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Alternative Exchange Rate Regimes for MENA countries: Gravity Model Estimates of the Trade Effects

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  • Christopher Adam
  • David Cobham

Abstract

Middle East and North African (MENA) countries have traditionally anchored their currencies largely on the US dollar, but the creation of the euro means that there is now for the first time a real alternative numéraire and anchor available. This paper estimates the effect of a menu of exchange rate regimes on trade within a gravity model, using the Baier & Bergstrand (2006) Taylor expansion technique to allow for multilateral trade resistance. This approach allows simulations of the effects of changes in the exchange rate regime for a particular country or region which explicitly take into account the associated changes in multilateral and world trade resistance. Results are presented for eight different scenarios: pegging to the dollar, dollarising, pegging to the euro and euroising, each of these on an individual country basis and when the MENA countries all implement the change together. We find that in terms of the trade effects for most MENA countries it would be better to anchor on the euro than on the dollar, but for some others (typically small oil exporters with large exports to Asian countries) it would be better to continue to anchor on the dollar.

Suggested Citation

  • Christopher Adam & David Cobham, 2008. "Alternative Exchange Rate Regimes for MENA countries: Gravity Model Estimates of the Trade Effects," CERT Discussion Papers 0803, Centre for Economic Reform and Transformation, Heriot Watt University.
    • Handle: RePEc:hwe:certdp:0803
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    References listed on IDEAS

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    Cited by:

    1. Alberto Behar & Laia Cirera-i-Crivillé, 2013. "Does it Matter Who You Sign With? Comparing the Impacts of North–South and South–South Trade Agreements on Bilateral Trade," Review of International Economics, Wiley Blackwell, vol. 21(4), pages 765-782, September.
    2. Santana-Gallego, Maria & Pérez-Rodríguez, Jorge V., 2019. "International trade, exchange rate regimes, and financial crises," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 85-95.
    3. nnamdi, Kelechi & ifionu, Ebele, 2013. "Exchange rate volatility and exchange rate uncertainty in Nigeria: a financial econometric analysis (1970- 2012)," MPRA Paper 48316, University Library of Munich, Germany, revised 2013.
    4. Klaus Schmidt-Hebbel, 2019. "Macroeconomic Institutions: Lessons from World Experience for MENA Countries," Working Papers 1311, Economic Research Forum, revised 21 Aug 2019.
    5. Coutinho, Leonor, 2012. "Determinants of Growth and Inflation in Southern Mediterranean Countries," CEPS Papers 6736, Centre for European Policy Studies.

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    More about this item

    Keywords

    gravity; geography; trade; exchange rate regime; currency union; transactions costs; multilateral trade resistance; MENA; Middle East; North Africa; euro; dollar;
    All these keywords.

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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