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Hard or Soft Pegs? Choice of Exchange Rate Regime and Trade in Africa

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  • Qureshi, Mahvash Saeed
  • Tsangarides, Charalambos G.

Abstract

This paper revisits the link between fixed exchange rate regimes and trade in the context of Africa’s exchange rate arrangements, differentiating the effects of hard pegs (currency unions) from conventional soft pegs. Using a novel dataset of exchange rate regime classification, the paper augments the gravity model of bilateral trade flows with measures of currency unions and conventional pegged arrangements, and benchmarks Africa’s experience against the rest of the world. We find that in both samples, currency unions and pegs increase trade vis-à-vis more flexible exchange rate arrangements through channels in addition to reduced exchange rate volatility; however the effect is almost twice as large for Africa. In addition, the trade-generating effect of pegs is at least as large for Africa as that of currency unions, suggesting that pegs could present a viable option—perhaps an alternative to currency unions—to promote trade in the region.

Suggested Citation

  • Qureshi, Mahvash Saeed & Tsangarides, Charalambos G., 2012. "Hard or Soft Pegs? Choice of Exchange Rate Regime and Trade in Africa," World Development, Elsevier, vol. 40(4), pages 667-680.
  • Handle: RePEc:eee:wdevel:v:40:y:2012:i:4:p:667-680
    DOI: 10.1016/j.worlddev.2011.09.010
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    Cited by:

    1. Gnimassoun, Blaise, 2015. "The importance of the exchange rate regime in limiting current account imbalances in sub-Saharan African countries," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 36-74.
    2. Couharde, Cécile & Coulibaly, Issiaka & Guerreiro, David & Mignon, Valérie, 2013. "Revisiting the theory of optimum currency areas: Is the CFA franc zone sustainable?," Journal of Macroeconomics, Elsevier, vol. 38(PB), pages 428-441.
    3. Campbell, Douglas L., 2011. "Estimating the impact of currency unions on trade using a dynamic gravity framework," MPRA Paper 35531, University Library of Munich, Germany.
    4. Simplice Asongu & Jacinta Nwachukwu & Vanessa Tchamyou, 2017. "A Literature Survey On Proposed African Monetary Unions," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 878-902, July.
    5. Simplice Asongu & Jacinta C. Nwachukwu & Vanessa S. Tchamyou, 2017. "A summary of a survey on proposed African monetary unions," Working Papers 17/008, African Governance and Development Institute..
    6. repec:eee:jimfin:v:77:y:2017:i:c:p:143-163 is not listed on IDEAS
    7. Coulibaly, Issiaka & Gnimassoun, Blaise, 2013. "Optimality of a monetary union: New evidence from exchange rate misalignments in West Africa," Economic Modelling, Elsevier, vol. 32(C), pages 463-482.

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