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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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Author Info

  • 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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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=17616
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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;

    This paper has been announced in the following NEP Reports:

    References

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    1. Rose, Andrew K, 2002. "Do We Really Know that the WTO Increases Trade?," CEPR Discussion Papers 3538, C.E.P.R. Discussion Papers.
    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. Alan V. Deardorff, 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," NBER Working Papers 5377, National Bureau of Economic Research, Inc.
    4. 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.
    5. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
    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. repec:fth:michin:382 is not listed on IDEAS
    8. 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.
    9. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
    10. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    11. 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.
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    Citations

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    Cited by:
    1. 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.
    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. Christopher Adam & David Cobham, 2007. "Exchange Rate Regimes And Trade," Manchester School, University of Manchester, vol. 75(s1), pages 44-63, 09.
    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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