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Trade Liberalization and Real Exchange Rate Movement


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  • Xiangming Li
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    Although theory suggests that the real exchange rate should depreciate after a credible trade liberalization but could appreciate temporarily with a noncredible one, little empirical evidence exists. Unlike existing studies that use either indirect tests or unreliable openness measures, this paper uses an event study based on carefully documented trade liberalization in 45 countries. The result shows that real exchange rates depreciate after countries open their economies to trade. In countries with multiple liberalization episodes, however, real exchange rates appreciate during early episodes, suggesting that partial or noncredible trade liberalizations are associated with real appreciation.

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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/124.

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    Length: 38
    Date of creation: 01 Jun 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/124

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    Keywords: Real effective exchange rates; exchange rate; real exchange rate; trade liberalization; average tariff; exchange rates; quantitative restrictions; terms of trade; foreign trade; trade liberalizations; tariff rate; foreign exchange; real exchange rates; exchange rate indices; partner countries; trade policy review; domestic price; real exchange rate movement; exchange rate movement; trade intensity; world trade; world trade organization; bilateral real exchange rate; tariff rates; multilateral real exchange rate; trade barriers; trade regime; tariff barriers; non-tariff barriers; exchange rate index; exchange control; tariff reduction; average tariff rate; international trade; reduction in tariffs; average real exchange rate; nontradable goods; world price; import tariffs; tariff levels; exchange controls; world prices; foreign exchange controls; import penetration; bilateral exchange rates; free trade; import duties; tariff structure; average tariff rates; trade policies; trading partners; external tariffs; import items; domestic prices; exchange rate policy; exchange rate regime; trade liberalization period; exchange rate system; liberalized trade; trade flows; foreign investment; tariff lines; exchange rate movements; import demand; average tariffs; impact of trade; nontariff barriers; trade regimes; foreign exchange control; black market premium; impact of trade liberalization; global integration; non-tariff measures; open regionalism; import quotas; policy regimes; trade changes; multiple exchange rates; exchange restrictions; foreign exchange restrictions; real exchange rate misalignment; transport cost; import taxes; market opening; import license; trade openness; trade reforms; exchange rate volatility; tariff revenue; exchange retention; intermediate goods; tradable goods; currency convertibility; trade policy issues; nominal exchange rate; weighted tariff; trade restrictions; exchange transactions; effects of trade liberalization; import liberalization; trade restriction; export earnings; foreign exchange retention; domestic price index; export supply; exchange rate crises; exchange rate misalignment; tariff reform; imported goods; foreign exchange allocations; real exchange rate movements; export taxes; trade policy stance; trade data; nominal exchange rates; terms of trade shocks; tariff revenues; trade policy reform; import duty; trade flow; import controls; low trade barriers; trading partner; wholesale price; domestic production; import restrictions; depreciating exchange rate; nontariff measures; trade shocks; common market; foreign exchange transactions; import bans; external tariff; import protection; low trade; liberalization of trade; foreign exchange budget;


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    1. Andriamananjara, Shuby & Nash, John, 1997. "Have trade policy reforms led to greater openness in developing countries : evidence from readily available trade data," Policy Research Working Paper Series 1730, The World Bank.
    2. Mohsin S. Khan & Jonathan David Ostry, 1991. "Response of the Equilibrium Real Exchange Rate to Real Disturbances in Developing Countries," IMF Working Papers 91/3, International Monetary Fund.
    3. Guillermo A. Calvo & Allan Drazen, 1997. "Uncertain Duration of Reform: Dynamic Implications," NBER Working Papers 5925, National Bureau of Economic Research, Inc.
    4. Edward E. Leamer, 1988. "Measures of Openness," NBER Chapters, National Bureau of Economic Research, Inc, in: Trade Policy Issues and Empirical Analysis, pages 145-204 National Bureau of Economic Research, Inc.
    5. Calvo, Guillermo A. & Drazen, Allan, 1998. "Uncertain Duration Of Reform," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 2(04), pages 443-455, December.
    6. Gerwin Bell & M. Zühtü Yücelik & Paul Duran & Saleh M. Nsouli & Sena Eken, 1993. "The Path to Convertibility and Growth," IMF Occasional Papers 109, International Monetary Fund.
    7. Robert E. Baldwin, 1989. "Measuring Nontariff Trade Policies," NBER Working Papers 2978, National Bureau of Economic Research, Inc.
    8. Willett:, Thomas D., 1986. "Exchange-rate volatility, international trade, and resource allocation: A perspective on recent research," Journal of International Money and Finance, Elsevier, Elsevier, vol. 5(1, Supple), pages S101-S112, March.
    9. Dani Rodrik, 1992. "The Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(1), pages 87-105, Winter.
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    Cited by:
    1. Ketenci, Natalya, 2014. "The Effect of the European Union Customs Union on the Balance of Trade in Turkey," MPRA Paper 54662, University Library of Munich, Germany.
    2. Mesfin Bezuneh & Zelealem Yiheyis, 2014. "Has Trade Liberalization Improved Food Availability In Developing Countries? An Empirical Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 39(1), pages 63-78, March.
    3. Bezuneh, Mesfin & Yiheyis, Zelealem, 2009. "Has Trade Liberalization Improved Food Availability in Developing Countries? An Empirical Analysis," 2009 Conference, August 16-22, 2009, Beijing, China, International Association of Agricultural Economists 51136, International Association of Agricultural Economists.
    4. Pao-Lin Tien, 2009. "Using Long-Run Restrictions to Investigate the Sources of Exchange Rate Fluctuations," Wesleyan Economics Working Papers, Wesleyan University, Department of Economics 2009-004, Wesleyan University, Department of Economics.


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