TRADE MARGINS AND EXCHANGE RATE REGIMES: NEW EVIDENCE FROM A PANEL VARX MODEL

This paper studies the dynamics of output and export margins in the aftermath of external shocks in fixed and floating exchange rate regimes. Using a panel VARX model, it traces the mean responses of output, terms of trade, extensive and intensive margins to real and nominal shocks in 22 developed economies over the period 1988-2011. It finds remarkable differences in the transmission of shocks depending on the exchange rate regime. In the sample of peggers, trade switches from previously traded goods towards trade of new products and previously non-traded goods in response to external shocks. This in turn exacerbates output fluctuations. Overall, our findings provide novel evidence in support of the stabilization advantages of flexible exchange rates based on their ability to smooth extensive margins. These findings are consistent with the predictions of theoretical models with firm entry.