Export diversification and exchange-rate regimes: Evidences from 72 developing countries

Liu, Xiaohui and Zhang, Jing (2015): Export diversification and exchange-rate regimes: Evidences from 72 developing countries.

Abstract

Drawing on a new dataset of diversification of export products, the paper makes the first attempt in the empirical literature to test the impact of product diversification on the choice of exchange-rate regimes in a sample of 72 developing countries (1974-2010). The paper finds that diversification of export products has a positive but insignificant effect on the choice of fixed exchange-rate regimes. When export diversification is decomposed into the extensive and intensive margins, evidences of the paper show that higher level of product diversification at the extensive margin has a statistically positive effect on exchange-rate regime choices while the intensive margin has a negative but insignificant impact on the choice.

• Item Type: MPRA Paper
• Language: English
• Keywords: Export Diversification, Extensive Margin, Intensive Margin, The Choice of Exchange-rate Regime, Developing Countries
• Subjects: F - International Economics > F3 - International Finance > F30 - General; F - International Economics > F3 - International Finance > F38 - International Financial Policy: Financial Transactions Tax; Capital Controls; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General

References

Baldwin, Richard, 2005. Heterogeneous Firms and Trade: Testable and Untestable Properties of The Melitz Model, NBER, Working Paper, No. 11471.

Berdiev, Aziz N., Yoonbai Kim, and Chun Ping Chang, 2012. The Political Economy of Exchange Rate Regimes in Developed and Developing Countries, European Journal of Political Economy, Vol. 28, No. 1, 38-53.

Bergin, Paul R., and Ching-Yi Lin, 2008. Exchange Rate Regimes and the Extensive Margin of Trade, NBER, Working Paper, No. 14126.

Bernard, Andrew B., J. Bradford Jensen, Stephen J. Redding, and Peter K. Schott, 2007. Firms in International Trade, Journal of Economic Perspectives, Vol. 21, No. 3, 105-130.

Broz, Lawrence J., 2002. Political System Transparency and Monetary Commitment Regimes, International Organization, Vol. 56, No. 4, 861-887.

Cadot, Olivier, Céline Carrère, and Vanessa Strauss-Kahn, 2011. Export Diversification: What’s Behind the Hump? Review of Economics and Statistics, Vol. 93, No. 2, 590-605.

Cadot, Olivier, Céline Carrère, and Vanessa Strauss-Kahn, 2013.Trade Diversification, Income, and Growth: What Do We Know? Journal of Economic Surveys, Vol. 27, No. 4, 790-812.

Calderón, César, and Klaus Schmidt-Hebbel, 2008. Choosing An Exchange Rate Regime, Central Bank of Chile, Working Paper, No. 494.

Carmignani, Fabrizio, Emilio Colombo, and Patrizio Tirelli, 2008. Exploring Different Views of Exchange Rate Regime Choice, Journal of International Money and Finance, Vol. 27, No. 7, 1117-1197.

Cavallari, Lilia, and Stefano D′Addona, 2013. Trade margins and Exchange Rate Regimes: New Evidence from a Panel VARX Model, MPRA Paper, No. 51585.

Chinn, Menzie D., and Ito Hiro 2006. What Matters For Financial Development? Capital Controls, Institutions and Interactions, Journal of Development Economics, Vol. 81, No. 1, 163-192.

Chowdhury, T. H., Mohammad, Prasad Sankar Bhattacharya, Debdulal Mallick, and Mehmet Ali Ulubaşoğlu, 2014. An Empirical Inquiry into the Role of Sectoral Diversification in Exchange Rate Regime Choice, European Economic Review, Vol. 67, 210-227.

Frieden, Jeffry A., David Leblang, and Neven Valev, 2010. The Political Economy of Exchange Rate Regimes in Transition Economies, Review of International Organization, Vol. 5, No. 1. 1-25.

Ghosh, Atish R., Anne-Marie Gulde, Jonathan D. Ostry, and Holger C. Wolf, 1997. Does the Nominal Exchange Rate Matter? NBER, Working Paper, No. 5874.

Hamano, Masashige, and Pierre M. Picard, 2013. Extensive and Intensive Margins and the Choice of Exchange Rate Regimes, University of Luxembourg, Discussion Paper, No. 18.

Harms, Philipp, and Mathias Hoffmann, 2011. Deciding To Peg the Exchange Rate in Developing Countries: The Role of Private Sector Debt, Open Economies Review, Vol. 22, No. 5, 825-846.

Heller, Robert H., 1978. Determinants of Exchange Rate Practices, Journal of money, credit and banking, Vol. 10, No. 3, 308-321.

Holden, Paul, Merle Holden, and Esther C. Suss, 1979. The Determinants of Exchange Rate Flexibility: An Empirical Investigation, Review of Economics and Statistics, Vol. 61, No. 3, 327-333.

Hummels, David, and Peter J. Klenow, 2005. The Variety and Quality of A Nation’s Exports, American Economic Review, Vol. 95, No. 3, 704-723.

IMF, 2014. Long-run Growth and Macroeconomic Stability in Low-Income Countries: The Role of Structural Transformation and Diversification, IMF, Policy Paper, March 5, 2014.

Jin, Sainan, 2009. Discrete Choice Of Modeling With Nonstationary Panels Applied to Exchange Rate Regime Choice, Journal of Econometrics, Vol. 150, No. 2, 312-321.

Kenen, Peter B., 1969. The Theory of Optimum Currency Areas: An Eclectic View, in Monetary Problems of the International Economy (Robert A. Mundell and Alexander K. Swoboda eds.), University of Chicago Press, 41-60.

Levy-Yeyati, Eduardo, and Sturzenegger, Federico, 2005. Classifying Exchange Rate Regimes: Deeds vs. words, European Economic Review, Vol. 49, No. 6, 1603-1635.

Levy-Yeyati, Eduardo, Federico Sturzenegger, and Iliana Reggio, 2010. On The Endogeneity of Exchange Rate Regimes, European Economic Review, Vol. 54, No. 5, 659-677.

Lin, Ching-Yi, 2007. Exchange Rate Uncertainty and the Extensive Margin of Exports, University of California, Davis, Mimeo.

Lin, Shu, and Ye, Haichun, 2011. The Role of Financial Development in Exchange Rate Regime Choices, Journal of International Money and Finance, Vol. 30, No. 4, 641-659.

Markiewicz, Agniewszka, 2006. Choice of Exchange Rate Regime In Transition Economies: An Empirical Analysis, Journal of Comparative Economics, Vol. 34, No. 3, 484-498.

McKinnon, Ronald I., 1963. Optimum Currency Areas, American Economic Review, Vol. 53, No. 4, 717-725.

McKinnon, Ronald I., 1969. Comment, in Monetary Problems of the International Economy (Robert A. Mundell and Alexander K. Swoboda eds.), University of Chicago Press.

Melitz, Marc J., 2003. The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity, Econometrica, Vol. 71, No. 6, 1695-1725.

Melvin, Michael, 1985. The Choice of An Exchange Rate System and Macroeconomic Stability, Journal of Money, Credit and Banking, Vol. 17, No. 4, 467-478.

Méon, Pierre-Guillaume, and Jean-Marc Rizzo, 2002. The Viability of Fixed Exchange Rate Commitments: Does Politics Matter? A Theoretical and Empirical Investigation, Open Economies Review, Vol. 13, No. 2, 113-132.

Méon, Pierre-Guillaume, and Minne, Geoffrey, 2014. Mark My Words: Information and The Fear of Declaring An Exchange Rate Regime, Journal of Development Economics, Vol. 107, No. 2, 244-261.

Mundell, Robert A., 1961. A Theory of Optimum Currency Areas, American Economic Review, Vol. 51, No. 4, 657-665.

Poirson, Hélène, 2001. How Do Countries Choose Their Exchange Rate Regime? IMF, Working Paper, No. 46.

Reinhart, Carmen M., and Kenneth Rogoff, 2004. The Modern History of Exchange Rate Arrangement: A Reinterpretation, Quarterly Journal of Economics, Vol. 119, No. 1, 1-48.

Rizzo, Jean-Marc, 1998. The Economic Determinants of the Choice of An Exchange Rate Regime: A Probit Analysis, Economics Letters, Vol. 59, No. 3, 283-287.

Shambaugh, Jay C., 2004. The Effect of Fixed Exchange Rates on Monetary Policy, Quarterly Journal of Economics, Vol. 119, No. 1, 300-351.

Singer, D., Andrew, 2010. Migrant Remittances and Exchange Rate Regimes in The Developing World, American Political Science Review, Vol. 104, No. 2, 307-323.

Steinberg, David, A., and Malhotra, Krishan, 2014. The Effect of Authoritarian Regime Type on Exchange Rate Policy, World Politics, Vol. 66, No. 3, 491-529.

Tavlas, George S., 1993. The “New” Theory of Optimum Currency Area, World Economy, Vol. 16, No. 6, 663-685.

von Hagen, Jürgen, and Jizhong Zhou, 2007. The Choice of Exchange Rate Regimes in Developing Countries: A Multinomial Panel Analysis, Journal of International Money and Finance, Vol. 26, No. 7, 1071-1094.