Emerging Currency Blocs

Jeffrey A. Frankel, Shang-Jin Wei

NBER Working Paper No. 4335
Issued in April 1993
NBER Program(s):International Trade and Investment, International Finance and Macroeconomics

Using the gravity model to examine bilateral trade patterns throughout the world. we find clear evidence of trading blocs in Europe. the Western Hemisphere, East Asia and the Pacific. In Europe, it is the EC that operates as a bloc, not including EFTA. Two EC members trade an extra 55 per cent more with each other. beyond what can be explained by proximity, size. and GNP/capita. We also find slight evidence of trade-diversion in 1990. Even though the blocs fall along natural geographic lines. they may actually be "super-natural." Turning to the possibility of currency blocs, we find a degree of intra-regional stabilization of exchange rates, especially in Europe. Not surprisingly. the European currencies link to the OM. and Western Hemisphere countries peg to the dollar. East Asian countries, however, link to the dollar. not the yen. We also find some tentative cross-section evidence that bilateral exchange rate stability may have a (small) effect on trade. A sample calculation suggests that if real exchange rate variability within Europe were to double, as it would if it returned from the 1990 level to the 1980 level, the volume of intra-regional trade might fall by an estimated 0.7 per cent.

download in pdf format
   (1652 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4335

Published: The Future of the Internationals Monetary System and its Institutions, Genberg, Hans, ed., Geneva, 1994.

Users who downloaded this paper also downloaded* these:
Frankel w4050 Is Japan Creating a Yen Bloc in East Asia and the Pacific?
Frankel, Stein, and Wei w4588 Continental Trading Blocs: Are They Natural, or Super-Natural?
Deardorff Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?
Frankel and Wei Yen Bloc or Dollar Bloc? Exchange Rate Policies of the East Asian Economies
Wei and Frankel w5272 Open Regionalism in a World of Continental Trade Blocs
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us