TY  - JOUR
AU  - Bergin, Paul R
AU  - Lin, Ching-Yi
TI  - Exchange Rate Regimes and the Extensive Margin of Trade
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14126
PY  - 2008
Y2  - June 2008
DO  - 10.3386/w14126
UR  - http://www.nber.org/papers/w14126
L1  - http://www.nber.org/papers/w14126.pdf
N1  - Author contact info:
Paul Bergin
Department of Economics
University of California, Davis
One Shields Ave.
Davis, CA 95616
Tel: 530/752-8398
Fax: 530/752-9382
E-Mail: prbergin@ucdavis.edu

Ching-Yi Lin
National Tsing Hua University
Department of Economics
E-Mail: lincy@mx.nthu.edu.tw
M1  - published as Paul R. Bergin, Ching-Yi Lin. "Exchange Rate Regimes and the Extensive Margin of Trade," in Jeffrey Frankel and Christopher Pissarides, organizers, "NBER International Seminar on Macroeconomics 2008" University of Chicago Press (2009)

AB  - This paper finds that currency unions and direct exchange rate pegs raise trade through distinct channels. Panel data analysis of the period 1973-2000 indicates that currency unions have raised trade predominantly at the extensive margin, the entry of new firms or products. In contrast, direct pegs have worked almost entirely at the intensive margin, increased trade of existing products.  A stochastic general equilibrium model is developed to understand this result, featuring price stickiness and firm entry under uncertainty. Because both regimes tend to reliably provide exchange rate stability over the horizon of a year or so, which is the horizon of price setting, they both lead to lower export prices and greater demand for exports. But because currency unions historically are more durable over a longer horizon than pegs, they encourage firms to make the longer-term investment needed to enter a new market. The model predicts that when exchange rate uncertainty is completely and permanently eliminated, all of the adjustment in trade should occur at the extensive margin.
ER  -