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Division of Economics
A.J. Palumbo School of Business Administration
Duquesne University
Pittsburgh, Pennsylvania
AN ECONOMIC ANALYSIS OF THE EFFECTS OF EXCHANGE RATE
REGIMES ON INTERNATIONAL TRADE
Colleen Gorman
Submitted to the Economics Faculty
in partial fulfillment of the requirements for the degree of
Bachelor of Science in Business Administration
December 2007
Faculty Advisor Signature Page
Mark T. Gillis
Visiting Instructor of Economics and Quantitative Sciences
Date
Jennifer P. Bayley
Assistant Professor of Economics
Date
2
AN ECONOMIC ANALYSIS OF THE EFFECTS OF EXCHANGE RATE
REGIMES ON INTERNATIONAL TRADE
Colleen Gorman
Duquesne University, 2007
For over a decade, China has fixed the nominal exchange rate between the dollar and the
Yuan at a value that is widely believed to be lower than it otherwise would be. The
intention of this policy is to give Chinese producers a competitive advantage over
producers in other countries, including the United States. The extent to which such an
exchange rate regime is actually beneficial for a country, however, is questionable.
Consequently, the purpose of this analysis is to examine the relationship between a
country’s exchange rate regime choice and several macroeconomic variables, such as
exports, imports, and economic growth, over time. Furthermore, each exchange rate
regime is represented in the model by its de facto degree of fixedness versus flexibility.
Ultimately, this paper applies the outcomes of this model to China in order to estimate
what effect the undervaluation of their currency is having on China’s economic
outcomes, and what impact a change to a floating exchange rate would have.
In this analysis, I use a panel data econometric model to test the effect of exchange rate
regime types on GDP per capita growth, exports as a share of GDP, imports as a share
of GDP, and current account as a share of GDP, while taking into account other factors
that are theoretically involved in determining this relationship. I find that, ceteris
paribus, these exchange rate regimes have significant effects on these macroeconomic
variables. Floating exchange rate regimes yield a greater GDP per capita growth, while
a fixed exchange rate regime is correlated with higher exports and imports as a share of
GDP. Furthermore, no particular exchange rate regime consistently increases or
decreases the current account variable.
3
Table of Contents
Introduction ..........................................................................................................................5
Literature Review.................................................................................................................6
Data ....................................................................................................................................12
Model .................................................................................................................................15
Results and Discussion ......................................................................................................16
Conclusion .........................................................................................................................21
Future Research .................................................................................................................22
References ..........................................................................................................................24
Appendix ............................................................................................................................25
4
1. Introduction
The purpose of this paper is to analyze the impacts of different exchange rate regimes on
trade and economic growth. In finding this impact, this paper examines a number of
countries’ exchange rate regime choices and their imports, exports, real GDP, and real
GDP per capita. Furthermore, this analysis determines which exchange rate regime
produces the highest social welfare, which is represented by the growth of GDP per
capita in each country.
This analysis requires four models, each having slight variations in their
dependent and explanatory variables. All models include explanatory variables other
than the exchange rate regime dummies. These variables are basic sources of economic
growth such as technological advancement and the level of capital investment. Also,
three of the models will examine the short-term effects of the exchange rate regime and
the fourth model examines the long-term effects of exchange rate regimes on an
economy.
During the final analysis, the primary focus is on China’s trade practices, and also
on determining what the impact of their undervalued currency has on the Chinese
economy itself, the US economy, and other trading countries’ economies.
5
2. Literature Review
Many notable researchers, who have created either theoretical or empirical models
centered around this topic of exchange rate regime effects on economic growth, find
some type of relationship between a flexible exchange rate and an increase in
international trade. Even though this is so, there are other variables that need to be in
place within an economy, such as strong monetary policies and institutions, especially in
the cases of transition economies, and economies that have undervalued or overvalued
their currency for a long period of time, in order for a flexible exchange rate to cause
increases in international trade overall.
There have been several prominent studies which find a causal link between
exchange rate regime choice and economic growth. Perhaps the most well-known of
these was performed by a researcher from the University of California, Andrew K. Rose
(2000). He found that two countries sharing the same currency trade three times as much
as they would if they were using different currencies. Rose uses a panel data set that
includes bilateral observations from the years 1970 through 1990 for 186 countries. He
concludes that currency unions like the EMU could lead to a massive increase in
international trade. His results are so strong, that other countries other than the European
Union might find it beneficial to use a common currency, in order to benefit consumers
within the currency union and also to take another important step towards increasing
global integration.1 His findings support my hypothesis by showing the effects that
exchange rate volatility have on trade.
1
Andrew K. Rose, “One Money, One Market: Estimating the Effect of Common Currencies on Trade,” Economic Policy (2000).
6
The results of Rose’s research suggest the use of undervaluation of currencies and
pegging of currencies can decrease trade, and they support using common currencies in
order to increase trade between countries. These policies can include maintaining small
budget deficits, controlling inflation, and being open to global trade.1
Fred Hu (2004) also finds a negative effect associated with using fixed exchange
rate regimes on economic growth. His study focused on China in particular, and the need
for this country to liberalize their currency and capital control. He concludes that China
must go through a gradual process that will ultimately lead them to a more liberalized
system overall. First, they must remove the renminbi peg causing them to have a free
floating exchange rate. This would cause them to enter a more balanced trading field
among their major trading partners. Second, they need to introduce a sound banking
reform program, which would stabilize their domestic financial system. Lastly, China
should relax their capital control policies. This would assist them in avoiding financial
crisis while simultaneously allow them to gain more capital freedom. 2
Furthermore, the research done by Stilianos Fountas and Kyriaco Aristotelous
(2003) closely resembles the purpose of my paper. They investigate the impacts of the
different exchange rate regimes throughout the twentieth century on the bilateral exports
between the United Kingdom and the United States. They find that fixed exchange rate
regimes and managed float exchange rate regimes are equally favorable to trade, but,
more importantly, freely floating exchange rate regimes produce more trade than fixed
Fred Hu, “Capital Flows, Overheating, and the Nominal Exchange Rate Regime in China,” Cato Institute
Conference April 8-9 (2004).
2
7
exchange rate regimes.3
Similarly, a study done by Josef Brada and Jose Mendez (1988) examines the
effects of exchange rate regimes on the volume of international trade. They found that
bilateral trade flows between countries with floating exchange rates are greater than those
in countries with fixed exchange rates. They conclude that “while exchange-rate risk
does reduce the volume of trade among countries regardless of the nature of their
exchange-rate regime, the greater risk faced by traders in floating exchange-rate countries
is more than offset by the trade-reducing effects of restrictive commercial policies
imposed by fixed exchange rate countries.” This not only shows the direct economic
impact an exchange rate regime can have on economic growth, but more specifically, the
underlying problems associated with fixed exchange rate countries that also affect their
trade, which is their strict policies outside of their currency regulations.4
Balazs Egert and Amalia Morales-Zumaquero (2005) analyze the impact of
exchange rate volatility and changes in the exchange rate regimes on export volume for
ten Central and Eastern European transition economies. The first group of countries
started their transition with pegged regimes and then moved towards flexibility. The
second group of countries experienced no major changes in their exchange rate regimes
in the past ten years. Their results indicate that an increase in the exchange rate volatility
decreases exports, and this impact has a delay rather than being instantaneous.5
3
Stilianos Fountas and Kyriaco Aristotelous, "Does the Exchange Rate Regime Affect Export Volumes?
Evidence from Bilateral Exports in the US-UK Trade: 1900-1998," Department of Economics 43, National
University of Ireland, Galway (2003).
4
Josef Brada and Jose Mendez, “Exchange Rate Risk, Exchange Rate Regime and the Volume of
International Trade” Kyklos 41 (1988): 263-80.
8
Balazs Egert and Amalia Morales-Zumaquero, “Exchange Rate Regimes, Foreign Exchange Volatility
and Export Performance in Central and Eastern Europe: Just Another Blur Project?” 8 Bofit Discussion
Papers (2005).
5
In another study, Guillermo A. Calvo and Frederic S. Mishkin (2003) take on a
different view of exchange rate regimes. They argue that macroeconomic success in
emerging market countries can be produced primarily through good fiscal, financial, and
monetary institutions, and they believe that less emphasis should be placed on the
flexibility of an exchange rate regime. They find that when choosing an exchange rate
regime, not all countries are able to conform to one type. This is due to each countries
particular needs and their economy, institutions, and political culture.6
John Williamson (1999) analyzes different exchange rate regimes that are being
used within certain countries, specifically Asian countries. He proposes that if a country
feels it is necessary to peg their currency, they should “adopt a sufficiently sophisticated
management regime to allow adaptation to the pressures of capital mobility.”7 It is with
this suggestion, that Williamson is in agreement with Fred Hu’s research, which is
concentrated on relaxing capital controls in Asian countries that continue to peg their
currency.
Another analysis, done by Mustapha Kamel Nabli and Marie-Ange VéganzonèsVaroudakis (2002), looks at the Middle East and North African (MENA) countries that
were characterized by having an overvaluation of their currencies throughout the 1970s
and the 1980s. They were able to compute this overvaluation through the use of an
“indicator of misalignment.” A panel of 53 countries were used, and ten of these were
MENA countries. Their research shows that manufactured exports were significantly
6
Guillermo A. Calvo and Frederic S. Mishkin, “The Mirage of Exchange Rate Regimes for Emerging
Market Countries” NBER Working Papers (June 2003).
9
7
John Williamson, “Future Exchange Rate Regimes for Developing East Asia: Exploring the Policy
Options” Peterson Institute for International Economics (1999).
affected by the overvaluation of their currencies. In the 1990s, when overvaluation was
decreased within the MENA countries overall, there was also “a continuous rise in the
diversification of their manufactured exports.”8
Zdenek Drabek and Josef Brada (1998) argue that the flexible exchange rate
regime is applicable and appropriate for six countries with transition economies. Within
each of these economies, inappropriate exchange rate policies have led to an increase in
protectionism by these governments. Because of these policies, the nominal exchange
rate is not an indicator of comparative advantage, rather the true indicator is the level of
the real effective exchange rate. Drabek and Brada conclude that these transition
economies will have to eventually switch to a more flexible exchange rate in order to
send more accurate signals to both foreign and domestic investors about the comparative
advantages of their country.9
Jeffrey D. Sachs (1996) analyzes countries in Eastern Europe that are adapting to
a fairly new, open, market-based international trade. These countries have had no prior
experience with currency convertibility. Sachs suggests that during the beginning of
these economies’ transitions, a pegged exchange rate regime is appropriate for one or two
years during liberalization and stabilization of the economy. After this, the country
should take on a more flexible regime. He argues that after initial transition years, the
flexible exchange rate will reap economic benefits, such as an increase in exports, if the
“price stability is underpinned by strengthened domestic monetary targets and
Mustapha Kamel Nabli and Marie-Ange Véganzonès-Varoudakis, “Exchange Rate Regime and
Competitiveness of Manufactured Exports: The Case of MENA Countries” World Bank (2002).
8
10
9
Zdenek Drabek and Josef Brada, “Exchange Rate Regimes and the Stability of Trade Policy in Transition
Economies” WTO Economic Research and Analysis Division Working Paper (July 1998).
institutions.”10 This implies that a transition economy can be successful during
liberalization by not only implementing a more flexible exchange rate, but also backing
this regime with strong monetary policies and institutions.
In estimating a model to determine the effects of exchange rate regime choices on
an economy, I build on the previously cited literature. Most literature focuses on
economies in transition from a fixed to a more flexible exchange rate. While taking this
into account in my model, I examine an array of countries with different levels of
exchange rate fixedness and flexibility and growth patterns over the past 25 years in order
to analyze effects of each exchange rate regime. The results of this analysis ultimately
shed light on the current situation in China, where, for over the last ten years, the Chinese
government has fixed the nominal exchange rate between their currency, the Yuan, and
the Dollar at an undervalued amount. This policy is intended to give Chinese producers a
competitive export advantage over producers in trading countries. What remains
questionable, however, is how beneficial an exchange rate regime like theirs is for an
economy and to what extent this type of regime can affect a country’s exports and
imports. This analysis not only finds the general economic effects of an exchange rate
regime, but more specifically, it applies the outcomes generated by a series of models to
China. This is done in order to estimate the effect that the undervaluation of their
currency is having on China’s economic outcomes and the impact that a change from a
fixed exchange rate to a floating exchange rate would have on these economic outcomes.
11
Jeffrey D. Sachs “Economic Transition and the Exchange-Rate Regime” The American Economic
Review (1996).
10
3. Methodology
3.1 Data Description
The analysis utilizes a panel dataset, which covers 172 countries ranging from
low to high development.11 I restrict the range of this study to the period from 1980
through 2004. With 172 cross sections, there is a potential 4,300 observations over this
time span. I collect the data in annual format from several sources. Most of the data
come from the International Monetary Fund (IMF)12 and a de-facto classification of
exchange rate regimes compiled by Eduardo Levy-Yeyati and Federico Sturzenegger.13
Each exchange rate regime is represented in my model by its de facto degree of fixedness
versus flexibility. This is a five-way classification including inconclusive, float, dirty
float, crawling peg, and fixed exchange rates, with a respective scale ranging from one,
equating to inconclusive, to five, equating to fixed. It is important to use de facto
exchange rate regimes as opposed to de jure because, for the purposes of this analysis, the
de facto regimes provide for more practical data. This is due to the possibility of
significant differences between the regime a country’s government announces they use
and what a country is really using in practice with regards to their exchange rate control.
Levy-Yeyati and Sturzenegger’s database of exchange rate classifications was compiled
through analyzing changes in the nominal exchange rate, the volatility of these changes,
and the volatility of international reserves. The application of these de facto
classifications to my model allows this paper to differentiate itself from previous
empirical research. Most of this past research on exchange rate regimes has used the
11
See Appendix A for a list of included countries.
12
12
Available at http://www.imf.org.
Levy-Yeyati, Eduardo and Sturzenegger, Federico, “Classifying Exchange Rate Regimes: Deeds vs.
Words,” European Economic Review, Vol. 49, Issue 6: Pages 1603-1635 (2005).
13
International Monetary Fund’s de jure classification system.
Furthermore, for the countries used in this analysis, yearly data on
macroeconomic variables such as exports, imports, GDP, and GDP per capita growth are
used. Table 1 below lists the variables included in this study and the source from which
they are obtained:
Table 1: Data Sources
Variable
Unit
Source
Current Account
Share of GDP
IMF
Real Gross Domestic
Product per Capita
Growth Rate
IMF
Exports
Share of GDP
IMF
Imports
Share of GDP
IMF
Inflation
Real Exchange Rate
Percentage rate of
change in CPI
Currency in terms
of US Dollars
IMF
IMF
Population
Growth Rate
IMF
Real Money Market Rate
Percentage
IMF
Government Deficit or
Surplus
Share of GDP
IMF
Landlocked Dummy
Population Density
Country Size
North America Dummy
South America Dummy
Asia Dummy
Europe Dummy
1 = Yes,
0 = Otherwise
Millions per
Square Kilometer
Square Kilometers
1 = Yes,
0 = Otherwise
1 = Yes,
0 = Otherwise
1 = Yes,
0 = Otherwise
1 = Yes,
0 = Otherwise
IMF
CIA World Factbook13
CIA World Factbook
CIA World Factbook
CIA World Factbook
CIA World Factbook
CIA World Factbook
13
1 = Yes,
CIA World Factbook
0 = Otherwise
Oceania Dummy
1 = Yes,
CIA World Factbook
0 = Otherwise
1 = Yes,
Organization for Economic Cooperation and
OECD Dummy
0 = Otherwise
Development14
14
Available at https://www.cia.gov/library/publications/the-world-factbook/index.html
1 = Yes,
Organization for Petroleum Exporting
OPEC Dummy
0 = Otherwise
Countries15
Inconclusive Exchange Rate
1 = Yes,
Levy-Yeyati and Sturzenegger’s Exchange
Classification
0 = Otherwise
Rate Regime Classification System
Float Exchange Rate
1 = Yes,
Levy-Yeyati and Sturzenegger’s Exchange
Classification
0 = Otherwise
Rate Regime Classification System
Dirty Float Exchange Rate
1 = Yes,
Levy-Yeyati and Sturzenegger’s Exchange
Classification
0 = Otherwise
Rate Regime Classification System
Crawling Peg Exchange
1 = Yes,
Levy-Yeyati and Sturzenegger’s Exchange
Rate Classification
0 = Otherwise
Rate Regime Classification System
Fixed Exchange Rate
1 = Yes,
Levy-Yeyati and Sturzenegger’s Exchange
Classification
0 = Otherwise
Rate Regime Classification System
Country Dummies for all
1 = Yes,
172 Countries
0 = Otherwise
Year Dummies for all
1 = Yes,
25 Years
0 = Otherwise
Africa Dummy
The OECD and OPEC dummy variables are used in the analysis in order to view
more specific effects that an exchange rate regime has on a particular group of countries.
Similarly, the continent and landlocked dummies serve the purpose of illustrating and
explaining effects on the macroeconomic variables within each model. The landlocked
dummy indicates whether or not a country is completely surrounded on all borders by
other countries, with no major access to water. Furthermore, the purpose of the 172
country dummy variables and the 25 year dummy variables is to allow the models in this
analysis to employ three types of effects: random effects, which include no control for
country or year, fixed effects for countries and fixed effects for years, which are used to
capture systematic differences among the panel observations results for both country and
year.
14
15
Available at http://www.oecd.org.
16
Available at http://www.opec.org.
3.2 Model Specification
There are four separate models required for this analysis, and of which are divided
into three short-run models and one long-run model. All three short-run models employ a
ratio as the dependent variable using a combination of imports, exports, and GDP. The
long-run model examines the effects of an exchange rate regime on GDP per capita
growth. The following equations represent the general equations used in this analysis.
Short-run models:
In all of the following models, (1.1), (1.2), (1.3), and (1.4), X represents all
relevant variables affecting the dependent variable other than the exchange rate regime
types, and β represents the coefficient of interest.
Exports
    * Exchange Rate Regime Dummies   X * 
GDP
(1.1)
Imports
    * Exchange Rate Regime Dummies   X * 
GDP
(1.2)
In the following equation, if the dependent variable is greater than one, there is a
current account deficit; if it is less than one, there is a current account surplus.
(Exports - Imports)
    * Exchange Rate Regime Dummies   X * 
GDP
(1.3)
Long-run model:
15
The ultimate goal of this portion of the analysis is to determine which exchange
rate regime produces the highest social welfare:
GDP per capita growth     * Exchange Rate Regime Dummies   X * 
(1.4)
3.3 Expected Results
I expect that the models will generate results that indicate a freely floating
exchange rate regime produces the higher GDP per capita growth. Also, I hope to
conclude that restricting exchange rates to increase exports is bad for economic growth. I
want to ultimately relate my results to the situation in China, where they are undervaluing
their currency, and their exports have been soaring immensely as a result. This increase
in exports has not been reflected in their GDP per capita, and that is the basis upon which
I conclude that a restricted exchange rate is not beneficial for overall economic growth.
3.4 Actual Results17
The results of the first set of OLS regressions are shown below in Table 2:
Table 2: OLS Regression Results
Dependent Variable: Exports (share of GDP)
Parameter
Inconclusive Exchange
Rate Dummy
Floating Exchange Rate
Dummy
Dirty Float Exchange Rate
Dummy
Crawling Peg Exchange
Rate Dummy
Fixed Exchange Rate
Dummy
1
38.915
(0.000)
26.764
(0.000)
32.143
(0.000)
30.985
(0.000)
42.536
(0.000)
Real Exchange Rate
-
Inflation
-
Population Change
-
2
30.656
(0.000)
12.741
(0.000)
23.416
(0.000)
19.269
(0.000)
30.455
(0.000)
14.982
(0.000)
-0.006
(0.159)
-
3
33.767
(0.000)
16.481
(0.000)
27.101
(0.000)
23.167
(0.000)
34.741
(0.000)
13.130
(0.000)
-0.007
(0.063)
-1.699
(0.000)
4
42.121
(0.000)
23.284
(0.010)
33.571
(0.000)
30.186
(0.001)
41.379
(0.000)
11.918
(0.000)
-0.005
(0.207)
-0.753
(0.137)
5
36.959
(0.000)
18.349
(0.000)
28.579
(0.000)
25.348
(0.000)
35.844
(0.000)
13.712
(0.000)
-0.004
(0.253)
-0.872
(0.072)
6
29.989
(0.005)
16.494
(0.065)
24.322
(0.009)
19.037
(0.034)
31.699
(0.001)
16.038
(0.000)
0.005
(0.194)
0.053
(0.928)
7
27.880
(0.000)
16.993
(0.001)
24.058
(0.000)
22.285
(0.000)
27.960
(0.000)
10.886
(0.000)
0.009
(0.014)
0.215
(0.704)
16
17
All regressions were tested and corrected for heteroskedasticity with White Heteroskedasticity-
8
32.315
(0.000)
22.727
(0.000)
26.416
(0.000)
24.432
(0.000)
30.431
(0.000)
13.419
(0.000)
0.009
(0.009)
-
Population Density
-
-
-
-
-
-
Square Kilometers
-
-
-
-
-
-
Landlocked Dummy
-
-
-
-
-
-
-
Real Money Market Rate
-
-5.02E-07
(0.593)
-3.25E-07
(0.697)
Government Surplus
(Share of GDP)
-
-
-
-9.25E-07
(0.340)
0.839
(0.000)
-1.22E-06
(0.136)
0.942
(0.000)
North America Dummy
-
-
-
-
-
South America Dummy
-
-
-
-
-
Asia Dummy
-
-
-
-
-
Europe Dummy
-
-
-
-
-
Africa Dummy
-
-
-
-
-
-2.21E-06
(0.009)
0.872
(0.000)
6.717
(0.001)
-9.438
(0.000)
4.768
(0.045)
7.964
(0.001)
1.782
(0.447)
OECD Dummy
-
-
-
-
-
OPEC Dummy
-
-
-
-
-
No
No
No
Yes
No
-1.47E-06
(0.122)
0.948
(0.000)
4.381
(0.016)
-13.738
(0.000)
11.993
(0.000)
12.974
(0.000)
-1.631
(0.523)
-12.201
(0.000)
-6.876
(0.001)
Yes
Yes
0.018
(0.000)
-0.111
(0.000)
5.985
(0.004)
-2.06E-06
(0.013)
0.764
(0.000)
2.244
(0.182)
-19.359
(0.000)
-3.222
(0.154)
7.823
(0.000)
-8.262
(0.000)
-12.045
(0.000)
1.875
(0.222)
Yes
Included Observations
2736
1336
1336
1082
1082
1082
1082
1082
R-squared
0.092
0.149
0.159
0.198
0.192
0.296
0.509
0.534
Adjusted R-squared
0.090
0.144
0.154
0.173
0.185
0.269
0.490
0.515
S.E. of Regression
21.622
21.687
21.562
21.759
21.601
20.461
17.093
16.657
Year Effects
0.017
(0.000)
-0.135
(0.000)
-
The results of these regressions indicate that, on average, countries with a fixed
exchange rate have a greater amount of exports as a percentage of gross domestic
product. Regardless of any other variables that were added to the model, the trend
remained the same: countries with a fixed exchange rate have the highest percentage of
exports, whereas, countries with a floating exchange rate have the lowest percentage of
exports.
The results of the second set of OLS regressions are shown below in Table 3:
Table 3: OLS Regression Results
Dependent Variable: Imports (share of GDP)
Parameter
1
2
3
4
5
6
7
17
8
Inconclusive Exchange
Rate Dummy
Floating Exchange Rate
Dummy
Dirty Float Exchange Rate
Dummy
Crawling Peg Exchange
Rate Dummy
Fixed Exchange Rate
Dummy
42.295
(0.000)
30.675
(0.000)
35.019
(0.000)
35.409
(0.000)
47.996
(0.000)
39.877
(0.000)
32.840
(0.000)
34.173
(0.000)
36.080
(0.000)
45.309
(0.000)
Real Exchange Rate
-
-
Inflation
-
-
-
Population Density
-
Square Kilometers
-
Landlocked Dummy
-
0.016
(0.000)
-0.263
(0.000)
4.358
(0.001)
Real Money Market Rate
-
-
Government Surplus
(Share of GDP)
-
-
0.017
(0.000)
-0.183
(0.000)
8.089
(0.000)
-2.20E-06
(0.000)
0.532
(0.000)
33.720
(0.000)
23.880
(0.000)
27.810
(0.000)
28.974
(0.000)
35.322
(0.000)
9.448
(0.000)
0.001
(0.709)
0.017
(0.000)
-0.183
(0.000)
8.094
(0.000)
-2.43E-06
(0.000)
0.532
(0.000)
31.375
(0.000)
21.725
(0.000)
25.627
(0.000)
27.242
(0.000)
32.352
(0.000)
9.245
(0.000)
0.010
(0.000)
0.017
(0.000)
-0.225
(0.000)
10.183
(0.000)
-3.01E-06
(0.000)
0.536
(0.000)
12.454
(0.000)
-10.795
(0.000)
2.474
(0.298)
2.703
(0.217)
1.932
(0.385)
34.357
(0.000)
24.396
(0.000)
28.826
(0.000)
30.203
(0.000)
35.836
(0.000)
7.583
(0.002)
0.010
(0.001)
0.016
(0.000)
-0.223
(0.000)
10.178
(0.000)
-2.75E-06
(0.000)
0.428
(0.007)
11.824
(0.000)
-13.275
(0.000)
1.659
(0.500)
1.661
(0.461)
0.701
(0.761)
North America Dummy
-
-
-
-
South America Dummy
-
-
-
-
Asia Dummy
-
-
-
-
Europe Dummy
-
-
-
-
Africa Dummy
-
-
-
-
OECD Dummy
-
-
-
-
-
-
OPEC Dummy
-
-
-
-
-
-
No
No
No
No
No
Included Observations
2738
2737
1082
1082
R-squared
0.103
0.265
0.473
Adjusted R-squared
0.102
0.263
S.E. of Regression
22.447
20.335
Year Effects
33.790
(0.000)
23.940
(0.000)
27.916
(0.000)
29.059
(0.000)
35.396
(0.000)
9.374
(0.000)
37.767
(0.000)
29.529
(0.000)
34.146
(0.000)
32.458
(0.000)
39.130
(0.000)
11.972
(0.000)
0.006
(0.042)
0.016
(0.000)
-0.189
(0.000)
Yes
-2.47E-06
(0.000)
0.558
(0.001)
6.321
(0.001)
-19.358
(0.000)
-5.332
(0.019)
4.814
(0.006)
-5.534
(0.017)
-15.750
(0.000)
-9.855
(0.000)
Yes
39.808
(0.000)
31.766
(0.000)
33.088
(0.000)
33.070
(0.000)
39.553
(0.000)
11.380
(0.000)
0.008
(0.003)
0.016
(0.000)
-0.181
(0.000)
12.016
(0.000)
-2.46E-06
(0.000)
0.437
(0.004)
5.403
(0.002)
-24.725
(0.000)
-7.913
(0.000)
3.239
(0.033)
-10.916
(0.000)
-17.863
(0.000)
-6.860
(0.000)
Yes
1082
1082
1082
1082
0.473
0.509
0.517
0.546
0.573
0.468
0.467
0.502
0.499
0.528
0.556
17.198
17.206
16.643
16.688
16.199
15.716
-
The results of these regressions show that, on average, countries with a fixed
exchange rate regime can be associated with higher imports as a share of GDP; whereas
countries with a floating exchange rate produced the lowest percentage of imports as a
18
share of GDP. These results can be indicative of a fixed exchange rate country. These
countries tend to have smaller economies, and therefore, need to import more goods and
services.
The results of the third set of OLS regressions are shown below in Table 4:
Table 4: OLS Regression Results
Dependent Variable: Current Account (share of GDP)
Parameter
Inconclusive Exchange
Rate Dummy
Floating Exchange Rate
Dummy
Dirty Float Exchange Rate
Dummy
Crawling Peg Exchange
Rate Dummy
Fixed Exchange Rate
Dummy
1
-2.284
(0.003)
-2.785
(0.000)
-3.361
(0.000)
-4.208
(0.000)
-3.882
(0.000)
2
-1.485
(0.199)
-2.192
(0.024)
-2.434
(0.015)
-2.347
(0.017)
-3.058
(0.001)
3
-6.610
(0.000)
-7.262
(0.000)
-3.095
(0.000)
-5.604
(0.000)
-6.729
(0.000)
2.595
(0.000)
4
-5.694
(0.000)
-6.056
(0.000)
-5.180
(0.000)
-5.657
(0.000)
-7.000
(0.000)
1.842
(0.000)
5
-5.332
(0.000)
-5.988
(0.000)
-5.536
(0.000)
-6.666
(0.000)
-7.774
(0.000)
2.516
(0.000)
6
-6.852
(0.000)
-8.538
(0.000)
-6.353
(0.000)
-7.689
(0.000)
-8.406
(0.000)
3.143
(0.000)
Real Exchange Rate
-
-
Inflation
-
-
-
-
-
-
Population Change
-
-
-
-
-
-
Population Density
-
-
-
Square Kilometers
-
-
-
0.002
(0.000)
0.024
(0.000)
0.002
(0.000)
0.026
(0.000)
0.002
(0.000)
0.069
(0.000)
Landlocked Dummy
-
-
-8.999
(0.000)
-
-
-
Real Money Market Rate
-
-
-
-
-
-
Government Surplus
(Share of GDP)
-
-
-
-
-
-
North America Dummy
-
-
-
-
-
South America Dummy
-
-
-
-
-
Asia Dummy
-
-
-
-
-
Europe Dummy
-
-
-
-
-
Africa Dummy
-
-
-
-
-
OECD Dummy
-
-
5.780
(0.000)
3.593
(0.000)
-
OPEC Dummy
-
-
-
-
9.015
(0.000)
-4.042
(0.001)
3.017
(0.023)
-1.677
(0.203)
-0.181
(0.871)
-4.744
(0.001)
4.860
(0.000)
14.713
(0.000)
7
-7.694
(0.002)
-8.971
(0.000)
-6.594
(0.005)
-8.158
(0.000)
-7.613
(0.001)
3.186
(0.000)
0.001
(0.650)
0.552
(0.000)
-6.534
(0.000)
0.002
(0.106)
-2.361
(0.060)
3.920
(0.003)
0.006
(0.996)
1.554
(0.164)
-1.901
(0.172)
4.528
(0.000)
12.581
(0.000)
8
-5.444
(0.032)
-7.167
(0.002)
-6.147
(0.012)
-7.574
(0.002)
-8.071
(0.001)
1.342
(0.174)
0.002
(0.134)
0.808
(0.007)
0.002
(0.000)
0.037
(0.000)
-0.087
(0.880)
9.21E-08
(0.761)
0.290
(0.000)
-0.175
(0.872)
5.164
(0.000)
5.176
(0.000)
6.010
(0.000)
2.902
(0.034)
3.694
(0.000)
8.623
(0.000)
19
Country Effects
No
Yes
No
No
No
No
No
No
Year Effects
No
No
No
No
No
No
Yes
Yes
Included Observations
3344
3344
2603
3009
3009
2602
2046
1100
R-squared
0.002
0.559
0.096
0.069
0.110
0.162
0.209
0.364
Adjusted R-squared
0.001
0.535
0.094
0.067
0.108
0.158
0.193
0.338
S.E. of Regression
12.518
8.537
13.622
9.120
8.915
13.130
11.630
5.846
The results of these regressions show that, on average, none of the fixed exchange
regime types are consistently correlated with the current account as a share of GDP.
Depending on the other variables added to the model, the fixed exchange rate dummy and
flexible exchange rate dummy coefficients switch positions. This indicates that no
specific exchange rate regime necessarily yields a higher current account as a share of
GDP.
The results of the fourth set of OLS regressions are shown below in Table 5:
Table 5: OLS Regression Results
Dependent Variable: Real GDP per Capita % Change
Parameter
Inconclusive Exchange Rate
Dummy
Floating Exchange Rate
Dummy
Dirty Float Exchange Rate
Dummy
Crawling Peg Exchange
Rate Dummy
Fixed Exchange Rate
Dummy
1
3.012
(0.000)
2.552
(0.000)
1.453
(0.036)
1.193
(0.020)
1.762
(0.000)
2
4.514
(0.000)
4.834
(0.000)
4.572
(0.000)
4.480
(0.000)
4.812
(0.000)
3
6.620
(0.000)
6.906
(0.000)
6.228
(0.000)
5.716
(0.000)
6.759
(0.000)
4
8.254
(0.000)
8.512
(0.000)
7.589
(0.000)
7.368
(0.000)
8.252
(0.000)
5
6.336
(0.000)
6.949
(0.000)
5.991
(0.000)
5.451
(0.000)
6.615
(0.000)
Real Exchange Rate
-
-
-
-
-
Current Account (Share of
GDP
-
0.064
(0.152)
0.131
(0.009)
0.117
(0.019)
0.118
(0.025)
Inflation
-
-
-
-
-
Population Change
-
Population Density
-
-1.082
(0.000)
-0.001
(0.143)
-1.385
(0.000)
-0.001
(0.002)
-1.428
(0.000)
-0.001
(0.005)
Square Kilometers
-
-
-
-
Landlocked Dummy
-
0.821
1.176
1.268
-1.491
(0.000)
-0.001
(0.000)
-0.001
(0.899)
-
6
5.356
(0.016)
5.763
(0.007)
5.138
(0.018)
4.440
(0.056)
5.379
(0.008)
1.211
(0.365)
0.003
(0.439)
-1.348
(0.000)
-0.001
(0.000)
0.006
(0.533)
0.824
7
6.275
(0.004)
7.083
(0.001)
6.156
(0.004)
5.693
(0.011)
6.560
(0.001)
1.005
(0.437)
0.163
(0.011)
0.003
(0.504)
-1.473
(0.000)
-0.001
(0.000)
-0.001
(0.950)
0.817
20
8
5.322
(0.005)
5.901
(0.001)
4.917
(0.008)
4.457
(0.026)
5.652
(0.001)
0.907
(0.487)
0.116
(0.025)
0.003
(0.457)
-1.473
(0.000)
-0.001
(0.000)
-0.003
(0.762)
1.753
(0.183)
(0.060)
(0.042)
-1.71E-06
(0.000)
0.296
(0.000)
-1.87E-06
(0.000)
0.280
(0.000)
-1.82E-06
(0.000)
0.277
(0.000)
(0.147)
(0.173)
(0.011)
-2.18E-06
(0.015)
1.778
(0.018)
0.713
(0.620)
4.405
(0.000)
1.531
(0.059)
1.296
(0.229)
-1.582
(0.006)
-1.530
(0.255)
Yes
-2.20E-06
(0.018)
0.285
(0.000)
1.792
(0.029)
-0.151
(0.922)
3.529
(0.001)
0.539
(0.579)
0.791
(0.512)
-2.202
(0.001)
-2.945
(0.020)
Yes
-2.24E-06
(0.015)
0.285
(0.000)
2.113
(0.009)
-0.041
(0.978)
3.793
(0.000)
0.877
(0.331)
0.814
(0.469)
-2.479
(0.000)
-2.738
(0.032)
No
Real Money Market Rate
-
Government Surplus (Share
of GDP)
-
North America Dummy
-
-
-
-
South America Dummy
-
-
-
-
Asia Dummy
-
-
-
-
Europe Dummy
-
-
-
-
Africa Dummy
-
-
-
-
OECD Dummy
-
-
OPEC Dummy
-
-
No
No
-2.981
(0.000)
-2.506
(0.060)
No
-3.069
(0.000)
-2.391
(0.066)
Yes
-1.62E-06
(0.000)
0.290
(0.000)
2.106
(0.009)
0.182
(0.902)
3.788
(0.000)
0.891
(0.325)
0.818
(0.468)
-2.397
(0.000)
-2.857
(0.023)
Yes
Included Observations
2775
1080
1080
1080
1080
1111
1098
1098
R-squared
0.003
0.106
0.141
0.198
0.227
0.230
0.226
0.169
Adjusted R-squared
0.001
0.098
0.131
0.171
0.196
0.178
0.194
0.158
S.E. of Regression
8.621
6.277
6.161
6.019
5.926
6.017
5.967
6.021
Year Effects
-
The results of these regressions show that, on average, countries with a fixed
exchange rate regime yield a lower Real GDP per capita percentage than countries with a
floating exchange rate. The corresponding results imply that the flexible exchange rate
regime produces higher growth rates; whereas, the fixed exchange rate regime users have
slower or even negative growth rates in some instances.
4. Conclusions
The results indicate that fixed exchange rate regimes can be associated with higher
percentages of exports and imports as a percentage of their GDP. Furthermore, the
regressions show that flexible exchange rates yield a higher growth rate; whereas, fixed
exchange rates yield a lower growth rate. Regarding the current account, the coefficients
21
of each exchange rate varied so greatly, indicating that no one specific regime is
necessarily indicative of effects in a country’s current account as a share of their GDP.
Even though the fixed exchange rates yield higher percentages of international trade in
GDP, they consistently produced lower growth rates in GDP per capita than flexible
exchange rates. This indicates that, in China’s situation, restricting their exchange rates
to increase exports can have negative effects as well. With a more flexible and open
economy that is complimented with a flexible exchange rate, the results show that these
countries are able to grow at a faster pace than those that peg their exchange rate against
a trading partner’s currency.
5. Economic Implications of Results
This research has economic implications in the area of economic policy reform. When
choosing an exchange rate regime, the results of this analysis should be considered
because each exchange rate regime has effects that echo throughout an entire economy;
the decision affects the domestic business, consumers, trading partners, and overall social
welfare.
6. Suggestions for Future Research
The analysis in this paper leads to many avenues for further research. Future research
should explore the role of capital controls in deciding which exchange rate regime is
appropriate for a specific economy. Typically countries with strict capital controls find it
difficult to adapt to a freely floating exchange rate. Extended research built upon this
analysis should also examine the long-term effects of exchange rate regimes on the
growth of exports and imports as a percentage of total GDP.
22
Scholars should also explore other ways of quantifying and classifying exchange
rate types, with respect to its fixedness versus flexibility, to provide for additional testing
of potential impacts an exchange rate regime has on an economy’s trade and welfare.
23
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Volume of International Trade” Kyklos 41 (1988): 263-80.
Calvo, Guillermo A. and Mishkin, Frederic S., “The Mirage of Exchange Rate Regimes
for Emerging Market Countries” NBER Working Papers (June 2003).
Drabek, Zdenek and Brada, Josef, “Exchange Rate Regimes and the Stability of Trade
Policy in Transition Economies” WTO Economic Research and Analysis Division
Working Paper (July 1998).
Egert, Balazs and Morales-Zumaquero, Amalia, “Exchange Rate Regimes, Foreign
Exchange Volatility and Export Performance in Central and Eastern Europe: Just
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Fountas, Stilianos and Aristotelous, Kyriaco, "Does the Exchange Rate Regime Affect
Export Volumes? Evidence from Bilateral Exports in the US-UK Trade: 19001998," Department of Economics 43, National University of Ireland, Galway
(2003).
Hu, Fred, “Capital Flows, Overheating, and the Nominal Exchange Rate Regime in
China,” Cato Institute Conference April 8-9 (2004).
Levy-Yeyati, Eduardo and Sturzenegger, Federico, “Classifying Exchange Rate Regimes:
Deeds vs. Words,” European Economic Review, Vol. 49, Issue 6: Pages 16031635 (2005).
Nabli, Mustapha Kamel and Véganzonès-Varoudakis, Marie-Ange, “Exchange Rate
Regime and Competitiveness of Manufactured Exports: The Case of MENA
Countries” World Bank (2002).
Rose, Andrew K., “One Money, One Market: Estimating the Effect of Common
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Sachs, Jeffrey D., “Economic Transition and the Exchange-Rate Regime” The American
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Williamson, John, “Future Exchange Rate Regimes for Developing East Asia: Exploring
the Policy Options” Peterson Institute for International Economics (1999).
24
Appendix A: Included Countries
Afghanistan
Albania
Algeria
Angola
Antigua and Barbuda
Argentina
Armenia
Australia
Austria
Azerbaijan
Bahamas, The
Bahrain
Bangladesh
Barbados
Belarus
Belgium
Belize
Benin
Bhutan
Bolivia
Bosnia and Herzegovina
Botswana
Brazil
Brunei Darussalam
Bulgaria
Burkina Faso
Burundi
Cambodia
Cameroon
Canada
Cape Verde
Central African Republic
Chad
Chile
China, P.R.: Hong Kong
China, P.R.: Mainland
Colombia
Comoros
Congo, Dem. Republic of
Congo, Republic of
Costa Rica
Côte d’Ivoire
Croatia
Cyprus
Czech Republic
Denmark
Djibouti
Dominica
Dominican Republic
Ecuador
Egypt
El Salvador
Equatorial Guinea
Estonia
Ethiopia
Fiji
Finland
France
Gabon
Gambia, The
Georgia
Germany
Ghana
Greece
Grenada
Guatemala
Guinea
Guinea-Bissau
Guyana
Haiti
Honduras
Hungary
Iceland
India
Indonesia
Iran, I.R. of
Ireland
Israel
Italy
Jamaica
Japan
Jordan
Kazakhstan
Kenya
Kiribati
Korea
Kuwait
Kyrgyz Republic
Lao People’s Dem. Rep.
Latvia
Lebanon
Lesotho
Liberia
Libya
Lithuania
Luxembourg
Macedonia, FYR
Madagascar
Malawi
Malaysia
Maldives
Mali
Mauritania
Mauritius
Mexico
Moldova
Mongolia
Morocco
Mozambique
Myanmar
Namibia
Nepal
Netherlands
New Zealand
Nicaragua
Niger
Nigeria
Norway
Oman
Pakistan
Panama
Papua New Guinea
Paraguay
Peru
Philippines
Poland
Portugal
Qatar
Romania
Russia
Rwanda
St. Kitts & Nevis
St. Lucia
St. Vincent & Grens.
Samoa
Sao Tome & Principe
Saudi Arabia
Senegal
Seychelles
Sierra Leone
Singapore
Slovak Republic
Slovenia
Solomon Islands
South Africa
Spain
Sri Lanka
Sudan
Suriname
Swaziland
Sweden
Switzerland
Syrian Arab Republic
Tajikistan
Tanzania
Thailand
Togo
Tonga
Trinidad & Tobago
Tunisia
Turkey
Uganda
Ukraine
United Arab Emirates
United Kingdom
United States
Uruguay
Venezuela
Vietnam
Yemen, Republic of
Zambia
Zimbabwe
25