Will You Buy My Peg? the Credibility of a Fixed Exchange Rate Regime As a Determinant of Bilateral Trade

Emilia Jurzyk and Bernhard Fritz-Krockow

No 2004/165, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the relationship between fixed exchange rate arrangements and trade using a gravity model of international trade together with bilateral trade data from 24 countries from the Caribbean and Latin America for the period 1960-2001. The analysis indicates that a credible fixed peg has a positive impact on the value of bilateral trade. Moreover, the positive impact on trade is more pronounced with a stricter definition of the fixed peg or a longer duration of the peg. This supports the argument that the credibility of an exchange rate peg is an important element to determine bilateral trade. There is, however, no evidence to suggest that a currency union provides additional benefits.

Keywords: WP; trade; regime; country; Exchange rate regime; gravity model; exchange rate peg; import trade data; trade-reducing effect; regime dummy; trade-creating effect; trade statistics; trade performance; Conventional peg; Exchange rate arrangements; Currencies; Monetary unions; Plurilateral trade; Caribbean (search for similar items in EconPapers)
Pages: 25
Date: 2004-09-01
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Citations: View citations in EconPapers (17)

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