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Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach
David C. Parsley Vanderbilt University - Owen Graduate School of Management Shang-Jin Wei Columbia Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF); China Academy of Financial Research (CAFR) December 2001 IMF Working Paper No. 01/197 Abstract: This paper studies the effect of instrumental and institutional stabilization of exchange rate volatility on the integration of goods markets. Rather than using data on volume of trade, this paper employs a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities around the world during 1990-2000. We find that the impact of an institutional stabilization - currency board or dollarization - promotes market integration far beyond an instrumental stabilization. Among them, long-term currency unions are more effective than more recent currency boards. All have room to improve relative to a U.S. benchmark.
Keywords: Hard pegs, currency union, dollarization, market integration JEL Classifications: F33 Working Paper SeriesDate posted: February 06, 2006 ; Last revised: February 06, 2006Suggested CitationContact Information
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