Exchange rates, international trade, and growth: Re-evaluation of undervaluation

Arbeitspapier

This paper shows that regional trade integration shifts the burden of the exchange rate adjustment towards the less integrated trading partners. Thus, they bear the cost of trade balance expansion, while competitive exchange rate moves vis-a-vis RTA trading partners result in no expansion or deterioration of the overall trade balance. First, using the data on 138 countries since 1990 that have been envolved in regional trade integration through signing regional trade agreements (RTAs), this paper shows that upon a 10% depreciation towards non-RTA trading partners results in a 4.4% improvement of the aggregate trade balance. A similar competitive depreciation towards RTA trading partners has resulted on average 3.7% deterioration of the aggregate trade balance. Second, I confirm that RTA participation can act as a good proxy for trade integration, and test the results with alternative measures of trade balance. Third, I use a simple model framework based on the current account adjustments to put the empirical findings into the theoretical frame. Altogether, this paper indicates that regional trade integration in the form of RTA should be taken into account in questions related to the competitive exchange rate effects and trade balance adjustment.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ADBI Working Paper ; No. 684

Classification and Topics

• Classification: Wirtschaft ; Trade: General ; Trade Policy; International Trade Organizations ; Empirical Studies of Trade ; Economic Integration ; Macroeconomic Aspects of International Trade and Finance: General ; Open Economy Macroeconomics ; Macroeconomic Issues of Monetary Unions
• Subject: trade balance ; regional trade agreements ; competitive depreciation ; economic integration ; terms-of-trade

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Sokolova, Maria V.
• Event: Veröffentlichung
• (who): Asian Development Bank Institute (ADBI)
• (where): Tokyo
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/163184
• Last update: 12.03.2025, 4:27 AM CET