AFSE 2016Laura Lebastard attended the 65th Annual Meeting of the French Economic Association (AFSE), hosted by the University of Lorraine in Nancy, between June 25th and 27th 2016. She presented her paper “Disentangle the Effects on Trade: Currency Union, Peg One-to-one and Simple Fixed Exchange Rate”.
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 but 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.