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Will You Buy My Peg? the Credibility of a Fixed Exchange Rate Regime As a Determinant of Bilateral Trade

  • Emilia Magdalena Jurzyk
  • Bernhard Fritz-Krockow
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    This paper examines the relationship between fixed exchange rate arrangements and trade using a gravity model of international trade together with bilateral trade data from 24 countries from the Caribbean and Latin America for the period 1960-2001. The analysis indicates that a credible fixed peg has a positive impact on the value of bilateral trade. Moreover, the positive impact on trade is more pronounced with a stricter definition of the fixed peg or a longer duration of the peg. This supports the argument that the credibility of an exchange rate peg is an important element to determine bilateral trade. There is, however, no evidence to suggest that a currency union provides additional benefits.

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    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=17616
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    Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/165.

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    Length: 25
    Date of creation: 01 Sep 2004
    Date of revision:
    Handle: RePEc:imf:imfwpa:04/165
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    1. Andrew K. Rose, 2002. "Do We Really Know that the WTO Increases Trade?," NBER Working Papers 9273, National Bureau of Economic Research, Inc.
    2. Tamim Bayoumi & Barry J. Eichengreen, 1995. "Is Regionalism Simply a Diversion? Evidence from the Evolution of the EC and EFTA," IMF Working Papers 95/109, International Monetary Fund.
    3. James E. Anderson & Eric van Wincoop, 2003. "Gravity with Gravitas: A Solution to the Border Puzzle," American Economic Review, American Economic Association, vol. 93(1), pages 170-192, March.
    4. Deardorff, A.V., 1995. "Determinants of Bilateral Trade : Does Gravity Work in a Neoclassical World?," Papers 95-05, Michigan - Center for Research on Economic & Social Theory.
    5. Torsten Persson, 2001. "Currency unions and trade: how large is the treatment effect?," Economic Policy, CEPR;CES;MSH, vol. 16(33), pages 433-462, October.
    6. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February.
    7. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-16, March.
    8. Jeffrey A. Frankel & Shang-Jin Wei, 1993. "Emerging Currency Blocs," NBER Working Papers 4335, National Bureau of Economic Research, Inc.
    9. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR;CES;MSH, vol. 15(30), pages 7-46, 04.
    10. Laszlo Matyas, 1997. "Proper Econometric Specification of the Gravity Model," The World Economy, Wiley Blackwell, vol. 20(3), pages 363-368, 05.
    11. Bergstrand, Jeffrey H, 1985. "The Gravity Equation in International Trade: Some Microeconomic Foundations and Empirical Evidence," The Review of Economics and Statistics, MIT Press, vol. 67(3), pages 474-81, August.
    12. Deardoff, A.V., 1995. "Determinants of Bilateral Trade: Does Gravity Work in a Neoclassical World?," Working Papers 382, Research Seminar in International Economics, University of Michigan.
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