Fixed Exchange Rates and Trade / Michael W. Klein, Jay C. Shambaugh.

Format:

Book

Author/Creator:

Klein, Michael W.

Contributor:

National Bureau of Economic Research.

Shambaugh, Jay C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w10696.

NBER working paper series no. w10696

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2004.

Summary:

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.

Notes:

Print version record

August 2004.