria
Frankel, Jeffrey A. "Should Eastern European Countries Join the Euro? A Review and Update of Trade Estimates and Consideration of Endogenous OCA Criteria." HKS Faculty Research Working Paper Series RWP08-059, October 2008.
Abstract
An advantage of monetary union is facilitating trade. After many critiques, Rose’s basic finding is left standing: currency unions have greater trade effects than previously believed. Updated estimates also find an effect of the euro on trade among members that is significant (though mysteriously still only 15%). An argument for retaining monetary independence is asymmetric shocks, i.e., low cyclical correlation. Eastern European countries might want to wait before joining, because their trade patterns and cyclical correlations have been gradually shifting toward Western Europe anyway; thus the argument for the euro strengthens as time passes, while the argument against it weakens.
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