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Exchange Rate Regimes, Specialization and Trade Volume

  • Devereux Michael B

    ()

    (University of British Columbia)

  • Voss Graham M

    ()

    (University of Victoria and Hong Kong Institute of Monetary Research)

We develop a general equilibrium monetary model of endogenous specialization and international trade to examine the degree of specialization and trade volume under alternative monetary systems, a multiple currency system with a flexible exchange rate and a common currency system. Where demand shocks are important, we demonstrate an increase in specialization, trade and welfare under the common currency relative to flexible exchange rates. The weaker the substitution between exports and imports or the greater the risk aversion, the stronger are these effects. Where supply shocks are important, the effects on specialization and trade are smaller and ambiguous in direction, though the welfare effects are comparable to those for demand shocks. Broadly speaking, the model's results are qualitatively consistent with the empirical results of Rose (2000), which finds an increase in trade due to the adoption of a common currency.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 6 (2006)
Issue (Month): 2 (October)
Pages: 1-36

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Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:2:n:12
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  1. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1993. "International business cycles: theory vs. evidence," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 14-29.
  2. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
  3. Voss, G M, 1998. "Monetary Integration, Uncertainty and the Role of Money Finance," Economica, London School of Economics and Political Science, vol. 65(258), pages 231-45, May.
  4. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
  5. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "Exchange Rate Dynamics Redux," CEPR Discussion Papers 1131, C.E.P.R. Discussion Papers.
  6. Andrew K. Rose & T. D. Stanley, 2005. "A Meta-Analysis of the Effect of Common Currencies on International Trade ," Journal of Economic Surveys, Wiley Blackwell, vol. 19(3), pages 347-365, 07.
  7. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  8. Michael B. Devereux & Charles Engel & C√ądric Tille, 2003. "Exchange Rate Pass-Through and the Welfare Effects of the Euro," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(1), pages 223-242, February.
  9. Rose, Andrew, 1999. "One Money, One Market: Estimating the Effect of Common Currencies on Trade," Seminar Papers 678, Stockholm University, Institute for International Economic Studies.
  10. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
  11. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March.
  12. Kemp, Murray C & Liviatan, Nissan, 1973. "Production and Trade Patterns under Uncertainty," The Economic Record, The Economic Society of Australia, vol. 49(126), pages 215-27, June.
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