Fixed Exchange Rates and Trade

Michael Klein and Jay Shambaugh

No 10696, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A classic argument for a fixed exchange rate is its promotion of trade. Empirical support for this, however, is mixed. While one branch of research consistently shows a small negative effect of exchange rate volatility on trade, another, more recent, branch presents evidence of a large positive impact of currency unions on trade. This paper helps resolve this disconnect. Our results, which use a new data-based classification of fixed exchange rate regimes, show a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it. Furthermore, the web of fixed exchange rates created when countries link to a common base also promotes trade, but only when these countries are part of a wider system, as during the Bretton Woods period. These results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates.

JEL-codes: F3 (search for similar items in EconPapers)
Date: 2004-08
New Economics Papers: this item is included in nep-cba and nep-ifn
Note: IFM ITI
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Citations: View citations in EconPapers (43)

Published as Klein, Michael W. & Shambaugh, Jay C., 2006. "Fixed exchange rates and trade," Journal of International Economics, Elsevier, vol. 70(2), pages 359-383, December.

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Journal Article: Fixed exchange rates and trade (2006)
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