Exploring the impact of a proposed monetary union and exchange rate indices on international trade

Scope and Method of Study:This dissertation consists of two chapters. Chapter 1 extends the augmented gravity model by including the exchange rate volatility to investigate the effect of a proposed monetary union on bilateral trade using data for years 1990 through 2009. Chapter 2 uses three weighted exchange rate indices constructed for specific industries to investigates the impact of exchange rate on national output using data for ASEAN+3 countries for the period from 1992 to 2004.Findings and Conclusions:Findings show evidence that a monetary union will increase the probability of intra-trade, and the reduction in exchange rate volatility between groups of countries due to the monetary union would have nearly the same effect of trade creation and trade diversion. More importantly, the exchange rate variable confirms the negative relationship between currency fluctuations and world trade activities. Results in Chapter 2 show that compared to the nominal exchange rate, industry-specific indices have a better performance in explaining the movement in industrial output. The findings show that there is always a significant relationship between currency depreciation and the change of the level of industry output