(This abstract was borrowed from another version of this item.)"> (This abstract was borrowed from another version of this item.)">
[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/a/eee/inecon/v70y2006i2p359-383.html
   My bibliography  Save this article

Fixed exchange rates and trade

Author

Listed:
  • Klein, Michael W.
  • Shambaugh, Jay C.
Abstract
A classic argument for a fixed exchange rate is its promotion of trade. Empirical support for this, however, is mixed. While one branch of research consistently shows a small negative effect of exchange rate volatility on trade, another, more recent, branch presents evidence of a large positive impact of currency unions on trade. This paper helps resolve this disconnect. Our results, which use a new data-based classification of fixed exchange rate regimes, show a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it. Furthermore, the web of fixed exchange rates created when countries link to a common base also promotes trade, but only when these countries are part of a wider system, as during the Bretton Woods period. These results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
    • Handle: RePEc:eee:inecon:v:70:y:2006:i:2:p:359-383
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0022-1996(06)00025-0
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    2. Alejandro Micco & Ernesto Stein & Guillermo Ordoñez, 2003. "The currency union effect on trade: early evidence from EMU [‘A theoretical foundation for the gravity equation’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(37), pages 315-356.
    3. Glick, Reuven & Rose, Andrew K., 2002. "Does a currency union affect trade? The time-series evidence," European Economic Review, Elsevier, vol. 46(6), pages 1125-1151, June.
    4. Christopher M. Meissner, 2003. "Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era," American Economic Review, American Economic Association, vol. 93(1), pages 344-353, March.
    5. Jong-Wha Lee & Kwanho Shin, 2010. "Exchange Rate Regimes and Economic Linkages," International Economic Journal, Taylor & Francis Journals, vol. 24(1), pages 1-23.
    6. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 691-751, September.
    7. Stilianos Fountas & Kyriacos Aristotelous, 2003. "Does The Exchange Rate Regime Affect Export Volume? Evidence From Bilateral Exportsin US–UK Trade: 1900–98," Manchester School, University of Manchester, vol. 71(1), pages 51-64, January.
    8. Ghatpande, S. M., 1984. "The Role of the (Nigerian) Agricultural Credit Guarantee Scheme Fund in Agricultural Finance," Indian Journal of Agricultural Economics, Indian Society of Agricultural Economics, vol. 39(2), April.
    9. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356, National Bureau of Economic Research, Inc.
    10. Padma Gotur, 1985. "Effects of Exchange Rate Volatility on Trade: Some Further Evidence (Effets de l'instabilité des taux de change sur le commerce mondial: nouvelles constatations) (Efectos de la inestabilidad de los t," IMF Staff Papers, Palgrave Macmillan, vol. 32(3), pages 475-512, September.
    11. Mr. Aasim M. Husain & Mr. Ashoka Mody & Nienke Oomes & Mr. Robin Brooks & Mr. Kenneth Rogoff, 2003. "Evolution and Performance of Exchange Rate Regimes," IMF Working Papers 2003/243, International Monetary Fund.
    12. Eichengreen, Barry & Irwin, Douglas A., 1995. "Trade blocs, currency blocs and the reorientation of world trade in the 1930s," Journal of International Economics, Elsevier, vol. 38(1-2), pages 1-24, February.
    13. Alejandro Micco & Ernesto H. Stein & Guillermo Luis Ordoñez, 2003. "The Currency Union Effect on Trade: Early Evidence from EMU," Research Department Publications 4339, Inter-American Development Bank, Research Department.
    14. 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.
    15. Andrew K. Rose, 2004. "Do We Really Know That the WTO Increases Trade?," American Economic Review, American Economic Association, vol. 94(1), pages 98-114, March.
    16. O. Cushman, David, 1986. "Has exchange risk depressed international trade? The impact of third-country exchange risk," Journal of International Money and Finance, Elsevier, vol. 5(3), pages 361-379, September.
    17. Hooper, Peter & Kohlhagen, Steven W., 1978. "The effect of exchange rate uncertainty on the prices and volume of international trade," Journal of International Economics, Elsevier, vol. 8(4), pages 483-511, November.
    18. Tenreyro, Silvana, 2007. "On the trade impact of nominal exchange rate volatility," Journal of Development Economics, Elsevier, vol. 82(2), pages 485-508, March.
    19. Robert C. Feenstra, 2002. "Border Effects and the Gravity Equation: Consistent Methods for Estimation," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(5), pages 491-506, November.
    20. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-In-Differences Estimates?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 249-275.
    21. Ritschl, Albrecht & Wolf, Nikolaus, 2003. "Endogeneity of Currency Areas and Trade Blocs: Evidence from the Inter-war Period," CEPR Discussion Papers 4112, C.E.P.R. Discussion Papers.
    22. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 301-352.
    23. Gabor Kezdi, 2005. "Robus Standard Error Estimation in Fixed-Effects Panel Models," Econometrics 0508018, University Library of Munich, Germany.
    24. Klein, Michael W., 1990. "Sectoral effects of exchange rate volatility on United States exports," Journal of International Money and Finance, Elsevier, vol. 9(3), pages 299-308, September.
    25. Antoni Estevadeordal & Brian Frantz & Alan M. Taylor, 2003. "The Rise and Fall of World Trade, 1870–1939," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 359-407.
    26. Klein, Michael W., 2005. "Dollarization and trade," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 935-943, October.
    27. Mr. Paolo Mauro & Miss Grace Juhn, 2002. "Long-Run Determinants of Exchange Rate Regimes: A Simple Sensitivity Analysis," IMF Working Papers 2002/104, International Monetary Fund.
    28. Jeffrey Frankel & Andrew Rose, 2002. "An Estimate of the Effect of Common Currencies on Trade and Income," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 437-466.
    29. Josef C. Brada & José A. Méndez, 1988. "Exchange Rate Risk, Exchange Rate Regime and the Volume of International Trade," Kyklos, Wiley Blackwell, vol. 41(2), pages 263-280, May.
    30. Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.
    31. repec:bla:kyklos:v:41:y:1988:i:2:p:263-80 is not listed on IDEAS
    32. 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 474-481, August.
    33. Thursby, Jerry G & Thursby, Marie C, 1987. "Bilateral Trade Flows, the Linder Hypothesis, and Exchange Risk," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 488-495, August.
    34. Cushman, David O., 1983. "The effects of real exchange rate risk on international trade," Journal of International Economics, Elsevier, vol. 15(1-2), pages 45-63, August.
    35. Yeyati, Eduardo Levy, 2003. "On the impact of a common currency on bilateral trade," Economics Letters, Elsevier, vol. 79(1), pages 125-129, April.
    36. Andrew K. Rose, 2000. "One money, one market: the effect of common currencies on trade," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 15(30), pages 08-45.
    37. Kenen, Peter B & Rodrik, Dani, 1986. "Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates," The Review of Economics and Statistics, MIT Press, vol. 68(2), pages 311-315, May.
    38. Cushman, David O., 1988. "U.S. bilateral trade flows and exchange risk during the floating period," Journal of International Economics, Elsevier, vol. 24(3-4), pages 317-330, May.
    39. Andrew K. Rose & Eric van Wincoop, 2001. "National Money as a Barrier to International Trade: The Real Case for Currency Union," American Economic Review, American Economic Association, vol. 91(2), pages 386-390, May.
    40. Anderson, James E, 1979. "A Theoretical Foundation for the Gravity Equation," American Economic Review, American Economic Association, vol. 69(1), pages 106-116, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gil-Pareja, Salvador & Llorca-Vivero, Rafael & Martínez-Serrano, José Antonio, 2008. "Trade effects of monetary agreements: Evidence for OECD countries," European Economic Review, Elsevier, vol. 52(4), pages 733-755, May.
    2. Dorn, Sabrina & Egger, Peter, 2015. "On the distribution of exchange rate regime treatment effects on international trade," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 75-94.
    3. Wong, Kin-Ming & Chong, Terence Tai-Leung, 2016. "Does monetary policy matter for trade?," International Economics, Elsevier, vol. 147(C), pages 107-125.
    4. Tomáš Havránek, 2010. "Rose effect and the euro: is the magic gone?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 146(2), pages 241-261, June.
    5. Theo S. Eicher & Christian Henn, 2011. "One Money, One Market: A Revised Benchmark," Review of International Economics, Wiley Blackwell, vol. 19(3), pages 419-435, August.
    6. 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.
    7. Tenreyro, Silvana, 2007. "On the trade impact of nominal exchange rate volatility," Journal of Development Economics, Elsevier, vol. 82(2), pages 485-508, March.
    8. J.M.C. Santos Silva & Silvana Tenreyro, 2010. "Currency Unions in Prospect and Retrospect," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 51-74, September.
    9. Bergin, Paul R. & Lin, Ching-Yi, 2012. "The dynamic effects of a currency union on trade," Journal of International Economics, Elsevier, vol. 87(2), pages 191-204.
    10. Tomáš Havránek, 2009. "Rose Effect and the Euro: The Magic is Gone," Working Papers IES 2009/20, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2009.
    11. Salvador Gil-Pareja, 2011. "Do nonreciprocal preference regimes increase exports?," ERSA conference papers ersa11p1561, European Regional Science Association.
    12. Gil-Pareja, Salvador & Llorca-Vivero, Rafael & Martínez-Serrano, José Antonio, 2014. "Do nonreciprocal preferential trade agreements increase beneficiaries' exports?," Journal of Development Economics, Elsevier, vol. 107(C), pages 291-304.
    13. Terborgh, Andrew G., 2003. "The post-war rise of world trade: does the Bretton Woods System deserve credit?," Economic History Working Papers 22351, London School of Economics and Political Science, Department of Economic History.
    14. James Yetman, 2007. "Currency Unions, Trade Flows And Capital Flows," Pacific Economic Review, Wiley Blackwell, vol. 12(2), pages 189-204, May.
    15. Maria Cipollina & Luca Salvatici, 2010. "Reciprocal Trade Agreements in Gravity Models: A Meta‐Analysis," Review of International Economics, Wiley Blackwell, vol. 18(1), pages 63-80, February.
    16. 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.
    17. Jacks, David S. & Meissner, Christopher M. & Novy, Dennis, 2011. "Trade booms, trade busts, and trade costs," Journal of International Economics, Elsevier, vol. 83(2), pages 185-201, March.
    18. Yuan, Yan & Awokuse, Titus O., 2003. "Exchange Rate Volatility And U.S. Poultry Exports: Evidence From Panel Data," 2003 Annual meeting, July 27-30, Montreal, Canada 22083, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    19. Antoni Estevadeordal & Brian Frantz & Alan M. Taylor, 2003. "The Rise and Fall of World Trade, 1870–1939," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 359-407.
    20. Paul R. Bergin & Ching‐Yi Lin, 2009. "Exchange Rate Regimes and the Extensive Margin of Trade," NBER International Seminar on Macroeconomics, University of Chicago Press, vol. 5(1), pages 201-227.

    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:inecon:v:70:y:2006:i:2:p:359-383. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505552 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.