Fixed exchange rates and trade

TLDR: This article showed that a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it can be found when using a new data-based classification of fixed exchange rates.

About: This article is published in Journal of International Economics.The article was published on 2006-12-01 and is currently open access. It has received 157 citations till now. The article focuses on the topics: Exchange rate & Bilateral trade.

Figures

Table 6. System effects across classifications (full time sample)

Table 4. System Effects

Table 5. Results across different classifications

Figure 1.

Table 8: Controls for Dynamics

Table 1. Sample Descriptions

Frequently asked questions

Q1. What are the contributions mentioned in the paper "Nber working paper series fixed exchange rates and trade" ?

This paper helps resolve this disconnect. 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. 

Q2. What is the main argument for the de facto classification of the two schemes?

The de facto classification scheme of Reinhart and Rogoff (2004) is based on theprobability that a market-determined exchange rate remains within a band over a five year window.38 

Q3. What is the effect of a direct peg on trade between industrial countries?

In the post Bretton Woods era, the limited number of direct pegs seem to increase world trade by 2-3% and the positive impact on unlinked peg pairs adds another 1-2%. 

Q4. How does the IV regressions support the core specifications?

to the extent that one accepts the exogeneity of the instrument, these IV regressions appear to support the core specifications by showing that eliminating endogeneity does not weaken their results. 

Q5. What is the average size of a typical developing country in the post Bretton Woods sample?

developing countries in currency unions are typically only 10% the size of a typical developing country in the post Bretton Woods sample. 

Q6. Why do dyads switch to indirect pegs?

Because of the intertwining relationships in currency unions, not all of these switches represent independent events, unlike the case with direct pegs. 

Q7. How can one correct the omission of country-level fixed effects?

This omission can be corrected by country-level fixed effects if one assumes multilateral resistance to trade, as is done by Anderson and van Wincoop (2001). 

Q8. How does the CPFE estimate the interaction between the system variable and the unlinked peg?

a peg is part of a larger system by including, in the regression, the interaction between the system variable and the unlinked peg variable.