This paper investigates the interaction between institutional integration and trade deepening in the EU over the last 50 years. It uses Granger causality tests, a VECM and variance decompositions to further the understanding of this interaction. The evidence indicates two-way endogeneity. But the link from institution building to trade dominates. Yet, this link has weakened over time, possibly due to globalisation sidestepping institutions. Moreover, the sensitivity of institutional integration to trade deepening has risen, which suggests that economic forces have gained more strength in determining institutional steps.
Optimum currency area Endogeneity Institutional integration Trade EU
E42 F15 F33 F41
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This paper benefited from the comments and suggestions of Matteo Ciccarelli, Andrew Rose, Sean Holly, Philippe Moutot, Peter Welz, Lorenzo Cappiello, Chiara Osbat, and several participants to presentations at the ECB and the Third Annual CEPII-IDB Conference on “The New Regionalism: Progress, Setbacks and Challenges” held in Washington in January 2006. We would also like to thank an anonymous referee and the journal’s editor for valuable comments. Moreover, we are grateful to Andre Geis for excellent assistance with the data. The views expressed in the paper are those of the authors and do not necessarily reflect the views of the ECB. We are fully responsible for any error or omission.
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