Limiting Currency Volatility to Stimulate Goods Market Integration: A Price-Based Approach
By David Parsley, Shang-jin Wei. Social Science Research Network, 2001
148 citations recorded by the source corpus.
This paper empirically studies the effect of instrumental and institutional stabilization of the exchange rate on the integration of goods markets. An instrumental stabilization of the exchange rate is accomplished through intervention in the foreign exchange market, or by monetary policies. An institutional stabilization, is an adoption a currency board or a common currency. In contrast to the literature that employs data on the volume of trade, an important novelty of this paper is the use of a 3-dimensional panel of prices of 95 very disaggregated goods (e.g., light bulbs) in 83 cities from around the world from 1990 to 2000. We find that goods market integration is increasing over time and is inversely related to distance, exchange rate variability, and tariff barriers. In addition, the impact of an institutional stabilization of the exchange rate provides a stimulus to goods market integration that goes far beyond an instrumental stabilization. Among the institutional arrangements, long-term currency unions demonstrate greater integration than more recent currency boards. All of them can improve their integration further relative to a U.S. benchmark.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/6e815dde0417984c5275b7a1b9970b889accb35b
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Citations in the corpus
- Quantifying the Trade and Economic Effects of Non-Tariff Measures (2006, methodology): “22 It has also been used to examine the related question of the slowness of exchange rate movements in reducing deviations from purchasing power parity (PPP) by Rogers (2000, 2002) and Parsley and Wei (2001).”