How to increase the value of bilateral trade? Currency union versus fixed exchange rate regime

Abstract

The objective of the article is to determine which exchange rate regime provides higher bilateral trade: fixed rate or currency union. Research Design & Methods: An index was designed based on variables commonly recognised as those that might affect the value of bilateral trade and those that are differently affected by fixed exchange rate regime and currency union. These variables are trade openness, trading partner trade importance, similarities of government debt and borrowing, similarities of inflation, and the correlation coefficient of detrended GDP. The index serves as a dependent variable in the main model, which was created using principal component analysis. I also ran models with both trade openness and trading partner trade importance as dependent variables. Findings: Although the index appeared to be higher in countries with a currency union, the results show that a currency union does not provide higher values of bilateral trade compared to a fixed exchange rate regime. Implications & Recommendations: Research can be repeated with more attention dedicated to independent variables. Alternative de facto classifications of exchange rate regimes can be used for future studies as well.Contribution & Value Added: The article contributes to existing studies on exchange rate regimes that commonly and interchangeably use notions of fixed exchange rate regime and currency union. To my best knowledge, there is no previous empirical research that would separately compare the impact on trade of these notions. The current study fills this gap. Article type:research article

Price and output effects of long-term exchange rate changes: Central and Eastern European countries in 2002-2019

“…As control variables, the trade openness and several indexes of institutional quality had been used. The importance of links between trade openness and exchange rate regime has been stressed recently by Stoykova (2021). Regarding the exchange rate effects on output, the control for institutional variables is provided by Chavez (2020).…”

Export-led growth hypothesis: Empirical evidence from the Southern African Customs Union countries

“…Apart from the role played by SACU membership, the exchange rate arrangements in SACU also act as interlinkages in the sub-region. Under the Common Monetary Area (CMA) arrangement, all SACU countries except Botswana, have pegged their local currencies to the South African Rand (Stoykova, 2021). This implies that trade patterns in SACU are likely to follow fluctuations in the South African Rand.…”

Macroeconomic policy coordination and the European business cycle: Accounting for model uncertainty and reverse causality

“…Additional variables were included in the investigation to account for the impact of other determinants of BCS. Bilateral trade is one of the cornerstones of the optimum currency areas theory (McKinnon, 1963) and is considered as one of the main business cycle transmission channels (Alimi, 2015; Calderón et al., 2007; Dées & Zorell, 2012; Duval et al., 2015; Frankel & Rose, 1998; Jeon, 2018; Nzimande & Ngalawa, 2017; Stoykova, 2021). Accordingly, the next variable is calculated as the sum of exports and imports between a pair of countries scaled by the sum of their GDPs: $$\begin{equation}{\rm{Trad}}{{\rm{e}}_{ij}} = \frac{1}{3}\mathop \sum \limits_{t = 1}^3 \frac{{{\rm{Impor}}{{\rm{t}}_{ijt}} + {\rm{Exopr}}{{\rm{t}}_{ijt}}}}{{{\rm{GD}}{{\rm{P}}_{it}} + {\rm{GD}}{{\rm{P}}_{jt}}}}.\end{equation}$$…”

“…Additional variables were included in the investigation to account for the impact of other determinants of BCS. Bilateral trade is one of the cornerstones of the optimum currency areas theory (McKinnon, 1963) and is considered as one of the main business cycle transmission channels (Alimi, 2015;Calderón et al, 2007;Dées & Zorell, 2012;Duval et al, 2015;Frankel & Rose, 1998;Jeon, 2018;Nzimande & Ngalawa, 2017;Stoykova, 2021). Accordingly, the next variable is calculated as the sum of exports and imports between a pair of countries scaled by the sum of their GDPs:…”