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Country Size and Exchange Rates

Listed author(s):
  • Vahagn Galstyan

type="main" xml:id="ecca12120-abs-0001"> This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a two-country neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a depreciation of the real exchange rate. Our estimations reveal a systematic pattern in the sensitivity of the real exchange rate to external imbalances: larger countries are characterized by a higher absolute trade elasticity of the exchange rate.

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File URL: http://hdl.handle.net/10.1111/ecca.2015.82.issue-326
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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 82 (2015)
Issue (Month): 326 (April)
Pages: 222-235

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Handle: RePEc:bla:econom:v:82:y:2015:i:326:p:222-235
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  1. Philip R. Lane & Gian Maria Milesi-Ferretti, 2004. "The Transfer Problem Revisited: Net Foreign Assets and Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 86(4), pages 841-857, November.
  2. Jordi Galí, 2008. "Introduction to Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework," Introductory Chapters,in: Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework Princeton University Press.
  3. Pesaran, M Hashem, 1997. "The Role of Economic Theory in Modelling the Long Run," Economic Journal, Royal Economic Society, vol. 107(440), pages 178-191, January.
  4. Galstyan, Vahagn & Lane, Philip R., 2009. "Fiscal Policy and International Competitiveness: Evidence from Ireland," The Economic and Social Review, Economic and Social Studies, vol. 40(3), pages 299-315.
  5. Bela Balassa, 1964. "The Purchasing-Power Parity Doctrine: A Reappraisal," Journal of Political Economy, University of Chicago Press, vol. 72, pages 584-584.
  6. Warnock, Francis E., 2003. "Exchange rate dynamics and the welfare effects of monetary policy in a two-country model with home-product bias," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 343-363, June.
  7. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, January.
  8. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External wealth, the trade balance, and the real exchange rate," European Economic Review, Elsevier, vol. 46(6), pages 1049-1071, June.
  9. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages 103-124, March.
  10. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
  11. Dornbusch, Rudiger & Fischer, Stanley & Samuelson, Paul A, 1977. "Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods," American Economic Review, American Economic Association, vol. 67(5), pages 823-839, December.
  12. Vahagn Galstyan & Philip R. Lane, 2009. "The Composition of Government Spending and the Real Exchange Rate," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(6), pages 1233-1249, September.
  13. Nelson C. Mark & Donggyu Sul, 2003. "Cointegration Vector Estimation by Panel DOLS and Long-run Money Demand," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 65(5), pages 655-680, December.
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