Trade margins and exchange rate regimes: new evidence from a panel VAR

Lilia Cavallari and Stefano d'Addona

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies how trade margins respond to output and terms of trade shocks in different exchange rate regimes within a panel of 23 OECD economies over the period 1988-2011. Using a panel VAR model, we confirm the predictions of entry models about the behaviour of export margins over the cycle. In addition, we find remarkable differences depending on the exchange rate regime. We document that fixed exchange rates have a positive effect on the extensive margin of trade in response to external shocks while flexible exchange rates have a pro-trade effect in response to output shocks. Our results imply that as long as extensive margins are a relevant portion of trade and external shocks are a major source of business cycle variability, the stabilization advantage of flexible exchange rates may be lower than previously thought.

Keywords: trade margins; international business cycle; Panel VAR model; exchange rate regimes. (search for similar items in EconPapers)
JEL-codes: F14 F4 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-int
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:51585

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