<tenreyro@fas.harvard.edu>. For helpful comments, I would like to thank Alberto Alesina, Robert Barro,

Why do countries participate in currency unions or unilaterally adopt a foreign currency? I investigate the roles of geography, synchronization of economic shocks, cultural similarity, size, political integration and colonial heritage as determinants of monetary unions. The results motivate a selection model for common currency areas, which I then use to revisit the impact of currency-union membership on trade. I argue that previous studies that do not account for endogenous selection tend to produce esti-mates with a large positive bias. Correcting for selection, I find that the evidence for an enhancement effect of currency unions on trade is weaker than previously documented