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Will You Buy My Peg? the Credibility of a Fixed Exchange Rate Regime As a Determinant of Bilateral Trade

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  • Emilia Magdalena Jurzyk
  • Bernhard Fritz-Krockow
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    Abstract

    This paper examines the relationship between fixed exchange rate arrangements and trade using a gravity model of international trade together with bilateral trade data from 24 countries from the Caribbean and Latin America for the period 1960-2001. The analysis indicates that a credible fixed peg has a positive impact on the value of bilateral trade. Moreover, the positive impact on trade is more pronounced with a stricter definition of the fixed peg or a longer duration of the peg. This supports the argument that the credibility of an exchange rate peg is an important element to determine bilateral trade. There is, however, no evidence to suggest that a currency union provides additional benefits.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/165.

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    Length: 25
    Date of creation: 01 Sep 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/165

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    Related research

    Keywords: Trade; Latin America; Bilateral trade; Currency pegs; Economic models; exchange rate; exchange rate regime; fixed exchange rate; exchange rate regimes; currency unions; exchange rate arrangement; fixed exchange rate regime; exchange rate arrangements; value of trade; trading partner; trade data; trade relations; international trade; free trade; exchange rate peg; trade arrangements; world economy; trading partners; regional trade; open economies; trade barriers; real exchange rate; trade-creating effect; exchange rate policy; trade agreement; flexible exchange rate; free trade agreement; trade performance; exchange rates; free trade arrangements; exchange rate volatility; credible fixed exchange rate regime; trade values; volume of trade; regional trade arrangements; trade blocs; exchange restrictions; real exchange rate misalignment; exchange rate misalignment; terms of trade; political economy; fixed exchange rate pegs; partner country; export performance; flexible exchange rate regimes; terms of trade shocks; exchange markets; common market; bilateral trade data; preferential trading; exchange rate misalignments; economic integration; world trade; product differentiation; foreign exchange markets; multilateral trade; trade area; trade liberalization; external trade barriers; exchange arrangements; exchange rate changes; increased trade; trade effects; trade impact; trade shocks; nominal exchange rates; trade patterns; external trade; free trade area; preferential trading arrangements; alternative exchange rate; fixed exchange rate agreements; trade variables; trade creating; currency markets; internal trade; exchange rate pegs; fixed exchange rate peg; real exchange rate misalignments; flexible exchange rate market; lowered trade; exchange rate flexibility; trade agreements; history of exchange rate; per capita income; trading arrangements;

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    References

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    1. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
    2. James E. Anderson & Eric van Wincoop, 2000. "Gravity with Gravitas: A Solution to the Border Puzzle," Boston College Working Papers in Economics 485, Boston College Department of Economics.
    3. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    4. Jeffrey A. Frankel and Shang-Jin Wei., 1993. "Emerging Currency Blocs," Center for International and Development Economics Research (CIDER) Working Papers C93-026, University of California at Berkeley.
    5. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
    6. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR & CES & MSH, vol. 15(30), pages 7-46, 04.
    7. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
    8. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    9. repec:fth:michin:382 is not listed on IDEAS
    10. Deardoff, A.V., 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," Working Papers 382, Research Seminar in International Economics, University of Michigan.
    11. Tamim Bayoumi & Barry J. Eichengreen, 1995. "Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA," IMF Working Papers 95/109, International Monetary Fund.
    12. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR & CES & MSH, vol. 16(33), pages 433-462, October.
    13. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
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    Cited by:
    1. Christopher Adam & David Cobham, 2007. "Exchange Rate Regimes And Trade," Manchester School, University of Manchester, vol. 75(s1), pages 44-63, 09.
    2. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers 2009-49, Kiel Institute for the World Economy.
    3. Petreski, Marjan, 2009. "Exchange-rate regime and economic growth: a review of the theoretical and empirical literature," Economics Discussion Papers 2009-31, Kiel Institute for the World Economy.
    4. 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.

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