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How Much Does the EMU Benefit Trade?

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How Much Does the EMU Benefit Trade?

FRBSF,

5 min read
5 take-aways
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What's inside?

When countries unite around a common currency, do they really enjoy significant increases in trade?

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Editorial Rating

8

Qualities

  • Comprehensive
  • Analytical
  • Innovative

Recommendation

Europe’s Economic and Monetary Union has conferred trade advantages on its participants in the form of reduced trade costs and the removal of exchange rate risk. Not everyone agrees, however, that those benefits are worth the cost. In a comprehensive study spanning 200 countries and 65 years of trade data, economists Reuven Glick and Andrew K. Rose examine the impact of various currency alliances on trade. getAbstract recommends this scholarly report to economists and anyone looking for a briefing on the value of a monetary union.

Summary

Countries that share a common currency experience both costs and benefits. The benefits include lower trade expenses, reduced exchange rate risk among members and increased price transparency. The costs include giving up the ability to set monetary policy at the national level and surrendering control of the exchange rate. Recent episodes of economic turmoil in Greece and other economies that joined Europe’s Economic and Monetary Union (EMU) raise the urgent question of whether the benefits of currency unions exceed the costs.

To answer that question, it’s useful to examine the impact...

About the Authors

Reuven Glick is a group vice president at the Federal Reserve Bank of San Francisco. Andrew K. Rose is a professor at Haas School of Business, University of California, Berkeley.


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