Working Paper: CEPR ID: DP810
Authors: Andre Sapir; Khalid Sekkat
Abstract: This paper investigates the role of the exchange rate regime in the process of trade adjustment, by examining the relationship between trade prices and exchange rate regimes. The theoretical framework is a dynamic one à la Froot-Klemperer (1989). The empirical investigation takes advantage of the simultaneous occurrence, since 1979, of relatively stable exchange rates inside the ERM and instable rates outside to engage in a controlled experiment on the impact of the exchange rate regime on trade prices. The results suggest that a system of pegged rates like the EMS, although helpful, is not necessary to achieve a smooth process of trade adjustment. It appears that the absence of misalignment rather than the type of exchange rate regime is the crucial factor for fulfilling such an objective.
Keywords: exchange rate regimes; trade; EMS
JEL Codes: F12; F31; L16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate stability (F31) | trade pricing behavior (D40) |
| absence of misalignment (D50) | smooth trade adjustment (F16) |
| exchange rate regime (EMS vs. floating rates) (F33) | trade prices (P22) |
| exchange rate stability (F31) | exporters' perceptions of stability (F14) |
| EMS (C87) | trade adjustment during the 1980s (F32) |