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The Empirics of Exchange Rate Regimes and Trade: Words vs. Deeds

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  • Mahvash S Qureshi
  • Mr. Charalambos G Tsangarides

Abstract

This paper examines the impact of exchange rate regimes on bilateral trade while differentiating the effects of "words" and "deeds". Our findings-based on an extended database for de jure and de facto exchange rate classifications-show that while fixed exchange rate regimes increase trade, there is no systematic difference in the effects of policy announcements versus actions to maintain exchange rate stability. The trade generating effect of more stable exchange rate regimes is however more pronounced when words and actions are aligned, both in the short and long-run. Policy credibility therefore plays an important role in determining the effects of de jure and de facto exchange rate arrangements such that deviations between the two could be costly. In addition, we find evidence that (i) the impact of hard pegs such as currency unions is broadly similar to that of conventional pegs; (ii) the currency union and direct peg effects evolve over time; and (iii) the effects of more stable regimes are heterogeneous across country groups.

Suggested Citation

  • Mahvash S Qureshi & Mr. Charalambos G Tsangarides, 2010. "The Empirics of Exchange Rate Regimes and Trade: Words vs. Deeds," IMF Working Papers 2010/048, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/048
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    References listed on IDEAS

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    2. AFOLABI Tunde Ahmed & NANKELA Ndinelago Monika, 2019. "The impact of exchange rate regime on Balance of payments in Namibia," International Journal of Science and Business, IJSAB International, vol. 3(5), pages 133-151.
    3. Huigang Chen & Mr. Alin T Mirestean & Mr. Charalambos G Tsangarides, 2011. "Limited Information Bayesian Model Averaging for Dynamic Panels with An Application to a Trade Gravity Model," IMF Working Papers 2011/230, International Monetary Fund.
    4. Campbell, Douglas L., 2011. "Estimating the impact of currency unions on trade using a dynamic gravity framework," MPRA Paper 35531, University Library of Munich, Germany.
    5. Kanu Success Ikechi & Nwadiubu Anthony, 2020. "Exchange Rate Volatility and International Trade in Nigeria," International Journal of Management Science and Business Administration, Inovatus Services Ltd., vol. 6(5), pages 56-72, July.
    6. Pedro Hugo Clavijo Cortes, 2017. "Balance comercial y volatilidad del tipo de cambio nominal: Un estudio de series de tiempo para Colombia," Revista Economía y Región, Universidad Tecnológica de Bolívar, vol. 11(1), pages 37-58, June.
    7. Qureshi, Mahvash Saeed & Tsangarides, Charalambos G., 2012. "Hard or Soft Pegs? Choice of Exchange Rate Regime and Trade in Africa," World Development, Elsevier, vol. 40(4), pages 667-680.
    8. Alessandro Nicita, 2013. "Exchange rates, international trade and trade policies," International Economics, CEPII research center, issue 135-136, pages 47-61.
    9. Auboin, Marc & Ruta, Michel, 2011. "The relationship between exchange rates and International Trade: A review of economic literature," WTO Staff Working Papers ERSD-2011-17, World Trade Organization (WTO), Economic Research and Statistics Division.
    10. Adewuyi, Adeolu & Ogebe, Joseph O. & Oshota, Sebil, 2021. "The role of exchange rate and relative import price on sawnwood import demand in Africa: Evidence from modified heterogeneous panel data methods," The Journal of Economic Asymmetries, Elsevier, vol. 24(C).
    11. Ms. Era Dabla-Norris & Ms. Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence," IMF Working Papers 2010/240, International Monetary Fund.
    12. Campbell, Douglas L., 2011. "Estimating the impact of currency unions on trade using a dynamic gravity framework," MPRA Paper 35531, University Library of Munich, Germany.
    13. Mahvash Saeed Qureshi & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and Trade: Is Africa Different?," WIDER Working Paper Series wp-2011-014, World Institute for Development Economic Research (UNU-WIDER).

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