Does trade openness influence the real effective exchange rate? New evidence from panel time-series

Abstract

Using a dataset of 101 countries over the 1960-2011 period, we examine the relationship between the real effective exchange rate (REER), on the one hand, and trade openness, trade balance, the terms of trade, factor productivity, and exchange rate regime, on the other one. We use new econometric estimators that deal with the problems of potential endogeneity and cross-sectional dependence that are present in the data, while also allowing for cross-country heterogeneity in the parameters of interest. The findings of the study strongly support the hypothesis that an increase in trade openness produces a depreciation of the REER. The other variables considered in the analysis-factor productivity, trade balance, terms of trade, and exchange rate regime-do not have a statistically significant effect that is robust to different sample compositions and alternative statistical estimators.

Effect of Poverty on Real Exchange Rate in Developing Countries

“…According to Buera et al (2011), nancial frictions induce a misallocation of productive resources across sectors, and consequently larger differences in cross-country productivity in goods sectors compared to the services sectors. Gantman and Dabós (2018) have found that while the effect of productivity on the real exchange rate is positive, it is not always statistically signi cant across all regressions. Nonetheless, Choudhri and Schembri (2010) have shown that as the elasticity of substitution between domestic and foreign goods can vary, the effect of the improvements in traded-goods productivity on the real exchange rate can be positive or negative.…”

“…Some works have provided empirical support for the Balassa-Samuelson hypothesis (e.g., Bergin et al, 2006;Buera et al, 2011;Drine and Rault 2003;Gantman and Dabós, 2018;Herrendorf and Valentinyi, 2012). For example, Herrendorf and Valentinyi (2012) have found that the cross-country productivity differences are larger in tradables than in nontradables.…”

“…This signi es that greater trade liberalization (or trade openness) would result in a depreciation of the real exchange rate. Gantman and Dabós (2018) have used a set of 101 countries (both developed and developing ones) over the period 1960-2011, and provided empirical evidence that greater trade openness leads to a depreciation of the real exchange rate.…”

“…Addison and Baliamoune-Lutz (2017) have obtained for Tunisia that terms of trade improvements also induce an appreciation of the real exchange rate. Gantman and Dabós (2018) have uncovered that movements in terms of trade do not affect in a robust way the real exchange rate appreciation.…”

The Effects of Currency Protectionism on the Exports of the Trade Partners - A Composite Index

“…11 See:Bärtschi (1978). 12 See:Kataria and Gupta (2018);Gantman and Dabós (2018);Vogiazas, Alexiou, and Ogan (2019).InternationalJournal of Applied Economics, Finance and Accounting 2021, Vol. 11, No.…”