Will You Buy My Peg?: The Credibility of a Fixed Exchange Rate Regime as a Determinant of Bilateral Trade

25 Pages Posted: 15 Feb 2006

See all articles by Bernhard Fritz-Krockow

Bernhard Fritz-Krockow

affiliation not provided to SSRN

Emilia Magdalena Jurzyk

affiliation not provided to SSRN

Date Written: September 2004

Abstract

This paper examines the relationship between fixed exchange rate arrangements and trade using a gravity model of international trade together with bilateral trade data from 24 countries from the Caribbean and Latin America for the period 1960-2001. The analysis indicates that a credible fixed peg has a positive impact on the value of bilateral trade. Moreover, the positive impact on trade is more pronounced with a stricter definition of the fixed peg or a longer duration of the peg. This supports the argument that the credibility of an exchange rate peg is an important element to determine bilateral trade. There is, however, no evidence to suggest that a currency union provides additional benefits.

Keywords: Exchange rate regime, trade, gravity model, exchange rate peg

JEL Classification: F15, F33

Suggested Citation

Fritz-Krockow, Bernhard and Jurzyk, Emilia Magdalena, Will You Buy My Peg?: The Credibility of a Fixed Exchange Rate Regime as a Determinant of Bilateral Trade (September 2004). IMF Working Paper, Vol. , pp. 1-25, 2004. Available at SSRN: https://ssrn.com/abstract=878990

Bernhard Fritz-Krockow (Contact Author)

affiliation not provided to SSRN

No Address Available

Emilia Magdalena Jurzyk

affiliation not provided to SSRN

No Address Available

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