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Exchange Rate Regimes and Trade

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Author Info
Christopher Adam
David Cobham

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Abstract

A 'new version' gravity model is used to estimate the effect of de facto exchange rate regimes, as classified by Reinhart and Rogoff (2004), on bilateral trade. The results indicate that, while participation in a common currency union is typically strongly 'protrade' - as first suggested by Rose (2000) - other exchange rate regimes which lower the exchange rate uncertainty and transactions costs associated with international trade between countries are significantly more pro-trade than the default regime of a 'double float'. They suggest that the direct and indirect effects of exchange rate regimes on uncertainty and transactions costs tend to outweigh the trade-diverting substitution effects. In addition, there is evidence that membership of different currency unions by two countries has pro-trade effects, which can be understood in terms of a large indirect effect on transactions costs. Tariff-equivalent monetary barriers associated with each of the exchange rate regimes are also calculated.

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Publisher Info
Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0505.

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Date of creation: 2005
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Handle: RePEc:hwe:certdp:0505

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Related research
Keywords: Gravity models; geography; trade; exchange rate regime; currency union; transactions costs; tariff-equivalent barriers;

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Find related papers by JEL classification:
F10 - International Economics - - Trade - - - General
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Rose, Andrew K, 2003. "Which International Institutions Promote International Trade?," CEPR Discussion Papers 3764, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. 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!]
    Other versions:
  3. Andrew K. Rose, 2001. "Currency unions and trade: the effect is large," Economic Policy, CEPR, CES, MSH, vol. 16(33), pages 449-461, October. [Downloadable!] (restricted)
  4. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August. [Downloadable!] (restricted)
  5. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May. [Downloadable!] (restricted)
  6. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate Of The Effect Of Common Currencies On Trade And Income," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 437-466, May. [Downloadable!] (restricted)
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  7. Emilia Magdalena Jurzyk & Bernhard Fritz-Krockow, 2004. "Will you Buy My Peg? The Credibility of a Fixed Exchange Rate Regime as a Determinant of Bilateral Trade," IMF Working Papers 04/165, International Monetary Fund. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tomáš Havránek, 2009. "Rose Effect and the Euro: The Magic is Gone," Working Papers IES 2009/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2009. [Downloadable!]
  2. Christopher Adam & David Cobham, 2008. "Alternative Exchange Rate Regimes for MENA countries: Gravity Model Estimates of the Trade Effects," CERT Discussion Papers 0803, Centre for Economic Reform and Transformation, Heriot Watt University. [Downloadable!]
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This page was last updated on 2009-11-25.

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