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The Empirics of Exchange Rate Regimes and Trade

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Author Info

  • Mahvash Saeed Qureshi
  • Charalambos G. Tsangarides

Abstract

This paper examines the impact of exchange rate regimes on bilateral trade while differentiating the effects of "words" and "deeds". Our findings-based on an extended database for de jure and de facto exchange rate classifications-show that while fixed exchange rate regimes increase trade, there is no systematic difference in the effects of policy announcements versus actions to maintain exchange rate stability. The trade generating effect of more stable exchange rate regimes is however more pronounced when words and actions are aligned, both in the short and long-run. Policy credibility therefore plays an important role in determining the effects of de jure and de facto exchange rate arrangements such that deviations between the two could be costly. In addition, we find evidence that (i) the impact of hard pegs such as currency unions is broadly similar to that of conventional pegs; (ii) the currency union and direct peg effects evolve over time; and (iii) the effects of more stable regimes are heterogeneous across country groups.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/48.

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Length: 45
Date of creation: 01 Feb 2010
Date of revision:
Handle: RePEc:imf:imfwpa:10/48

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Related research

Keywords: Exchange rate regimes; Bilateral trade; Currency pegs; Economic models; exchange rate; exchange rate regime; exchange rate volatility; currency unions; exchange rate arrangements; fixed exchange rate; exchange rates; exchange rate policy; trade flows; exchange rate stability; world trade; international trade; trading partners; stable exchange rate; real exchange rate; fixed exchange rate regimes; trade agreements; free trade; stable exchange rate regimes; exchange rate regime classifications; dynamic effects; regional trade; exchange rate arrangement; oil exporters; exchange rate movements; trading costs; bilateral trade flows; exchange rate risk; free trade agreements; fixed exchange rates; exchange rate regime classification; bilateral real exchange rate; regional trade agreements; monetary unions; exchange rate classifications; exchange rate behavior; border trade; free trade agreement; partner countries; trade agreement; world economy; fixed exchange rate regime; bilateral trade data; real exchange rates; classification of exchange rate; real exchange rate volatility; trade creating; trade data; trade effects; exchange restrictions; trade links; monetary union; multiple sources; monetary integration; world trade organization; trading partner; currency areas; transport costs; imperfect competition; neighboring countries; foreign trade; exchange arrangements; changes in trade; factor endowments; bilateral exchange rate; de facto exchange rate regime; non-tariff barriers; history of exchange rate; trade costs; stable exchange rate regime; trade flow; measures of volatility; value of trade; trade determinants; tariff barriers; elasticity of substitution; stable exchange rates; trade models; trade gains;

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References

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  1. Christopher Adam & David Cobham, 2007. "Exchange rate regimes and trade," Money Macro and Finance (MMF) Research Group Conference 2006 9, Money Macro and Finance Research Group.
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  13. Charalambos Tsangarides & Pierre Ewenczyk & Michal Hulej & Mahvash Saeed Qureshi, 2009. "Are Africa's Currency Unions Good for Trade?," IMF Staff Papers, Palgrave Macmillan, vol. 56(4), pages 876-918, November.
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  15. Jeffrey A. Frankel, 2008. "The Estimated Effects of the Euro on Trade: Why Are They Below Historical Effects of Monetary Unions Among Smaller Countries?," NBER Working Papers 14542, National Bureau of Economic Research, Inc.
  16. Baltagi, Badi H. & Bresson, Georges & Pirotte, Alain, 2003. "Fixed effects, random effects or Hausman-Taylor?: A pretest estimator," Economics Letters, Elsevier, vol. 79(3), pages 361-369, June.
  17. Volker Nitsch, 2002. "Honey, I Shrunk the Currency Union Effect on Trade," The World Economy, Wiley Blackwell, vol. 25(4), pages 457-474, 04.
  18. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
  19. Michael Bleaney & Manuela Francisco, 2007. "Classifying exchange rate regimes: a statistical analysis of alternative methods," Economics Bulletin, AccessEcon, vol. 6(3), pages 1-16.
  20. Egger, Peter, 2008. "De Facto exchange rate arrangement tightness and bilateral trade flows," Economics Letters, Elsevier, vol. 99(2), pages 228-232, May.
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Citations

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Cited by:
  1. Douglas Campbell, 2012. "Estimating the Impact of Currency Unions on Trade Using a Dynamic Gravity Framework," Working Papers 121, University of California, Davis, Department of Economics.
  2. Qureshi, Mahvash Saeed & Tsangarides, Charalambos G., 2012. "Hard or Soft Pegs? Choice of Exchange Rate Regime and Trade in Africa," World Development, Elsevier, vol. 40(4), pages 667-680.
  3. Huigang Chen & Alin Mirestean & Charalambos G. Tsangarides, 2011. "Limited Information Bayesian Model Averaging for Dynamic Panels with An Application to a Trade Gravity Model," IMF Working Papers 11/230, International Monetary Fund.
  4. Mahvash Saeed Qureshi & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and Trade: Is Africa Different?," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
  5. Era Dabla-Norris & Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid," IMF Working Papers 10/240, International Monetary Fund.

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