Country Size and Exchange Rates

Vahagn Galstyan

Economica, 2015, vol. 82, issue 326, 222-235

Abstract: type="main" xml:id="ecca12120-abs-0001">

This paper studies how country size affects the role of the exchange rate in external adjustment. First, the impact of country size on the sensitivity of relative prices to external imbalances is explored in a two-country neoclassical model. Second, at the empirical level, a significant effect of external imbalances on relative prices is found. In particular, a trade surplus is associated with a depreciation of the real exchange rate. Our estimations reveal a systematic pattern in the sensitivity of the real exchange rate to external imbalances: larger countries are characterized by a higher absolute trade elasticity of the exchange rate.

Date: 2015
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Working Paper: Country Size and the Transfer Effect (2007)
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