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Trade Liberalization and Real Exchange Rate Movement

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  • Xiangming Li

Abstract

Although theory suggests that the real exchange rate should depreciate after a credible trade liberalization but could appreciate temporarily with a noncredible one, little empirical evidence exists. Unlike existing studies that use either indirect tests or unreliable openness measures, this paper uses an event study based on carefully documented trade liberalization in 45 countries. The result shows that real exchange rates depreciate after countries open their economies to trade. In countries with multiple liberalization episodes, however, real exchange rates appreciate during early episodes, suggesting that partial or noncredible trade liberalizations are associated with real appreciation.

Suggested Citation

  • Xiangming Li, 2003. "Trade Liberalization and Real Exchange Rate Movement," IMF Working Papers 03/124, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:03/124
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    References listed on IDEAS

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    1. Calvo, Guillermo A. & Drazen, Allan, 1998. "Uncertain Duration Of Reform," Macroeconomic Dynamics, Cambridge University Press, vol. 2(04), pages 443-455, December.
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    3. Andriamananjara, Shuby & Nash, John, 1997. "Have trade policy reforms led to greater openness in developing countries : evidence from readily available trade data," Policy Research Working Paper Series 1730, The World Bank.
    4. Khan, Mohsin S. & Ostry, Jonathan D., 1992. "Response of the equilibrium real exchange rate to real disturbances in developing countries," World Development, Elsevier, vol. 20(9), pages 1325-1334, September.
    5. Guillermo A. Calvo & Allan Drazen, 1997. "Uncertain Duration of Reform: Dynamic Implications," NBER Working Papers 5925, National Bureau of Economic Research, Inc.
    6. Gerwin Bell & M. Zühtü Yücelik & Paul J Duran & Saleh M. Nsouli & Sena Eken, 1993. "The Path to Convertibility and Growth; The Tunisian Experience," IMF Occasional Papers 109, International Monetary Fund.
    7. Edward E. Leamer, 1988. "Measures of Openness," NBER Chapters,in: Trade Policy Issues and Empirical Analysis, pages 145-204 National Bureau of Economic Research, Inc.
    8. Dani Rodrik, 1992. "The Limits of Trade Policy Reform in Developing Countries," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 87-105, Winter.
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    Cited by:

    1. Natalya Ketenci, 2017. "The Effect of the European Union Customs Union on the Balance of Trade in Turkey," Foreign Trade Review, , vol. 52(4), pages 219-232, November.
    2. Per G. Fredriksson & Eric Neumayer, 2016. "Corruption and Climate Change Policies: Do the Bad Old Days Matter?," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 63(2), pages 451-469, February.
    3. Pao-Lin Tien, 2009. "Using Long-Run Restrictions to Investigate the Sources of Exchange Rate Fluctuations," Wesleyan Economics Working Papers 2009-004, Wesleyan University, Department of Economics.
    4. Bezuneh, Mesfin & Yiheyis, Zelealem, 2009. "Has Trade Liberalization Improved Food Availability in Developing Countries? An Empirical Analysis," 2009 Conference, August 16-22, 2009, Beijing, China 51136, International Association of Agricultural Economists.
    5. Nepal, Rabindra & Tisdell, Clem & Jamasb, Tooraj, 2017. "Economic Reforms and Carbon Dioxide Emissions in European and Central Asian Transition Economies," Economics, Ecology and Environment Working Papers 253076, University of Queensland, School of Economics.
    6. Mesfin Bezuneh & Zelealem Yiheyis, 2014. "Has Trade Liberalization Improved Food Availability In Developing Countries? An Empirical Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 39(1), pages 63-78, March.

    More about this item

    Keywords

    Foreign exchange; Trade liberalization; real exchange rate; exchange rate; average tariff; exchange rates; Macroeconomic Aspects of International Trade and Finance: General;

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