Does trade cause fear of appreciation?

Hao Zhang and Jiaqing Zhu

International Review of Economics & Finance, 2022, vol. 78, issue C, 68-80

Abstract: This paper identifies the fear-of-appreciation (Levy-Yeyati et al., 2013) channel through which trade balance affects domestic currency appreciations. By decomposing currency appreciations into a continuous and a discrete (jump) component, we find that only the discrete (jump) component of currency appreciation is significantly reduced by increases in trade balance, and this effect is stronger in countries with more foreign exchange interventions. The mediation analysis suggests that the fear-of-appreciation channel plays a unique role in the link between trade balance and the discrete (jump) component of domestic currency appreciations, above and beyond the fear-of-floating (Calvo and Reinhart, 2002) channel identified in prior literature.

Keywords: Exchange rate appreciation; International trade; Fear of appreciation; Fear of floating (search for similar items in EconPapers)
JEL-codes: F10 F21 F31 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:78:y:2022:i:c:p:68-80

DOI: 10.1016/j.iref.2021.11.014

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