Abstract
Many empirical studies show that participating in currency unions can promote trade. After the Euro was released in 1999, the prices become stable, and it promotes trade and investments, and deepens financial integration in Euro area. Mundell suggests that there should be three major currencies in the world, including the Dollar, the Euro and Asian currency unit (ACU), and there should be a fixed exchange rate among them. This study attempts to infer ACU’s potential effects on Asian trade by decomposing trade into its extensive and intensive margins, where the extensive margin is an increase in the number of firms or products, and the intensive margin is a rise in the value of trade by existing firms or products. Recent research in trade theory has emphasized this distinction, as it has intensive implications for the welfare gains of trade. This study uses empirical gravity model to quantify the effects using large panel data. Analyzing the effects of currency unions in different regions, and infer the effects of Asian countries based on other regional empirical results. The empirical results show that ACU will have a significant growth in trade in Asia largely at the extensive margin, the entry of new firms or products.