The Empirics of exchange rate regimes and trade: words vs. deeds, Issues 2010-2048
International Monetary Fund, Feb 1, 2010 - Business & Economics - 45 pages
This paper examines the impact of exchange rate regimes on bilateral trade while differentiating the effects of "words" and "deeds". Our findings-based on an extended database for de jure and de facto exchange rate classifications-show that while fixed exchange rate regimes increase trade, there is no systematic difference in the effects of policy announcements versus actions to maintain exchange rate stability. The trade generating effect of more stable exchange rate regimes is however more pronounced when words and actions are aligned, both in the short and long-run. Policy credibility therefore plays an important role in determining the effects of de jure and de facto exchange rate arrangements such that deviations between the two could be costly. In addition, we find evidence that (i) the impact of hard pegs such as currency unions is broadly similar to that of conventional pegs; (ii) the currency union and direct peg effects evolve over time; and (iii) the effects of more stable regimes are heterogeneous across country groups.
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Anderson benchmark speciﬁcation beneﬁts Binary variable CFA Franc zone classiﬁcatior Comborder Comcol Comctry Comlang conventional pegs country pairs CPFE credibility Curcol currency union CYFE deeds deﬁned deﬁnition Deutsche Mark direct pegs dyads Economics effect of direct endogeneity estimated coefﬁcient Evercol exchange rate arrangements exchange rate regimes exchange rate stability exchange rate volatility facto classiﬁcations facto pegs Figure A1 ﬁnd ﬁrst ﬁve ﬁxed effects ﬁxed exchange rate Fixed Exchange Rates French Franc GLS random effects gravity equation gravity model Hausman chi-2 FE Hausman test applied HT estimators HT HT HT HT method IMF’s impact indicate signiﬁcance jure classiﬁcation jure pegs Landl Lareap Ldist lnd-lnd lnd-Nind Nind-Nind long-run volatility Lrgdp Lrgdppc lsland mirage of ﬁxed nonpeg ofﬁcial omitted variable bias percent policy credibility PPML rbservations real exchange rate reﬂecting Robust clustered Shambaugh signiﬁcance levels signiﬁcantly positive subsamples Table trade ﬂows trade generating effect World World World