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Alternative Exchange Rate Regimes for MENA countries: Gravity Model Estimates of the Trade Effects

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  • Christopher Adam
  • David Cobham

Abstract

Middle East and North African (MENA) countries have traditionally anchored their currencies largely on the US dollar, but the creation of the euro means that there is now for the first time a real alternative numéraire and anchor available. This paper estimates the effect of a menu of exchange rate regimes on trade within a gravity model, using the Baier & Bergstrand (2006) Taylor expansion technique to allow for multilateral trade resistance. This approach allows simulations of the effects of changes in the exchange rate regime for a particular country or region which explicitly take into account the associated changes in multilateral and world trade resistance. Results are presented for eight different scenarios: pegging to the dollar, dollarising, pegging to the euro and euroising, each of these on an individual country basis and when the MENA countries all implement the change together. We find that in terms of the trade effects for most MENA countries it would be better to anchor on the euro than on the dollar, but for some others (typically small oil exporters with large exports to Asian countries) it would be better to continue to anchor on the dollar.

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Bibliographic Info

Paper provided by Centre for Economic Reform and Transformation, Heriot Watt University in its series CERT Discussion Papers with number 0803.

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Date of creation: 2008
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Handle: RePEc:hwe:certdp:0803

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Related research

Keywords: gravity; geography; trade; exchange rate regime; currency union; transactions costs; multilateral trade resistance; MENA; Middle East; North Africa; euro; dollar;

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References

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  1. Christopher Adam & David Cobham, 2007. "Exchange Rate Regimes And Trade," Manchester School, University of Manchester, vol. 75(s1), pages 44-63, 09.
  2. Richard Baldwin & Daria Taglioni, 2006. "Gravity for Dummies and Dummies for Gravity Equations," NBER Working Papers 12516, National Bureau of Economic Research, Inc.
  3. 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.
  4. Brun, Jean-François & Carrère, Céline & de Melo, Jaime & Guillaumont, Patrick, 2002. "Has Distance Died? Evidence from a Panel Gravity Model," CEPR Discussion Papers 3500, C.E.P.R. Discussion Papers.
  5. Alejandro Micco & Ernesto Stein & Guillermo OrdoÒez, 2003. "The currency union effect on trade: early evidence from EMU," Economic Policy, CEPR & CES & MSH, vol. 18(37), pages 315-356, October.
  6. Rose, Andrew K, 2003. "Which International Institutions Promote International Trade?," CEPR Discussion Papers 3764, C.E.P.R. Discussion Papers.
  7. James E. Anderson & Eric van Wincoop, 2001. "Gravity with Gravitas: A Solution to the Border Puzzle," NBER Working Papers 8079, National Bureau of Economic Research, Inc.
  8. Amina Lahrèche-Révil & Juliette Milgram, 2006. "Exchange-rate policies and trade in the MENA countries," ThE Papers 06/07, Department of Economic Theory and Economic History of the University of Granada..
  9. 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.
  10. Carrere, Celine, 2006. "Revisiting the effects of regional trade agreements on trade flows with proper specification of the gravity model," European Economic Review, Elsevier, vol. 50(2), pages 223-247, February.
  11. Michael W. Klein & Jay C. Shambaugh, 2004. "Fixed Exchange Rates and Trade," NBER Working Papers 10696, National Bureau of Economic Research, Inc.
  12. Jacques Melitz, 2005. "North, South and Distance in the Gravity Model," Working Papers 2005-11, Centre de Recherche en Economie et Statistique.
  13. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  14. Husain, Aasim M. & Mody, Ashoka & Rogoff, Kenneth S., 2005. "Exchange rate regime durability and performance in developing versus advanced economies," Journal of Monetary Economics, Elsevier, vol. 52(1), pages 35-64, January.
  15. 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.
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Cited by:
  1. nnamdi, Kelechi & ifionu, Ebele, 2013. "Exchange rate volatility and exchange rate uncertainty in Nigeria: a financial econometric analysis (1970- 2012)," MPRA Paper 48316, University Library of Munich, Germany, revised 2013.
  2. Coutinho, Leonor, 2012. "Determinants of Growth and Inflation in Southern Mediterranean Countries," CEPS Papers 6736, Centre for European Policy Studies.
  3. Alberto Behar & Laia Cirera i Crivillé, 2010. "The impact of North-South and South-South trade agreements on bilateral trade," CSAE Working Paper Series 2010-30, Centre for the Study of African Economies, University of Oxford.

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