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Trade Liberalization and Real Exchange Rate Movement

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  • Xiangming Li

    (International Monetary Fund)

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    Abstract

    Although theory suggests that the real exchange rate should depreciate after a permanent trade liberalization but could appreciate temporarily with a transitory one, little empirical evidence exists. Unlike existing studies that use either indirect tests or openness measures that could be unreliable, this paper uses an event study based on individually documented trade liberalization in 45 countries. The result shows that real exchange rates depreciate after countries open their economies to trade. In countries with multiple liberalization episodes, however, real exchange rates do not depreciate at the start of trade liberalization in early episodes, suggesting that partial or transitory trade liberalizations deter adjustments toward the equilibrium exchange rate.

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    Bibliographic Info

    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 51 (2004)
    Issue (Month): 3 (November)
    Pages: 553-584

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    Handle: RePEc:pal:imfstp:v:51:y:2004:i:3:p:553-584

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    Cited by:
    1. Norbert Fiess & Marco Fugazza, 2008. "Trade Liberalisation and Informality: New stylized facts," Working Papers, Business School - Economics, University of Glasgow 2008_34, Business School - Economics, University of Glasgow.
    2. Yin-Wong Cheung & Kon S. Lai, 2009. "A Multiple-Horizon Search for the Role of Trade and Financial Factors in Bilateral Real Exchange Rate Volatility," Working Papers, Hong Kong Institute for Monetary Research 212009, Hong Kong Institute for Monetary Research.
    3. Schröder, Marcel, 2013. "Should developing countries undervalue their currencies?," Journal of Development Economics, Elsevier, Elsevier, vol. 105(C), pages 140-151.
    4. Vandenbussche, Hylke & Zanardi, Maurizio, 2010. "The chilling trade effects of antidumping proliferation," European Economic Review, Elsevier, Elsevier, vol. 54(6), pages 760-777, August.
    5. Roberto Álvarez & Ricardo A. López, 2008. "Trade Liberalization and Industry Dynamics: A Difference in Difference Approach," Working Papers Central Bank of Chile, Central Bank of Chile 470, Central Bank of Chile.
    6. Marcel Schröder, 2013. "Should developing countries undervalue their currencies?," Departmental Working Papers, The Australian National University, Arndt-Corden Department of Economics 2013-12, The Australian National University, Arndt-Corden Department of Economics.
    7. You, Kefei & Sarantis, Nicholas, 2012. "Structural breaks and the equilibrium real effective exchange rate of China: A NATREX approach," China Economic Review, Elsevier, Elsevier, vol. 23(4), pages 1146-1163.
    8. Pamela Coke Hamilton & Yvonne Tsikata & Emmanuel Pinto Moreira, 2009. "Accelerating Trade and Integration in the Caribbean : Policy Options for Sustained Growth, Job Creation, and Poverty Reduction," World Bank Publications, The World Bank, number 2652, August.
    9. Yi Wu & Li Zeng, 2008. "The Impact of Trade Liberalizationon the Trade Balance in Developing Countries," IMF Working Papers, International Monetary Fund 08/14, International Monetary Fund.
    10. Taya Dumrongrittikul & Heather M. Anderson, 2013. "Do Policy-Related Shocks Affect Real Exchange Rates of Asian Developing Countries?," Monash Econometrics and Business Statistics Working Papers, Monash University, Department of Econometrics and Business Statistics 12/13, Monash University, Department of Econometrics and Business Statistics.
    11. Lee, Chin & Law, Chee-Hong, 2013. "The Effects of Trade Openness on Malaysian Exchange Rate," MPRA Paper 45185, University Library of Munich, Germany.

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