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The B.E. Journal of Macroeconomics

Editor-in-Chief: Cavalcanti, Tiago / Kambourov, Gueorgui

Ed. by Abraham, Arpad / Carceles-Poveda , Eva / Debortoli, Davide / Lambertini, Luisa / Nimark, Kristoffer / Wang, Pengfei

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CiteScore 2016: 0.36

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Exchange Rate Regimes, Specialization and Trade Volume

Michael B Devereux
  • 1University of British Columbia,
/ Graham M Voss
  • 2University of Victoria and Hong Kong Institute of Monetary Research,
Published Online: 2006-10-18 | DOI: https://doi.org/10.2202/1534-5998.1291

We develop a general equilibrium monetary model of endogenous specialization and international trade to examine the degree of specialization and trade volume under alternative monetary systems, a multiple currency system with a flexible exchange rate and a common currency system. Where demand shocks are important, we demonstrate an increase in specialization, trade and welfare under the common currency relative to flexible exchange rates. The weaker the substitution between exports and imports or the greater the risk aversion, the stronger are these effects. Where supply shocks are important, the effects on specialization and trade are smaller and ambiguous in direction, though the welfare effects are comparable to those for demand shocks. Broadly speaking, the model's results are qualitatively consistent with the empirical results of Rose (2000), which finds an increase in trade due to the adoption of a common currency.

Keywords: exchange rates; common currency; international trade

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Published Online: 2006-10-18

Citation Information: Topics in Macroeconomics, ISSN (Online) 1534-5998, DOI: https://doi.org/10.2202/1534-5998.1291.

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