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Title:Testing mundell's intuition of endogenous OCA theory PDF Logo
Authors:Warin, Thierry
Wunnava, Phanindra V.
Janicki, Hubert P.
Issue Date:2008
Series/Report no.:IZA discussion papers 3739
Abstract:This paper presents an empirical assessment of the endogenous optimum currency area theory. Frankel and Rose (1998) study the endogeneity of a currency union through the lens of international trade flows. Our study extends Frankel and Rose's model by using FDI flows to test the original theory developed by Mundell in 1973. A gravity model is used to empirically assess the effectiveness of the convergence criteria by examining location specific advantages that guide multinational investment within the European Union. A fixed effects model based on a panel data of foreign direct investment (FDI) flows within the EU-15 shows that horizontal investment promotes the diffusion of the production process across the national border. Specifically, our results suggest that economic convergence ensured by belonging to the common currency area helps double FDI flows.
Subjects:Economic integration
gravity model
endogenous optimum currency area
JEL:C23
Persistent Identifier of the first edition:urn:nbn:de:101:1-2008101543
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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