Terms Of Trade And Exchange Rate Regimes In Developing countries
- Topics:
- Global Strategy
- Source:
- Federal Reserve Bank of New York
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Overview: Since Friedman, an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate the economy more effectively against real shocks. A post-Bretton Woods sample of seventy-five developing countries is used to assess whether the responses of real GDP, real exchange rates, and prices to terms of trade shocks differ systematically across exchange rate regimes. It is found that responses are significantly different across regimes in a way that supports Friedman’s hypothesis. In response to a negative term of trade shock, countries with fixed regimes experience large and significant declines in real GDP, and the real exchange rate exchange rate depreciates slowly and by means of a fall in prices. The contributions of terms of trade disturbances to the actual fluctuation of real GDP, real exchange rates, and prices are also examined in this paper.
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Format: PDF | Size: 851KB | Date: Jan 2003 | Pages: 36
