DP810 Exchange Rate Regimes and Trade Prices: Does the EMS Matter?

Author(s): André Sapir, Khalid Sekkat
Publication Date: August 1993
Keyword(s): EMS, Exchange Rate Regimes, Trade
JEL(s): F12, F31, L16
Programme Areas: International Macroeconomics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=810

This paper investigates the role of the exchange rate regime in the process of trade adjustment, by examining the relationship between trade prices and exchange rate regimes. The theoretical framework is a dynamic one à la Froot-Klemperer (1989). The empirical investigation takes advantage of the simultaneous occurrence, since 1979, of relatively stable exchange rates inside the ERM and instable rates outside to engage in a controlled experiment on the impact of the exchange rate regime on trade prices. The results suggest that a system of pegged rates like the EMS, although helpful, is not necessary to achieve a smooth process of trade adjustment. It appears that the absence of misalignment rather than the type of exchange rate regime is the crucial factor for fulfilling such an objective.