Exchange Rate Regimes and Trade

Christopher Adam () and David Cobham

No 505, CERT Discussion Papers from Centre for Economic Reform and Transformation, Heriot Watt University

Abstract: A 'new version' gravity model is used to estimate the effect of de facto exchange rate regimes, as classified by Reinhart and Rogoff (2004), on bilateral trade. The results indicate that, while participation in a common currency union is typically strongly 'protrade' - as first suggested by Rose (2000) - other exchange rate regimes which lower the exchange rate uncertainty and transactions costs associated with international trade between countries are significantly more pro-trade than the default regime of a 'double float'. They suggest that the direct and indirect effects of exchange rate regimes on uncertainty and transactions costs tend to outweigh the trade-diverting substitution effects. In addition, there is evidence that membership of different currency unions by two countries has pro-trade effects, which can be understood in terms of a large indirect effect on transactions costs. Tariff-equivalent monetary barriers associated with each of the exchange rate regimes are also calculated.

Keywords: Gravity models; geography; trade; exchange rate regime; currency union; transactions costs; tariff-equivalent barriers (search for similar items in EconPapers)
JEL-codes: F10 F33 F49 (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-ifn and nep-int
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Related works:
Journal Article: EXCHANGE RATE REGIMES AND TRADE (2007)
Working Paper: Exchange rate regimes and trade (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:hwe:certdp:0505

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