When and How Much Does a Peg Increase Trade? The Role of Trade Costs and Import Demand Elasticity under Monetary Uncertainty

Alexander Mihailov ()

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: This paper extends stochastic research in new open-economy macroeconomics (NOEM) to study the effects of the exchange-rate regime on international trade in a more realistic, yet rigorous, analytical set-up. We essentially incorporate ”iceberg” costs, inducing home bias, into a unified framework which nests trade between countries that produce similar vs. different composite goods. Our main result is that given (some degree of) producer’s currency pricing with symmetry in structure and money shock distributions as the only source of uncertainty, a fixed exchange rate slightly reduces expected trade, measured as a share in GDP, relative to a float under elastic import demand, i.e. when countries’ output mixes are similar; inelastic import demand, possible under the same taste for diversity but far less substitutable national outputs arising in our model from differences in endowments although not in technological labor input requirements, reverses this conclusion. What a peg can achieve in any of these cases is trade stabilization (across states of nature). It would be greater for (symmetric) nations which (i) have a larger proportion of producer’s currency pricing in their trade, (ii) are exposed to higher monetary uncertainty, (iii) produce less substitutable output mixes and (iv) are located closer to one another or apply weaker bilateral trade restrictions.

Keywords: iceberg costs; home bias; import demand elasticity; exchangerate regimes; stochastic NOEM models. (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://repository.essex.ac.uk/8866/ original version (application/pdf)

Related works:
Working Paper: When and How Much Does a Peg Increase Trade? The Role of Trade Costs and Import Demand Elasticity under Monetary Uncertainty (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:esx:essedp:8866

Ordering information: This working paper can be ordered from
Discussion Papers Administrator, Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K.

Access Statistics for this paper

More papers in Economics Discussion Papers from University of Essex, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Essex Economics Web Manager ().