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

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Author Info
Christopher Adam
David Cobham

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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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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

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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This page was last updated on 2008-9-17.

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