Background and summary

a common currency enhanced bilateral trade by more than 200 percent.1 The paper divided the profession into two camps: Believers and skeptics. The latter doubted the plausibility of such a large trade effect and pointed out the futility of attempting to extrapolate the post-war experience of currency unions (made mostly of small and poor countries) to countries adopting the euro. Subsequent work by Micco, Stein, and Ordoñez (2003), using data on the early years of the euro, found that the effect of the euro on bilateral trade between euro-zone countries ranged from 4 to 10 percent, when compared to trade between all other pairs of countries, and from 8 to 16 percent, when compared to trade among non-euro-zone countries. As the euro marks its 10th anniversary, Jeff’s paper provides a timely opportu-nity to explain the gap between Rose’s and Micco et al.’s estimates and to reappraise the effect of the euro on trade. The paper argues that the gap between estimates is not caused by any of the usual suspects. In particular, the difference is not caused by 1) lags (or the view that it takes time for currency unions to affect trade patterns); 2) omitted variables (includin