The Empirics of Exchange Rate Regimes and Trade: Words vs. Deeds
IMF Working Papers, February 1, 2010
Source details
- Canonical URL
- The Empirics of Exchange Rate Regimes and Trade: Words vs. Deeds
Other formats
Bibliographic details
- Authors: Mahvash S Qureshi, Charalambos G Tsangarides
- Published: February 1, 2010
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451963199.001
Summary and core findings
- Study objective: examines the impact of exchange rate regimes on bilateral trade while differentiating the effects of "words" (de jure policy announcements) and "deeds" (de facto actions).
- Main finding: fixed exchange rate regimes increase trade.
- Words versus deeds: there is no systematic difference in the effects of policy announcements versus actions to maintain exchange rate stability.
- Alignment effect: the trade-generating effect of more stable exchange rate regimes is more pronounced when words and actions are aligned, both in the short and long-run.
- Role of credibility: policy credibility plays an important role in determining the effects of de jure and de facto exchange rate arrangements; deviations between the two could be costly.
Additional empirical results
- Hard pegs versus conventional pegs: evidence that the impact of hard pegs such as currency unions is broadly similar to that of conventional pegs.
- Time evolution: the currency union and direct peg effects evolve over time.
- Heterogeneity: the effects of more stable regimes are heterogeneous across country groups.
Policy implications
- Ensure alignment between announced exchange rate policy (words) and actual policy implementation (deeds) to maximize trade benefits.
- Recognize the importance of government/monetary authority credibility in obtaining trade gains from stable exchange rate arrangements.
- Consider that currency unions and direct pegs produce trade effects comparable to conventional pegs, but these effects may change over time and differ across country groups.