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An investigation on the effect of real exchange rate movements on OECD bilateral exports

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Author Info
Antoine Berthou () (CES, University Paris 1 and Paris School of Economics, 106-112, Bd de l’Hôpital - 75647 Paris Cedex 13, France.)

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Abstract

The reaction of exports to real exchange rate movements can differ according to the nature of the destination country. We derive and estimate a gravity equation for 20 OECD exporting countries and 52 developed and developing importing countries. We test how trade costs dampen the effect of real exchange rate movements on bilateral exports, and show that the elasticity on the real exchange rate is reduced when (i) the destination country has a low quality of institutions, (ii) this country is more distant, and (iii) the efficiency of customs is low in both the importing and exporting countries. These results are highly consistent with the existence of an hysteresis effect of real exchange rate movements on trade, as suggested by Baldwin and Krugman (1989). JEL Classification: F10, F32, D73.

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Paper provided by European Central Bank in its series Working Paper Series with number 920.

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Length: 45 pages
Date of creation: Jul 2008
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Handle: RePEc:ecb:ecbwps:20080920

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Related research
Keywords: Trade; Exchange Rate Movements; Institutions.;

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  1. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Baldwin, Richard & Krugman, Paul, 1989. "Persistent Trade Effects of Large Exchange Rate Shocks," The Quarterly Journal of Economics, MIT Press, vol. 104(4), pages 635-54, November. [Downloadable!] (restricted)
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  3. Djankov, Simeon & Freund, Caroline & Pham, Cong S., 2006. "Trading on time," Policy Research Working Paper Series 3909, The World Bank. [Downloadable!]
  4. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Andrei A. Levchenko, 2007. "Institutional Quality and International Trade," Review of Economic Studies, Blackwell Publishing, vol. 74(3), pages 791-819, 07. [Downloadable!] (restricted)
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  6. Thierry Mayer & Soledad Zignago, 2005. "Market Access in Global and Regional Trade," Working Papers 2005-02, CEPII research center. [Downloadable!]
  7. Keith Head & Thierry Mayer, 2004. "Market Potential and the Location of Japanese Investment in the European Union," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 959-972, 01. [Downloadable!] (restricted)
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  8. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March. [Downloadable!]
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  9. Menzie Chinn, 2006. "A Primer on Real Effective Exchange Rates: Determinants, Overvaluation, Trade Flows and Competitive Devaluation," Open Economies Review, Springer, vol. 17(1), pages 115-143, January. [Downloadable!] (restricted)
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  10. Nathan Nunn, 2007. "Relationship-Specificity, Incomplete Contracts, and the Pattern of Trade," The Quarterly Journal of Economics, MIT Press, vol. 122(2), pages 569-600, 05. [Downloadable!] (restricted)
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  11. Juan Botero & Simeon Djankov & Rafael Porta & Florencio C. Lopez-De-Silanes, 2004. "The Regulation of Labor," The Quarterly Journal of Economics, MIT Press, vol. 119(4), pages 1339-1382, November. [Downloadable!] (restricted)
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    • Simeon Djankov & Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Juan Botero, 2003. "The Regulation of Labor," NBER Working Papers 9756, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. Daniel Berkowitz & Johannes Moenius & Katharina Pistor, 2006. "Trade, Law, and Product Complexity," The Review of Economics and Statistics, MIT Press, vol. 88(2), pages 363-373, 08. [Downloadable!] (restricted)
  13. James E. Anderson & Douglas Marcouiller, 2002. "Insecurity And The Pattern Of Trade: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 342-352, May. [Downloadable!] (restricted)
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