GRAVITATY POTENTIAL FOR CURRENCY ALLIANCES’ INTRARIGIONAL TRADE

Abstract

The paper develops the concept of regional monetary integration, the framework of which includes three alternative exchange rate arrangements: currency board, full or parallel dollarization and currency union. Each of them has its own peculiarities of formation and development, its own advantages and disadvantages, but the common feature is unconditional exchange rate unification. The concept of currency proto-integration was introduced, which foresees the exchange of information on monetary initiatives between monetary authorities, consideration of counterparties’ interests to minimize risks or maximize common benefits in the field of monetary relations. In order to assess the effectiveness of monetary integration for the development of intra-regional trade flows, we use gravity modeling based on a sample of more than 105 thousand observations of bilateral trade flows within monetary integrational and proto-integrational alliances. Gravity model includes the parameters of the volumes of bilateral trade, gross domestic product, weighted distances between states and the system of dummy-variables for the determination of monetary associations, common language and borders between trading states. The applied gravity model demonstrates a fairly high level of certainty for South America, Europe, South and East Asia (R2 for them was 0.71, 0.63 and 0.54, respectively). It was established that among the monetary alliances, the integrational and proto-integrational structures of South America, Asia and Europe were most effective in the aspect of intensifying intraregional trade. Between the African monetary blocks, the regular growth of mutual trade was observed only in the West African Economic and Monetary Union, while the rest was characterized by reverse dependence.

Keywords

• regional monetary integration
• gravity modelling
• currency union
• intra-regional trade
• dollarization
• currency board