Testing the Links between Institutional Integration and Trade Deepening. Clues from Europe

Abstract

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