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Trade margins and exchange rate regimes: new evidence from a panel VAR

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  • Cavallari, Lilia
  • D'Addona, Stefano

Abstract

This paper studies how trade margins respond to output and terms of trade shocks in different exchange rate regimes within a panel of 23 OECD economies over the period 1988-2011. Using a panel VAR model, we confirm the predictions of entry models about the behaviour of export margins over the cycle. In addition, we find remarkable differences depending on the exchange rate regime. We document that fixed exchange rates have a positive effect on the extensive margin of trade in response to external shocks while flexible exchange rates have a pro-trade effect in response to output shocks. Our results imply that as long as extensive margins are a relevant portion of trade and external shocks are a major source of business cycle variability, the stabilization advantage of flexible exchange rates may be lower than previously thought.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51585.

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Date of creation: 2013
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Handle: RePEc:pra:mprapa:51585

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Keywords: trade margins; international business cycle; Panel VAR model; exchange rate regimes.;

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  1. Christophe Hurlin & Elena Dumitrescu, 2012. "Testing for Granger Non-causality in Heterogeneous Panels," Working Papers, HAL halshs-00224434, HAL.
  2. Paul Bergin & Ching-Yi Lin, 2010. "The Dynamic Effects of Currency Union on Trade," NBER Working Papers 16259, National Bureau of Economic Research, Inc.
  3. Born, Benjamin & Juessen, Falko & Müller, Gernot J., 2013. "Exchange rate regimes and fiscal multipliers," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(2), pages 446-465.
  4. Russ, Katheryn Niles, 2007. "The endogeneity of the exchange rate as a determinant of FDI: A model of entry and multinational firms," Journal of International Economics, Elsevier, Elsevier, vol. 71(2), pages 344-372, April.
  5. Auray, Stéphane & Eyquem, Aurélien & Poutineau, Jean-Christophe, 2012. "The effect of a common currency on the volatility of the extensive margin of trade," Journal of International Money and Finance, Elsevier, Elsevier, vol. 31(5), pages 1156-1179.
  6. Cavallari Lilia, 2007. "A Macroeconomic Model of Entry with Exporters and Multinationals," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 7(1), pages 1-32, September.
  7. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
  8. Corsetti, Giancarlo & Martin, Philippe & Pesenti, Paolo, 2007. "Productivity, terms of trade and the `home market effect'," Journal of International Economics, Elsevier, Elsevier, vol. 73(1), pages 99-127, September.
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