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Exchange Rate Regimes and the Extensive Margin of Trade

In: NBER International Seminar on Macroeconomics 2008

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  • Paul R. Bergin
  • Ching-Yi Lin

Abstract

This paper finds that currency unions and direct exchange rate pegs raise trade through distinct channels. Panel data analysis of the period 1973-2000 indicates that currency unions have raised trade predominantly at the extensive margin, the entry of new firms or products. In contrast, direct pegs have worked almost entirely at the intensive margin, increased trade of existing products. A stochastic general equilibrium model is developed to understand this result, featuring price stickiness and firm entry under uncertainty. Because both regimes tend to reliably provide exchange rate stability over the horizon of a year or so, which is the horizon of price setting, they both lead to lower export prices and greater demand for exports. But because currency unions historically are more durable over a longer horizon than pegs, they encourage firms to make the longer-term investment needed to enter a new market. The model predicts that when exchange rate uncertainty is completely and permanently eliminated, all of the adjustment in trade should occur at the extensive margin.

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This chapter was published in:

  • Jeffrey Frankel & Christopher Pissarides, 2009. "NBER International Seminar on Macroeconomics 2008," NBER Books, National Bureau of Economic Research, Inc, number fran08-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 8241.

    Handle: RePEc:nbr:nberch:8241

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    Cited by:
    1. Cooke, Dudley, 2014. "Monetary shocks, exchange rates, and the extensive margin of exports," Journal of International Money and Finance, Elsevier, Elsevier, vol. 41(C), pages 128-145.
    2. Bergin, Paul R; Lin, Ching Yi, 2010. "The Dynamic Effects of Currency Union on Trade," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 11, Competitive Advantage in the Global Economy (CAGE).
    3. Cavallari, Lilia, 2012. "Firms' entry, monetary policy and the international business cycle," MPRA Paper 41876, University Library of Munich, Germany.
    4. Campbell, Douglas L., 2010. "History, culture, and trade: a dynamic gravity approach," MPRA Paper 24014, University Library of Munich, Germany.
    5. Türkcan, Kemal, 2014. "Exports Margins in Austria’s Export Growth," MPRA Paper 53085, University Library of Munich, Germany.

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