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

Maria Sokolova ()

No 684, ADBI Working Papers from Asian Development Bank Institute

Abstract: We show that regional trade integration shifts the burden of the exchange rate adjustment towards the less integrated trading partners. Thus, they bear the cost of trade balance expansion, while competitive exchange rate moves vis-a-vis regional trade agreement (RTA) trading partners result in no expansion or deterioration of the overall trade balance. First, using the data on 138 countries that have been involved in regional trade integration through signing regional trade agreements (RTAs) since 1990, we show that upon a 10% depreciation towards non-RTA trading partners results in a 4.4% improvement of the aggregate trade balance. A similar competitive depreciation towards RTA trading partners has resulted in an average 3.7% deterioration of the aggregate trade balance. Second, we confirm that RTA participation can act as a good proxy for trade integration, and test the results with alternative measures of trade balance. Third, we use a simple model framework based on the current account adjustments to put the empirical findings into the theoretical frame. Altogether, we indicate that regional trade integration in the form of RTAs should be taken into account in questions related to the competitive exchange rate effects and trade balance adjustment.

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, nep-knm and nep-opm
Date: 2017-03-03
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Working Paper: Exchange Rates, International Trade and Growth: Re-Evaluation of Undervaluation (2016) Downloads
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