Does a currency union affect trade? The time-series evidence

Does leaving a currency union reduce international trade? We answer this question using a large annual panel data set covering 217 countries from 1948 through 1997. During this sample a large number of countries left currency unions; they experienced economically and statistically significant declines in bilateral trade, after accounting for other factors. Assuming symmetry, we estimate that a pair of countries that starts to use a common currency experiences a near doubling in bilateral trade.     

The effect of a currency union on trade: Lessons from the Irish experience

This paper studies the introduction of an exchange rate between Ireland and the UK in 1979 to shed light on the effects of a common currency on the composition of international trade. No evidence is found from time series or panel regressions that the change of exchange rate regime had a significant effect on Anglo-Irish trade. This finding is consistent with previous studies of currency unions between larger, developed countries but conflicts with findings based on more heterogeneous country groupings. The reasons for this discrepancy are discussed.     

US Trade Policy in the Trump Administration

President Donald Trump has emphasized three recurring themes regarding trade policy: the importance of trade balances, including bilateral trade balances, currency manipulation to gain unfair advantage in trade, and “disastrous” trade agreements. Asia figures prominently in these concerns. Trump withdrew the United States from the Trans‐Pacific Partnership, is increasing contingent or process protection, demanding the renegotiation under duress of the North American Free Trade Agreement and the Korea‐United States Free Trade Agreement. These policies are modeled quantitatively and results generated for sectoral output and employment at the state and metropolitan area level.     

Currency crisis transmission through international trade

The Eurozone recent crisis has shown how balance of payments problems in less developed European Monetary Union (EMU) member countries can affect EMU trading partners, spreading the crisis to a larger group of countries. This paper introduces a three-country dynamic general equilibrium model to analyze whether and how terms of trade effects can generate a spillover effect or a currency crisis transmission between countries. Specifically, using a two period model, it incorporates world market clearing conditions for tradables into a new theoretic model, analyzes net capital flow movements between countries, and establishes cross-border macroeconomic linkages. This paper shows how a currency crisis can transmit through the real (trade) sector channel of the economy.     

基于贸易收支数据的美国贸易逆差与美元汇率相互关系研究

通过选择美国与中国、日本、加拿大、英国和欧元区11国等美国主要贸易伙伴的双边贸易数据作为样本,研究美国的双边贸易逆差与美元汇率之间的关系.实证分析表明,美国对主要贸易伙伴国的双边贸易收支与美元汇率没有实质性联系.美国逼迫其它货币升值没有也不能缓解美国的贸易逆差问题,同样,美国逼迫人民币升值也不能缓解美中双边贸易失衡问题.     

The U.S. trade imbalance and real exchange rate: An application of the heterogeneous panel cointegration method

The United States economy suffers from persistent trade deficits, arising from the so-called ‘global external imbalance’. Can the depreciation of the US dollar improve this phenomenon? This study for the first time applies the heterogeneous panel cointegration method to examine the long-run relationship between the real exchange rate and bilateral trade balance of the U.S. and her 97 trading partners for the period 1973–2006. Using new annual data, the empirical results indicate that the devaluation of the US dollar deteriorates her bilateral trade balance with 13 trading partners, but improves it with 37 trading partners, especially for China. In the panel cointegrated framework, a long-run negative relationship between the real exchange rate and the bilateral trade balance exists for the U.S.     

Local Currency Pricing versus Producer Currency Pricing: Direct Evidence from German Exporters

Abstract. In new open-economy macroeconomic models, the assumption on the pricing behavior of firms in international trade plays a central role. Whether firms apply producer currency pricing (PCP) or local currency pricing (LCP) crucially affects, for example, the design of optimal monetary policy or the choice of the optimal exchange rate system. However, empirical evidence has so far been mixed and is furthermore mostly of an indirect nature. This paper draws direct evidence on the price-setting behavior of German exporters from a questionnaire-based survey. We find that PCP applies in more integrated markets. Differences between LCP firms and PCP firms mainly exist with respect to the use of mark-ups and in the validity of the law of one price for their respective products.     

The January effect in the foreign exchange market: Evidence for seasonal equity carry trades

In this study, we investigate monthly seasonality in the foreign exchange market. Given the well-known recurrent higher returns in some month than in others in stock markets around the world, we consider it likely that a seasonal outperformance of a country’s stock market over another is associated with similar seasonal patterns in capital flows and exchange rates. A seasonal profit (carry trade) opportunity can be created by the simultaneous appreciation of a country’s currency and the outperformance of its stock market. By focusing on the world’s key currency pairs, the US dollar-Deutsche mark and the US dollar-euro, and by using a Markov-switching framework, we document persistent January and December effects in the foreign exchange market from 1971 to 2017. Analysis of the German-US stock returns differential and their bilateral capital flows reveal similar month effects in 65% of the whole sample.     

One money, one market: the effect of common currencies on trade

A gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade. The panel data, bilateral observations for five years during 1970–90 covering 186 countries, includes 300+ observations in which both countries use the same currency. I find a large positive effect of a currency union on international trade, and a small negative effect of exchange rate volatility, even after controlling for a host of features, including the endogenous nature of the exchange rate regime. These effects, statistically significant, imply that two countries sharing the same currency trade three times as much as they would with different currencies. Currency unions like the European EMU may thus lead to a large increase in international trade, with all that that entails.     

基于VAR模型的中欧贸易“J曲线效应”实证分析

欧元作为一种新兴世界货币既在全球经济中发挥日益重要的作用,也是人民币汇率形成机制中的重要权重货币,由于欧盟是中国最大的贸易伙伴,故欧元兑人民币实际汇率变动对中欧贸易平衡产生重要影响。本文采用1999—2008年间欧元兑人民币汇率数据和中国与欧元区贸易季度数据构建VAR模型,并运用单位根检验、协整检验和脉冲响应函数的分析方法对欧元汇率变动对中欧贸易相对差额的影响进行实证分析。结果表明,人民币兑欧元的贬值初期会引起中国对欧元区贸易收支的短期恶化,但经过一段时间后由于我国对欧元区出口数量增加,贸易盈余趋于稳定,中国对欧元区贸易存在汇率贬值的"J曲线效应"。     

Currency unions and Irish external trade

Ireland has participated in two currency unions–a bilateral union with the UK that lasted until 1979 and as a founder member of European Monetary Union (EMU) that began in 1999. This article investigates whether currency unions have influenced Irish trade patterns.     

Analyzing exchange rate uncertainty and bilateral export growth in China: A multivariate GARCH-based approach

Dramatic changes to exchange rate policy for the world's largest exporter have arguably ushered in the optimal environment for studying the effects of exchange rate uncertainty on trade. This study builds on the recent literature by using an extremely general model that measures volatility using the flexible multivariate DCC-GARCH model to analyze the impact exchange rate uncertainty has on bilateral export growth for China's ten largest export markets. All model parameters are estimated simultaneously and lagged values of uncertainty are included for a full year, where significant effects are found. The more general methods potentially overcome issues associated with inefficient two-step methods and the assumption that volatility impacts are close to instantaneous. Using a comprehensive sample that spans 1994–2017, the paper presents evidence that exchange rate uncertainty has no impact on trade with the United States, which strongly contrasts a robust finding of trade deterring impacts for almost all remaining countries. The unifying methodology is also used to analyze nominal uncertainty itself. Here, it is found that Chinese inflation may be a positive contributor to risk in an environment where many exogenous events, such as the Asian currency crisis, are associated with periods of heightened yuan uncertainty.     

The MFN clause,welfare, and multilateral cooperation between countries of unequal size

This paper analyzes MFN in a “competing exporters” model of trade between three countries with unequal endowments and shows that MFN yields higher aggregate welfare than tariff discrimination even as it makes low income countries worse off. Furthermore, in a repeated game of tariff cooperation, multilateral free trade is easier to sustain under MFN punishments relative to discriminatory ones. This conclusion holds even when tariff discrimination takes the form of bilateral trade agreements. Overall, the analysis shows that from the viewpoint of low income countries, MFN and multilateral tariff cooperation are complementary in nature.     

Explaining the Transition between Exchange Rate Regimes*

This paper studies the transition between exchange rate regimes using a Markov chain model with time‐varying transition probabilities. The probabilities are parameterized as nonlinear functions of variables suggested by the currency crisis and optimal currency area literature. Results using annual data indicate that inflation and, to a lesser extent, output growth and trade openness help explain the exchange rate regime transition dynamics.     

The global arms trade network 1950–2007

Using SIPRI data on all international transfers of major conventional weapons 1950–2007, we study the relationship between differences in polity and arms trade. To study whether states tend to trade arms within their political vicinity we estimate gravity models of the likelihood of trade at the bilateral level and study the evolution of the global network over time. We find a stable negative relationship between differences in polity and the likelihood of arms trade for the duration of the Cold War, but not in recent years. In line with these results, the global arms trade network changes drastically over the sample period in several respects: it grows more dense, clustered and decentralized over time. The differences between the NATO and Warsaw Pact sub-networks that we find corroborate the common perception that the Warsaw Pact was more strongly centralized around the USSR than NATO around the UK, the US and France.     

Bilateral and regional trade elasticities of the EU

The traditional way of assessing the impact of currency depreciation and income on the trade balance has been to estimate the elasticity of trade volume to relative prices and income. The previous studies examine the problems associated with using aggregate data. The recent studies rely on bilateral data, yet another problem is that data for export and import prices are not available. Thus, this study proposes an alternative way of assessing the impact of currency depreciation by using the real exchange rate and the impact of income on bilateral trade. The models are applied between the EU and its major trading partners. Furthermore, the analysis includes the six major trading regions along side the eight major trading countries for 1980–2007, on the quarterly basis. This article uses the autoregressive distributive lag (ARDL) approach advocated by Pesaran and Pesaran (1997). Our results indicate a higher importance of income compared to the real exchange rate in defined bilateral export and import demand functions. In addition, the applied CUSUM and CUSUMSQ stability tests confirm the stability of estimated coefficients in most cases.     

VEHICLE CURRENCY*

Historically, the world economy has been dominated by a single currency accepted in the exchange of goods and assets among countries. In recent decades, the U.S. dollar has played this role. The dollar acts as a “vehicle currency” in the sense that agents in nondollar economies will generally engage in currency trade indirectly using the U.S. dollar instead of using direct bilateral trade among their own currencies. A vehicle currency is desirable when there are transactions costs of exchange. This article constructs a dynamic general equilibrium model of a vehicle currency. We explore the nature of the efficiency gains arising from a vehicle currency and show how it depends on the total number of currencies in existence, the size of the vehicle currency economy, and the monetary policy followed by the vehicle currency’s government. We find that there can be significant welfare gains to a vehicle currency in a system of many independent currencies. But these gains are asymmetrically weighted toward the residents of the vehicle currency country. The survival of a vehicle currency places natural limits on the monetary policy of the vehicle currency country.     

North, South and distance in the gravity model

It is generally assumed that distance in the gravity model strictly reflects frictions impeding bilateral trade. However, distances North-South could also reflect differences in factor endowment that provide opportunities for profitable trade. This paper investigates the hypothesis that if we control for distance in the ordinary sense, differences North-South promote international trade. The hypothesis receives ample support. Moreover, the significance of differences North-South survives a battery of robustness tests, concerning period, distinctions between differences in latitude North-North, North-South and South-South, and controls for other measures of differences in factor endowment, such as differences in per capita output and differences in average temperature, rainfall, and seasonal range in temperature. The impact of differences North-South on bilateral trade has also been falling. This decline, in turn, might be partly responsible for the weakening of the influence of distance that has been occurring since World War II. This last hypothesis receives confirmation as well. Finally, the paper examines the impact of internal distance and remoteness on trade. Since both variables are country-specific, this is done by studying their impact on the country fixed effects themselves in the earlier estimates. Internal distance turns out to have a far greater impact than remoteness—by an order of 10.     

Export,Exchange Rate Risk and Hedging: The Duopoly Case

Abstract. This paper studies a Cournot duopoly in international trade with firms exposed to exchange rate risk. A hedging opportunity is introduced by a forward market on which one firm can trade the foreign currency. We investigate two settings: First, we assume that hedging and output decisions are taken simultaneously. It is shown that hedging is exclusively done for risk‐managing reasons as it is not possible to use hedging strategically. Second, the hedging decision is made before the output decisions. We show that hedging is not only used to manage the risk exposure but also as a strategic device.     

The effects of currency fluctuations and trade integration on industry trade between Canada and Mexico

Since studies of North American trade flows tend to focus on the United States as the main trading partner, trade between Canada and Mexico has received relatively little attention. Here, we examine bilateral trade flows for 62 Canadian export industries to Mexico and 45 import industries from Mexico to assess the effects of currency fluctuations and trade integration on these individual trade flows. We find that Mexico’s largest export industries respond to depreciation more than Canada’s largest export industries do. Both countries’ trade flows are influenced even more by trade integration. Since there is evidence of strong intra-industry trade between these two countries, we can attribute this effect to the exploitation of economies of scale.