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Fixed exchange rates and trade

  • Klein, Michael W.
  • Shambaugh, Jay C.

A classic argument for a fixed exchange rate is its promotion of trade. Empirical support for this, however, is mixed. While one branch of research consistently shows a small negative effect of exchange rate volatility on trade, another, more recent, branch presents evidence of a large positive impact of currency unions on trade. This paper helps resolve this disconnect. Our results, which use a new data-based classification of fixed exchange rate regimes, show a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it. Furthermore, the web of fixed exchange rates created when countries link to a common base also promotes trade, but only when these countries are part of a wider system, as during the Bretton Woods period. These results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates.

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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 70 (2006)
Issue (Month): 2 (December)
Pages: 359-383

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Handle: RePEc:eee:inecon:v:70:y:2006:i:2:p:359-383
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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