Abstract
This paper studies the impact of monetary arrangements on trade integration and business cycle correlation in late 19th century Europe. We estimate a gravity model and show that tighter monetary integration was associated with substantially higher trade, as in recent studies using contemporary data. For instance, the Austro-Hungarian monetary union improved trade between member states by a factor of 3. To explain this, we build and estimate a simple model where greater monetary integration weakens the current account constraint by fostering business cycle co-movements.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Anderson, James E. and Van Wincoop Eric (2003) “Gravity with Gravitas; A Solution to the Border Puzzle.” American Economic Review 93(1):170–192.
A’Hearn, Brian and Ulrich Woitek (2001) “More International Evidence on the Historical Properties of Business Cycles.” Journal of Monetary Economics 47:321–346.
Angeloni, I., A. Kashyap and B. Mojon (2003) Monetary Policy Transmission in the Euro Area. Cambridge: Cambridge University Press.
Asdrubali, Pierfederico, Bent E. Sorensen and Oved Yosha (1996) “Channels of Interstate Risk Sharing: United States 1963–1990.” Quarterly Journal of Economics 1081–1110.
Bairoch, P. (1989) “European Trade Policy.” Cambridge Economic History of Europe 1–160.
Bordo, Michael and Anna Schwartz (1997) “Monetary Policy Regimes and Economic Performance: The Historical Record.” NBER Working Paper 6201, p. 83.
Clark, T.E. and E. van Wincoop (2000) “Borders and Business Cycles.” FRBNY manuscript.
De Ménil, G. and M. Maurel (1994) “Breaking Up a Custom Union: The Case of the Austro-Hungarian Empire in 1919.” Weltwirtschaftliches Archiv, Band 130, Heft 3:553–575.
Eichengreen, Barry (1992) “Should the Maastricht Treaty Be Saved?.” Princeton Studies in International Finance, No. 74, International Finance Section, Princeton University, December.
Einaudi, Luca (2001) Money and Politics. Oxford University Press.
Engel, C and A. Rose (2002) “Currency Unions and International Integration.” Journal of Money, Credit and Banking 34(4):1067–1089.
European Commission (1989) One Money, One Market. Oxford.
Fatas, Antonio and Andrew Rose (2001) “Do Monetary Handcuffs Restrain Leviathan? Fiscal Policy in Extreme Exchange Rate Regimes.” CEPR, DP 2692.
Flandreau, Marc (2000) “The Economics and Politics of Monetary Unions: A Reassessment of the Latin Monetary Union, 1865–1871.” Financial History Review 7:25–43.
Flandreau, Marc (2003) “The Bank, the States and the Market, an Austro-Hungarian Tale for Euroland.” In F. Capie et G. Wood (eds.), The History of Monetary Unions. London: Macmillan.
Flandreau, Marc (2005) “The Logic of Compromise: An Anti-Optimum Currency Area Manifesto.” CEPR Discussion Paper.
Flandreau, Marc and Frédéric Zumer (2004) The Making of Global Finance 1880–1913. Paris: OECD Development center.
Fontagné, Lionel and Michael, Freudenberg (1999) “Endogeneous Symmetry of Shocks in a Monetary Union.” Open Economies Review 10(3):263–287.
Frankel, J.A. and A.K. Rose (1998) “The Endogeneity of the Optimum Currency Area Criteria.” Economic Journal 108:1009–1025.
Frankel, Jeffrey (1997) Regional Trading Blocs in the World Economic System. International Institute Economics.
Furstenberg, George M. (2004) “Income Insurance Aspects of Monetary Unions.” In J. Mélitz, V. Alexander and G. von Furstenberg (eds.). Oxford: Oxford University Press.
Helpman, E. and Paul, Krugman (1989) Trade Policy and Market Structure. Cambridge: Massachusetts Institute Technology.
International Monetary Fund (1984) “Exchange Rate Volatility and World Trade.” IMF Occasional Papers, 28/7/84.
Kemmerer, Edwin (1944) Gold and the Gold Standard. NY and London: Mac Graw Hill.
Kenen, P. (1969) “The Theory of Optimum Currency Areas: An Eclectic View.” In Mundell and Swoboda (eds.), Monetary Problems of the International Economy. University of Chicago Press.
Komlos, John (1983) The Habsburg Monarchy as a Custom Union. Economic Development in Austria-Hungary in the Nineteenth Century. Princeton.
Krugman, Paul (1993) “Lessons of Massachusetts for EMU.” In F. Giavazzi and F. Torres (eds.), The Transition to Economic and Monetary Union in Europe, NY, CUP, pp. 241–61.
López-Córdova, J. Ernesto and Christopher M. Meissner (2003) “Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era.” American Economic Review 93(1):344–353.
Maurel, Mathilde (1998) Régionalisme et désintégration en Europe centrale et orientale: Une approche gravitationnelle. Paris, Presses du CNRS.
Maurel, Mathilde (2004) “Current Account Constraint as a Barrier to International Trade: The evidence from the European Enlargement Process.” Economic Systems 28(3):301–317.
McCallum, John (1995) “National Borders Matter: Canada-US: National Trade Patterns.” American Economic Review 85:615–623.
Mélitz, Jacques (2001) “Geography, Trade and Currency Union.” mimeo.
Mélitz, Jacques and Frédéric Zumer (1999) “Interregional and International Risk-Sharing and Lessons for EMU.” Carnegie Rochester Conference Series on Public Policy 51:149–188.
Mill, John Stuart (1848) Principles of Political Economy. London.
Mitchell, B.R. (1992) European Historical Statistics. London: Macmillan.
Mundell, Robert (1961) “ A Theory of Optimum Currency Areas.” American Economic Review 51:509–517.
Obstfeld, M. and K. Rogoff (2000) “The Six Major Puzzles in International Macro: Is There a Common Cause?” NBER Working Paper 7777.
Pakko, Michael R. and Howard Wall (2001) “Reconsidering the Trade Creating Effects of a Currency Union.” Federal Reserve Bank of Saint Louis.
Persson, Torsten (2001) “Currency Unions and Trade: How Large is the Treatment Effect?” Economic Policy.
Rose, Andrew K. (2000) “One Money, One Market, The Effect of Common Currencies on Trade.” Economic Policy 0(30):7–33.
Rose, Andrew K. (2001) “The Effect is Large.” Economic Policy.
Savage, I. Richard and Karl W. Deutsch (1960) “A Statistical Model of the Gross Analysis of Transaction Flows.” Econometrica 28(3):551–572.
Schelkle, Waltraub (2001) “The Optimum Currency Area Approach to European Monetary Integration: Framework of Debate or Dead End?” Working Paper.
Schulze, Max Stefan (2003) “Structural Change and Productivity Growth in the Habsburg Empire.” Mimeo, London School of Economics.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Flandreau, M., Maurel, M. Monetary Union, Trade Integration, and Business Cycles in 19th Century Europe. Open Econ Rev 16, 135–152 (2005). https://doi.org/10.1007/s11079-005-5872-4
Issue Date:
DOI: https://doi.org/10.1007/s11079-005-5872-4