Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach
IMF Working Papers, December 1, 2001
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Bibliographic details
- Authors: David C. Parsley, Shang-Jin Wei
- Published: December 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451860016.001
Research question and data
- Studies the effect of instrumental and institutional stabilization of exchange rate volatility on the integration of goods markets.
- Uses a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world during 1990-2000.
- Focuses on price data rather than volume of trade.
Key findings
- Institutional stabilization (currency board or dollarization) promotes market integration far beyond an instrumental stabilization.
- Long-term currency unions are more effective at promoting market integration than more recent currency boards.
- Even the most effective arrangements examined have room to improve relative to a U.S. benchmark.
Concepts and measures emphasized
- Exchange rate volatility and exchange rate variability.
- Goods market integration measured via price comparison, price difference, percentage price deviation, and price dispersion across cities for 95 disaggregated goods.
- Distinctions among common currency, currency union, conventional peg, currency boards, hard pegs, and dollarization.
Implications for policy
- Institutional arrangements that reduce exchange rate volatility (e.g., long-term currency unions) can strengthen goods market integration more than purely instrumental interventions.
- Currency boards and dollarization can promote integration, but effectiveness varies by type and longevity of the institutional arrangement.
- Policymakers seeking stronger goods market integration should consider the durability and institutional depth of exchange rate arrangements.
Scope and limitations noted
- Analysis is based on price data across cities and goods for 1990-2000; results pertain to price-based measures of integration rather than trade volumes.
- Comparison benchmark is the U.S.; improvements are possible relative to that benchmark.
Source: Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach (David C. Parsley, Shang-Jin Wei, December 1, 2001).