Laura Lebastard will attend the 22nd Spring Meeting of Young Economists 2017, hosted by Martin Luther University of Halle-Wittenberg (Germany), between March 23th and 25th 2016. She will present her paper “Disentangling the Effects on Trade: Different Characteristics for Different Fixed Exchange Rate Regimes”
Abstract:
This paper compares the effects of currency unions, pegs one-to-one and classical fixed exchange rates on bilateral trade. Indeed, peg one-to-one is a form of fixed exchange rate with price transparency. Therefore my study can help to disentangle the effect of the fixity of exchange rate and price transparency from the non-possibility of devaluation in currency union observed effect of increasing trade. In order to do that, it uses the proximity of the peg one-to-one and the currency union to have a better understanding of the volume of trade differential.
I study a two-country theoretical world economy with à la Melitz firms. I consider three cases: countries in currency union, in peg one-to-one or in simple fixed exchange rate. I then estimate the level of trade, firms taking into account cost of exporting (smaller for currency unions) and probability of devaluation (firms being risk-averse).
I use a panel data of 255 countries/regions from 1971 to 2014 and have constructed a database for three types of exchange rate regimes (currency unions, peg one-to-one and fixed exchange rate). I find that currency unions always have positive, significant and higher effects on trade than pegs one-to-one; and fixed exchange rate has no significant impact. However, peg one-to-one effect on trade turns to be endogenous. This reinforces the importance of the commitment dimension of the currency union in the impact on trade.