Flexible Exchange Rates as Shock Absorbers

32 Pages Posted: 29 Jul 2003 Last revised: 19 Jun 2022

See all articles by Sebastian Edwards

Sebastian Edwards

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area; National Bureau of Economic Research (NBER)

Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business

Date Written: July 2003

Abstract

In this paper we analyze empirically the effect of terms of trade shocks on economic performance under alternative exchange rate regimes. We are particularly interested in investigating whether terms of trade disturbances have a smaller effect on growth in countries with a flexible exchange rate regime, than in countries with a more rigid exchange rate arrangement. We also analyze whether negative and positive terms of trade shocks have asymmetric effects on growth, and whether the magnitude of these asymmetries depends on the exchange rate regime. We find evidence suggesting that terms of trade shocks get amplified in countries that have more rigid exchange rate regimes. We also find evidence of an asymmetric response to terms of trade shocks: the output response is larger for negative than for positive shocks. Finally, we find evidence supporting the view that, after controlling for other factors, countries with more flexible exchange rate regimes grow faster than countries with fixed exchange rates.

Suggested Citation

Edwards, Sebastian and Levy-Yeyati, Eduardo Levy, Flexible Exchange Rates as Shock Absorbers (July 2003). NBER Working Paper No. w9867, Available at SSRN: https://ssrn.com/abstract=428361

Sebastian Edwards (Contact Author)

University of California, Los Angeles (UCLA) - Global Economics and Management (GEM) Area ( email )

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Eduardo Levy Levy-Yeyati

Universidad Torcuato Di Tella - School of Business ( email )

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