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Exchange Rate Regimes, Specialization and Trade Volume

Author

Listed:
  • Devereux Michael B

    (University of British Columbia)

  • Voss Graham M

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

Abstract

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.

Suggested Citation

  • Devereux Michael B & Voss Graham M, 2006. "Exchange Rate Regimes, Specialization and Trade Volume," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(2), pages 1-36, October.
    • Handle: RePEc:bpj:bejmac:v:topics.6:y:2006:i:2:n:12
    DOI: 10.2202/1534-5998.1291
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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