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Exchange Rates, International Trade and Growth: Re-Evaluation of Undervaluation

Maria Sokolova ()

No 05-2016, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

Abstract: This paper shows that a regional bias resulting from trade integration alters the transmission of a country’s monetary policy by shifting the burden of the exchange rate adjustment towards the less integrated trading partners. I first develop a simple model which illustrates how a concentration of trade flows among regional trading partners affects the sensitivity of the trade balance to the terms-of-trade. In particular, the trade balance becomes less sensitive to the terms-of-trade vis-a-vis regional partners and more sensitive to the terms-of-trade vis-a-vis the other country. I then test the implication of the model using a panel of 133 countries between 1985 - 2010 that includes information on Regional Trade Agreements (RTA). I find that movements in the terms-of-trade vis-a-vis non-RTA members affect a country’s trade balance, while movements vis-a-vis RTA partners do not.

Keywords: trade balance; regional trade agreements; competitive depreciation; economic integration; terms-of-trade (search for similar items in EconPapers)
JEL-codes: F10 F13 F14 F15 F40 F41 F45 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-int and nep-opm
Date: 2016-06-01
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Working Paper: Exchange Rates, International Trade, and Growth: Re-evaluation of Undervaluation (2017) Downloads
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