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| Title: | | Terms of trade and exchange rate regimes in developing countries  |
| 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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