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

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

Essays on macroeconomic performance under alternative exchange rate regimes

Thesis (Ph. D.)--Massachusetts Institute of Technology, Dept. of Economics, 2001."June 2001."Includes bibliographical references (p. 94-95).Since Friedman (1953) an advantage often attributed to flexible exchange rate regimes relative to fixed regimes is their ability to better insulate the economy against real shocks. I use a post-Bretton Woods sample (1973-1996) of 74 developing countries to assess whether the response of real GDP, real exchange rates and prices to terms of trade shocks differ systematically across exchange rate regimes. I find that real GDP and the real exchange rate responses are significantly different across regimes. In response to a negative terms of trade shock, fixed regimes experience large and significant losses in real GDP growth and the real exchange rate depreciates only after two years. Flexible regimes, on the other hand, are associated with small growth losses and immediate large real depreciations. Negative shocks are inflationary in floats and deflationary in pegs. In the second chapter I document the large dispersion in price levels that exists between different exchange rate regimes. In low and medium income countries, price levels in floats are, respectively, 30 percent and 24 percent smaller than in pegs. A simple application of a stochastic open economy model with nominal rigidities suggests a possible explanation for this fact.(cont.) Uncertainty and the behavior of the monetary authority can affect the wage setting behavior of private agents. Under a peg, agents require a wage premium relative to floats, to be compensated for the higher variability in employment. This, in turn, implies a higher consumption based price level. However, an endogenous choice of the exchange rate regime and a less than fully accommodating policy in floats can potentially undo this result. Finally, the third chapter provides a simple dynamic framework to study the relation between the banking sector's safety nets and the share of foreign currency (dollar) deposits. When deposit and bank insurance schemes that do not discriminate between currencies they introduce a cross-transfer from local currency (peso) to dollar deposits that favors deposit dollarization and results in an increased currency exposure of banks. Second, the presence of a lender of last resort, by reducing the cost of risk to banks, stimulates dollar financing.by Christian M. Broda.Ph.D