Do Fixed Exchange Rates Cause Greater Integration?

Hosny, Amr Sadek

doi:2013.28.4.533

Journal of Economic Integration 2013 December;28(4) :533-550.
DOI: https://doi.org/10.11130/jei.2013.28.4.533

Do Fixed Exchange Rates Cause Greater Integration?

Amr Sadek Hosny

University of Wisconsin-Milwaukee, Milwaukee, U. S. A.

Corresponding Author: Amr Sadek Hosny ,Tel: +1 4142294375, Fax: +1 4142293860, Email: amrsadek@uwm.edu

ABSTRACT

A classic argument in favor of a fixed exchange rate regime (ERR) has been the promotion of international trade between the pegging country and its base country. Results from previous literature point to a significant and highly positive effect of adopting a fixed ERR on bilateral trade between any given country pair. In this paper, it is argued that these results should not be interpreted as causal effects, since countries do not typically choose their ERR independently of their trade flows. This source of selection bias can be greatly reduced by using the matching approach in estimating treatment effects. Estimates of the effect of fixed ERR using this procedure are close to the ordinary least squares estimates reported in the literature, suggesting that there is little bias in these conventional estimates. These findings are robust to using different propensity score matching methods.

JEL Classification

C21: Cross Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions
F31: Foreign Exchange
F41: Open Economy Macroeconomics

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