Trade Liberalization and Real Exchange Rate Movement

Xiangming Li

No 2003/124, IMF Working Papers from International Monetary Fund

Abstract: Although theory suggests that the real exchange rate should depreciate after a credible trade liberalization but could appreciate temporarily with a noncredible one, little empirical evidence exists. Unlike existing studies that use either indirect tests or unreliable openness measures, this paper uses an event study based on carefully documented trade liberalization in 45 countries. The result shows that real exchange rates depreciate after countries open their economies to trade. In countries with multiple liberalization episodes, however, real exchange rates appreciate during early episodes, suggesting that partial or noncredible trade liberalizations are associated with real appreciation.

Keywords: WP; trade liberalization; real exchange rate; cause individual; price level; trade liberalization episode of a country; trade liberalizations lead; credible trade liberalizations lead; trade liberalization events; trade intensity; only trade liberalization episode; trade liberalization in Guyana; liberalization datum; trade liberalization in Ghana; Real exchange rates; Tariffs; Terms of trade; Capital inflows; Global (search for similar items in EconPapers)
Pages: 38
Date: 2003-06-01
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Citations: View citations in EconPapers (8)

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