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Title:Terms of trade and exchange rate regimes in developing countries PDF Logo
Authors:Broda, Christian
Issue Date:2002
Series/Report no.:Staff Report, Federal Reserve Bank of New York 148
Abstract:Since Friedman (1953), an advantage often attributed to flexible exchange rate regimes over fixed regimes is their ability to insulate more effectively the economy against real shocks. I use a post-Bretton Woods sample (1973-96) of seventy-five developing countries to assess whether the responses of real GDP, real exchange rates, and prices to terms-of-trade shocks differ systematically across exchange rate regimes. I find that responses are significantly different across regimes in a way that supports Friedman's hypothesis. In response to a negative terms-of-trade shock, countries with fixed regimes experience large and significant declines in real GDP, and the real exchange rate depreciates slowly and by means of a fall in prices. Countries with more flexible regimes, by contrast, tend to have small real GDP losses and immediate large real depreciations. The contributions of terms-of-trade disturbances to the actual fluctuation of real GDP, real exchange rates, and prices are also examined.
Subjects:exchange rate regimes, exchange rate flexibility, terms-of-trade shock
JEL:E30
F31
F33
F41
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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