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Exchange Rate Regimes and Economic Linkages

  • Jong-Wha Lee

    (Korea University)

  • Kwanho Shin

    (Korea University)

We investigate how the exchange rate regime influences economic linkages across countries. We divide the exchange rate regime into three classifications: currency union, peg and floating exchange rates. Unlike most studies solely focusing on the relationship between anchor and client countries, the exchange rate regime between any two countries is inferred based on their relationship to the common anchor currency. Then we empirically explore how the various exchange rate regimes impact on bilateral trade, output co-movement and financial integration. Financial integration is measured by the degree of risk sharing reflected in consumption co-movement relative to output co-movement. We find that, while currency union has the greatest effect, the peg regime also significantly boosts trade. We also find that, while the peg regime contributes to both output and consumption co-movements, the currency union strengthens only consumption co-movement and possibly lowers output co-movement. These findings are interpreted that the currency union, the strictest form of pegged regimes, leads to higher industry specialization and better risk sharing opportunities than the less strict peg regime.

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Paper provided by EconWPA in its series International Finance with number 0409006.

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Length: 34 pages
Date of creation: 30 Sep 2004
Date of revision:
Handle: RePEc:wpa:wuwpif:0409006
Note: Type of Document - pdf; pages: 34
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