Division of Economics

A.J. Palumbo School of Business Administration

Duquesne University
Pittsburgh, Pennsylvania

AN ECONOMIC ANALYSIS OF THE EFFECTS OF EXCHANGE RATE

REGIMES ON INTERNATIONAL TRADE

Colleen Gorman

Submitted to the Economics Faculty

in partial fulfillment of the requirements for the degree of
Bachelor of Science in Business Administration

December 2007
2
Faculty Advisor Signature Page

Mark T. Gillis Date

Visiting Instructor of Economics and Quantitative Sciences

Jennifer P. Bayley Date

Assistant Professor of Economics

3
 AN ECONOMIC ANALYSIS OF THE EFFECTS OF EXCHANGE RATE
REGIMES ON INTERNATIONAL TRADE

Colleen Gorman

Duquesne University, 2007

For over a decade, China has fixed the nominal exchange rate between the dollar and
the Yuan at a value that is widely believed to be lower than it otherwise would be. The
intention of this policy is to give Chinese producers a competitive advantage over
producers in other countries, including the United States. The extent to which such an
exchange rate regime is actually beneficial for a country, however, is questionable.
Consequently, the purpose of this analysis is to examine the relationship between a
country’s exchange rate regime choice and several macroeconomic variables, such as
exports, imports, and economic growth, over time. Furthermore, each exchange rate
regime is represented in the model by its de facto degree of fixedness versus flexibility.
Ultimately, this paper applies the outcomes of this model to China in order to estimate
what effect the undervaluation of their currency is having on China’s economic
outcomes, and what impact a change to a floating exchange rate would have.

In this analysis, I use a panel data econometric model to test the effect of exchange rate
regime types on GDP per capita growth, exports as a share of GDP, imports as a share
of GDP, and current account as a share of GDP, while taking into account other factors
that are theoretically involved in determining this relationship. I find that, ceteris
paribus, these exchange rate regimes have significant effects on these macroeconomic
variables. Floating exchange rate regimes yield a greater GDP per capita growth, while
a fixed exchange rate regime is correlated with higher exports and imports as a share of
GDP. Furthermore, no particular exchange rate regime consistently increases or
decreases the current account variable.

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 Table of Contents

Introduction..........................................................................................................................5

Literature Review.................................................................................................................6

Data....................................................................................................................................12

Model.................................................................................................................................15

Results and Discussion......................................................................................................16

Conclusion.........................................................................................................................21

Future Research.................................................................................................................22

References..........................................................................................................................24

Appendix............................................................................................................................25

5
1. Introduction

The purpose of this paper is to analyze the impacts of different exchange rate regimes on

trade and economic growth. In finding this impact, this paper examines a number of

countries’ exchange rate regime choices and their imports, exports, real GDP, and real

GDP per capita. Furthermore, this analysis determines which exchange rate regime

produces the highest social welfare, which is represented by the growth of GDP per

capita in each country.

This analysis requires four models, each having slight variations in their

dependent and explanatory variables. All models include explanatory variables other

than the exchange rate regime dummies. These variables are basic sources of economic

growth such as technological advancement and the level of capital investment. Also,

three of the models will examine the short-term effects of the exchange rate regime and

the fourth model examines the long-term effects of exchange rate regimes on an

economy.

During the final analysis, the primary focus is on China’s trade practices, and also

on determining what the impact of their undervalued currency has on the Chinese

economy itself, the US economy, and other trading countries’ economies.

6
2. Literature Review

Many notable researchers, who have created either theoretical or empirical models

centered around this topic of exchange rate regime effects on economic growth, find

some type of relationship between a flexible exchange rate and an increase in

international trade. Even though this is so, there are other variables that need to be in

place within an economy, such as strong monetary policies and institutions, especially in

the cases of transition economies, and economies that have undervalued or overvalued

their currency for a long period of time, in order for a flexible exchange rate to cause

increases in international trade overall.

There have been several prominent studies which find a causal link between

exchange rate regime choice and economic growth. Perhaps the most well-known of

these was performed by a researcher from the University of California, Andrew K. Rose

(2000). He found that two countries sharing the same currency trade three times as much

as they would if they were using different currencies. Rose uses a panel data set that

includes bilateral observations from the years 1970 through 1990 for 186 countries. He

concludes that currency unions like the EMU could lead to a massive increase in

international trade. His results are so strong, that other countries other than the European

Union might find it beneficial to use a common currency, in order to benefit consumers

within the currency union and also to take another important step towards increasing

global integration.1 His findings support my hypothesis by showing the effects that

exchange rate volatility have on trade.

1
Andrew K. Rose, “One Money, One Market: Estimating the Effect of Common Currencies on Trade,” Economic Policy (2000).

7
 The results of Rose’s research suggest the use of undervaluation of currencies and

pegging of currencies can decrease trade, and they support using common currencies in

order to increase trade between countries. These policies can include maintaining small

budget deficits, controlling inflation, and being open to global trade.1

Fred Hu (2004) also finds a negative effect associated with using fixed exchange

rate regimes on economic growth. His study focused on China in particular, and the need

for this country to liberalize their currency and capital control. He concludes that China

must go through a gradual process that will ultimately lead them to a more liberalized

system overall. First, they must remove the renminbi peg causing them to have a free

floating exchange rate. This would cause them to enter a more balanced trading field

among their major trading partners. Second, they need to introduce a sound banking

reform program, which would stabilize their domestic financial system. Lastly, China

should relax their capital control policies. This would assist them in avoiding financial

crisis while simultaneously allow them to gain more capital freedom. 2

Furthermore, the research done by Stilianos Fountas and Kyriaco Aristotelous

(2003) closely resembles the purpose of my paper. They investigate the impacts of the

different exchange rate regimes throughout the twentieth century on the bilateral exports

between the United Kingdom and the United States. They find that fixed exchange rate

regimes and managed float exchange rate regimes are equally favorable to trade, but,

more importantly, freely floating exchange rate regimes produce more trade than fixed

2
Fred Hu, “Capital Flows, Overheating, and the Nominal Exchange Rate Regime in China,” Cato Institute
Conference April 8-9 (2004).

8
exchange rate regimes.3

Similarly, a study done by Josef Brada and Jose Mendez (1988) examines the

effects of exchange rate regimes on the volume of international trade. They found that

bilateral trade flows between countries with floating exchange rates are greater than those

in countries with fixed exchange rates. They conclude that “while exchange-rate risk

does reduce the volume of trade among countries regardless of the nature of their

exchange-rate regime, the greater risk faced by traders in floating exchange-rate countries

is more than offset by the trade-reducing effects of restrictive commercial policies

imposed by fixed exchange rate countries.” This not only shows the direct economic

impact an exchange rate regime can have on economic growth, but more specifically, the

underlying problems associated with fixed exchange rate countries that also affect their

trade, which is their strict policies outside of their currency regulations.4

Balazs Egert and Amalia Morales-Zumaquero (2005) analyze the impact of

exchange rate volatility and changes in the exchange rate regimes on export volume for

ten Central and Eastern European transition economies. The first group of countries

started their transition with pegged regimes and then moved towards flexibility. The

second group of countries experienced no major changes in their exchange rate regimes

in the past ten years. Their results indicate that an increase in the exchange rate volatility

decreases exports, and this impact has a delay rather than being instantaneous.5

3
Stilianos Fountas and Kyriaco Aristotelous, "Does the Exchange Rate Regime Affect Export Volumes?
Evidence from Bilateral Exports in the US-UK Trade: 1900-1998," Department of Economics 43, National
University of Ireland, Galway (2003).
4
Josef Brada and Jose Mendez, “Exchange Rate Risk, Exchange Rate Regime and the Volume of
International Trade” Kyklos 41 (1988): 263-80.
5
Balazs Egert and Amalia Morales-Zumaquero, “Exchange Rate Regimes, Foreign Exchange Volatility
and Export Performance in Central and Eastern Europe: Just Another Blur Project?” 8 Bofit Discussion
Papers (2005).

9
 In another study, Guillermo A. Calvo and Frederic S. Mishkin (2003) take on a

different view of exchange rate regimes. They argue that macroeconomic success in

emerging market countries can be produced primarily through good fiscal, financial, and

monetary institutions, and they believe that less emphasis should be placed on the

flexibility of an exchange rate regime. They find that when choosing an exchange rate

regime, not all countries are able to conform to one type. This is due to each countries

particular needs and their economy, institutions, and political culture.6

John Williamson (1999) analyzes different exchange rate regimes that are being

used within certain countries, specifically Asian countries. He proposes that if a country

feels it is necessary to peg their currency, they should “adopt a sufficiently sophisticated

management regime to allow adaptation to the pressures of capital mobility.”7 It is with

this suggestion, that Williamson is in agreement with Fred Hu’s research, which is

concentrated on relaxing capital controls in Asian countries that continue to peg their

currency.

Another analysis, done by Mustapha Kamel Nabli and Marie-Ange Véganzonès-

Varoudakis (2002), looks at the Middle East and North African (MENA) countries that

were characterized by having an overvaluation of their currencies throughout the 1970s

and the 1980s. They were able to compute this overvaluation through the use of an

“indicator of misalignment.” A panel of 53 countries were used, and ten of these were

MENA countries. Their research shows that manufactured exports were significantly

6
Guillermo A. Calvo and Frederic S. Mishkin, “The Mirage of Exchange Rate Regimes for Emerging
Market Countries” NBER Working Papers (June 2003).
7
John Williamson, “Future Exchange Rate Regimes for Developing East Asia: Exploring the Policy
Options” Peterson Institute for International Economics (1999).

10
affected by the overvaluation of their currencies. In the 1990s, when overvaluation was

decreased within the MENA countries overall, there was also “a continuous rise in the

diversification of their manufactured exports.”8

Zdenek Drabek and Josef Brada (1998) argue that the flexible exchange rate

regime is applicable and appropriate for six countries with transition economies. Within

each of these economies, inappropriate exchange rate policies have led to an increase in

protectionism by these governments. Because of these policies, the nominal exchange

rate is not an indicator of comparative advantage, rather the true indicator is the level of

the real effective exchange rate. Drabek and Brada conclude that these transition

economies will have to eventually switch to a more flexible exchange rate in order to

send more accurate signals to both foreign and domestic investors about the comparative

advantages of their country.9

Jeffrey D. Sachs (1996) analyzes countries in Eastern Europe that are adapting to

a fairly new, open, market-based international trade. These countries have had no prior

experience with currency convertibility. Sachs suggests that during the beginning of

these economies’ transitions, a pegged exchange rate regime is appropriate for one or two

years during liberalization and stabilization of the economy. After this, the country

should take on a more flexible regime. He argues that after initial transition years, the

flexible exchange rate will reap economic benefits, such as an increase in exports, if the

“price stability is underpinned by strengthened domestic monetary targets and

8
Mustapha Kamel Nabli and Marie-Ange Véganzonès-Varoudakis, “Exchange Rate Regime and
Competitiveness of Manufactured Exports: The Case of MENA Countries” World Bank (2002).
9 Zdenek Drabek and Josef Brada, “Exchange Rate Regimes and the Stability of Trade Policy in Transition

Economies” WTO Economic Research and Analysis Division Working Paper (July 1998).

11
institutions.”10 This implies that a transition economy can be successful during

liberalization by not only implementing a more flexible exchange rate, but also backing

this regime with strong monetary policies and institutions.

In estimating a model to determine the effects of exchange rate regime choices on

an economy, I build on the previously cited literature. Most literature focuses on

economies in transition from a fixed to a more flexible exchange rate. While taking this

into account in my model, I examine an array of countries with different levels of

exchange rate fixedness and flexibility and growth patterns over the past 25 years in order

to analyze effects of each exchange rate regime. The results of this analysis ultimately

shed light on the current situation in China, where, for over the last ten years, the Chinese

government has fixed the nominal exchange rate between their currency, the Yuan, and

the Dollar at an undervalued amount. This policy is intended to give Chinese producers a

competitive export advantage over producers in trading countries. What remains

questionable, however, is how beneficial an exchange rate regime like theirs is for an

economy and to what extent this type of regime can affect a country’s exports and

imports. This analysis not only finds the general economic effects of an exchange rate

regime, but more specifically, it applies the outcomes generated by a series of models to

China. This is done in order to estimate the effect that the undervaluation of their

currency is having on China’s economic outcomes and the impact that a change from a

fixed exchange rate to a floating exchange rate would have on these economic outcomes.

10
Jeffrey D. Sachs “Economic Transition and the Exchange-Rate Regime” The American Economic
Review (1996).

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3. Methodology

3.1 Data Description

The analysis utilizes a panel dataset, which covers 172 countries ranging from

low to high development.11 I restrict the range of this study to the period from 1980

through 2004. With 172 cross sections, there is a potential 4,300 observations over this

time span. I collect the data in annual format from several sources. Most of the data

come from the International Monetary Fund (IMF)12 and a de-facto classification of

exchange rate regimes compiled by Eduardo Levy-Yeyati and Federico Sturzenegger.13

Each exchange rate regime is represented in my model by its de facto degree of fixedness

versus flexibility. This is a five-way classification including inconclusive, float, dirty

float, crawling peg, and fixed exchange rates, with a respective scale ranging from one,

equating to inconclusive, to five, equating to fixed. It is important to use de facto

exchange rate regimes as opposed to de jure because, for the purposes of this analysis, the

de facto regimes provide for more practical data. This is due to the possibility of

significant differences between the regime a country’s government announces they use

and what a country is really using in practice with regards to their exchange rate control.

Levy-Yeyati and Sturzenegger’s database of exchange rate classifications was compiled

through analyzing changes in the nominal exchange rate, the volatility of these changes,

and the volatility of international reserves. The application of these de facto

classifications to my model allows this paper to differentiate itself from previous

empirical research. Most of this past research on exchange rate regimes has used the
11
See Appendix A for a list of included countries.
12
Available at http://www.imf.org.
13
Levy-Yeyati, Eduardo and Sturzenegger, Federico, “Classifying Exchange Rate Regimes: Deeds vs.
Words,” European Economic Review, Vol. 49, Issue 6: Pages 1603-1635 (2005).

13
 International Monetary Fund’s de jure classification system.

Furthermore, for the countries used in this analysis, yearly data on

macroeconomic variables such as exports, imports, GDP, and GDP per capita growth are

used. Table 1 below lists the variables included in this study and the source from which

they are obtained:

Table 1: Data Sources

Variable Unit Source

Current Account Share of GDP IMF
Real Gross Domestic
Growth Rate IMF
Product per Capita
Exports Share of GDP IMF

Imports Share of GDP IMF

Percentage rate of
Inflation IMF
change in CPI
Currency in terms
Real Exchange Rate IMF
of US Dollars
Population Growth Rate IMF

Real Money Market Rate Percentage IMF

Government Deficit or
Share of GDP IMF
Surplus
1 = Yes,
Landlocked Dummy IMF
0 = Otherwise
Millions per
Population Density CIA World Factbook13
Square Kilometer
Country Size Square Kilometers CIA World Factbook
1 = Yes,
North America Dummy CIA World Factbook
0 = Otherwise
1 = Yes,
South America Dummy CIA World Factbook
0 = Otherwise
1 = Yes,
Asia Dummy CIA World Factbook
0 = Otherwise
1 = Yes,
Europe Dummy CIA World Factbook
0 = Otherwise
1 = Yes,
Africa Dummy CIA World Factbook
0 = Otherwise
1 = Yes,
Oceania Dummy CIA World Factbook
0 = Otherwise

14
Available at https://www.cia.gov/library/publications/the-world-factbook/index.html
14
 1 = Yes, Organization for Economic Cooperation and
OECD Dummy
0 = Otherwise Development14
1 = Yes, Organization for Petroleum Exporting
OPEC Dummy
0 = Otherwise Countries15
Inconclusive Exchange Rate 1 = Yes, Levy-Yeyati and Sturzenegger’s Exchange
Classification 0 = Otherwise Rate Regime Classification System
Float Exchange Rate 1 = Yes, Levy-Yeyati and Sturzenegger’s Exchange
Classification 0 = Otherwise Rate Regime Classification System
Dirty Float Exchange Rate 1 = Yes, Levy-Yeyati and Sturzenegger’s Exchange
Classification 0 = Otherwise Rate Regime Classification System
Crawling Peg Exchange 1 = Yes, Levy-Yeyati and Sturzenegger’s Exchange
Rate Classification 0 = Otherwise Rate Regime Classification System
Fixed Exchange Rate 1 = Yes, Levy-Yeyati and Sturzenegger’s Exchange
Classification 0 = Otherwise Rate Regime Classification System
Country Dummies for all 1 = Yes,
-
172 Countries 0 = Otherwise
Year Dummies for all 1 = Yes,
-
25 Years 0 = Otherwise

The OECD and OPEC dummy variables are used in the analysis in order to view

more specific effects that an exchange rate regime has on a particular group of countries.

Similarly, the continent and landlocked dummies serve the purpose of illustrating and

explaining effects on the macroeconomic variables within each model. The landlocked

dummy indicates whether or not a country is completely surrounded on all borders by

other countries, with no major access to water. Furthermore, the purpose of the 172

country dummy variables and the 25 year dummy variables is to allow the models in this

analysis to employ three types of effects: random effects, which include no control for

country or year, fixed effects for countries and fixed effects for years, which are used to

capture systematic differences among the panel observations results for both country and

year.

15
Available at http://www.oecd.org.
16
Available at http://www.opec.org.

15
3.2 Model Specification

There are four separate models required for this analysis, and of which are divided

into three short-run models and one long-run model. All three short-run models employ a

ratio as the dependent variable using a combination of imports, exports, and GDP. The

long-run model examines the effects of an exchange rate regime on GDP per capita

growth. The following equations represent the general equations used in this analysis.

Short-run models:

In all of the following models, (1.1), (1.2), (1.3), and (1.4), X represents all

relevant variables affecting the dependent variable other than the exchange rate regime

types, and β represents the coefficient of interest.

Exports
= α + β * ( Exchange Rate Regime Dummies ) + X *Γ
GDP

(1.1)

Im ports
= α + β * ( Exchange Rate Regime Dummies ) + X *Γ
GDP

(1.2)

In the following equation, if the dependent variable is greater than one, there is a

current account deficit; if it is less than one, there is a current account surplus.

(Exports - Im ports )
= α + β * ( Exchange Rate Regime Dummies ) + X *Γ
GDP

(1.3)

Long-run model:

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 The ultimate goal of this portion of the analysis is to determine which exchange

rate regime produces the highest social welfare:

GDP per capita growth = α + β * ( Exchange Rate Regime Dummies ) + X *Γ

(1.4)

3.3 Expected Results

I expect that the models will generate results that indicate a freely floating

exchange rate regime produces the higher GDP per capita growth. Also, I hope to

conclude that restricting exchange rates to increase exports is bad for economic growth. I

want to ultimately relate my results to the situation in China, where they are undervaluing

their currency, and their exports have been soaring immensely as a result. This increase

in exports has not been reflected in their GDP per capita, and that is the basis upon which

I conclude that a restricted exchange rate is not beneficial for overall economic growth.

3.4 Actual Results17

The results of the first set of OLS regressions are shown below in Table 2:

Table 2: OLS Regression Results

Dependent Variable: Exports (share of GDP)

Parameter 1 2 3 4 5 6 7 8
Inconclusive Exchange 38.915 30.656 33.767 42.121 36.959 29.989 27.880 32.315
Rate Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.005) (0.000) (0.000)
Floating Exchange Rate 26.764 12.741 16.481 23.284 18.349 16.494 16.993 22.727
Dummy (0.000) (0.000) (0.000) (0.010) (0.000) (0.065) (0.001) (0.000)
Dirty Float Exchange Rate 32.143 23.416 27.101 33.571 28.579 24.322 24.058 26.416
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.009) (0.000) (0.000)
Crawling Peg Exchange 30.985 19.269 23.167 30.186 25.348 19.037 22.285 24.432
Rate Dummy (0.000) (0.000) (0.000) (0.001) (0.000) (0.034) (0.000) (0.000)
Fixed Exchange Rate 42.536 30.455 34.741 41.379 35.844 31.699 27.960 30.431
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.001) (0.000) (0.000)
14.982 13.130 11.918 13.712 16.038 10.886 13.419
Real Exchange Rate -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
-0.006 -0.007 -0.005 -0.004 0.005 0.009 0.009
Inflation -
(0.159) (0.063) (0.207) (0.253) (0.194) (0.014) (0.009)
-1.699 -0.753 -0.872 0.053 0.215
Population Change - - -
(0.000) (0.137) (0.072) (0.928) (0.704)

17
All regressions were tested and corrected for heteroskedasticity with White Heteroskedasticity-Consistent
Standard Errors and Covariance
17
 0.017 0.018
Population Density - - - - - -
(0.000) (0.000)
-0.135 -0.111
Square Kilometers - - - - - -
(0.000) (0.000)
5.985
Landlocked Dummy - - - - - - -
(0.004)
-5.02E-07 -3.25E-07 -9.25E-07 -1.22E-06 -1.47E-06 -2.21E-06 -2.06E-06
Real Money Market Rate -
(0.593) (0.697) (0.340) (0.136) (0.122) (0.009) (0.013)
Government Surplus 0.839 0.942 0.948 0.872 0.764
- - -
(Share of GDP) (0.000) (0.000) (0.000) (0.000) (0.000)
4.381 6.717 2.244
North America Dummy - - - - -
(0.016) (0.001) (0.182)
-13.738 -9.438 -19.359
South America Dummy - - - - -
(0.000) (0.000) (0.000)
11.993 4.768 -3.222
Asia Dummy - - - - -
(0.000) (0.045) (0.154)
12.974 7.964 7.823
Europe Dummy - - - - -
(0.000) (0.001) (0.000)
-1.631 1.782 -8.262
Africa Dummy - - - - -
(0.523) (0.447) (0.000)
-12.201 -12.045
OECD Dummy - - - - - -
(0.000) (0.000)
-6.876 1.875
OPEC Dummy - - - - - -
(0.001) (0.222)
Year Effects No No No Yes No Yes Yes Yes
Included Observations 2736 1336 1336 1082 1082 1082 1082 1082
R-squared 0.092 0.149 0.159 0.198 0.192 0.296 0.509 0.534
Adjusted R-squared 0.090 0.144 0.154 0.173 0.185 0.269 0.490 0.515
S.E. of Regression 21.622 21.687 21.562 21.759 21.601 20.461 17.093 16.657

The results of these regressions indicate that, on average, countries with a fixed

exchange rate have a greater amount of exports as a percentage of gross domestic

product. Regardless of any other variables that were added to the model, the trend

remained the same: countries with a fixed exchange rate have the highest percentage of

exports, whereas, countries with a floating exchange rate have the lowest percentage of

exports.

The results of the second set of OLS regressions are shown below in Table 3:

Table 3: OLS Regression Results

Dependent Variable: Imports (share of GDP)

Parameter 1 2 3 4 5 6 7 8
Inconclusive Exchange 42.295 39.877 33.790 33.720 31.375 34.357 37.767 39.808

18
Rate Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Floating Exchange Rate 30.675 32.840 23.940 23.880 21.725 24.396 29.529 31.766
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Dirty Float Exchange Rate 35.019 34.173 27.916 27.810 25.627 28.826 34.146 33.088
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Crawling Peg Exchange 35.409 36.080 29.059 28.974 27.242 30.203 32.458 33.070
Rate Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Fixed Exchange Rate 47.996 45.309 35.396 35.322 32.352 35.836 39.130 39.553
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
9.374 9.448 9.245 7.583 11.972 11.380
Real Exchange Rate - -
(0.000) (0.000) (0.000) (0.002) (0.000) (0.000)
0.001 0.010 0.010 0.006 0.008
Inflation - - -
(0.709) (0.000) (0.001) (0.042) (0.003)
0.016 0.017 0.017 0.017 0.016 0.016 0.016
Population Density -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
-0.263 -0.183 -0.183 -0.225 -0.223 -0.189 -0.181
Square Kilometers -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
4.358 8.089 8.094 10.183 10.178 12.016
Landlocked Dummy - -
(0.001) (0.000) (0.000) (0.000) (0.000) (0.000)
-2.20E-06 -2.43E-06 -3.01E-06 -2.75E-06 -2.47E-06 -2.46E-06
Real Money Market Rate - -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
Government Surplus 0.532 0.532 0.536 0.428 0.558 0.437
- -
(Share of GDP) (0.000) (0.000) (0.000) (0.007) (0.001) (0.004)
12.454 11.824 6.321 5.403
North America Dummy - - - -
(0.000) (0.000) (0.001) (0.002)
-10.795 -13.275 -19.358 -24.725
South America Dummy - - - -
(0.000) (0.000) (0.000) (0.000)
2.474 1.659 -5.332 -7.913
Asia Dummy - - - -
(0.298) (0.500) (0.019) (0.000)
2.703 1.661 4.814 3.239
Europe Dummy - - - -
(0.217) (0.461) (0.006) (0.033)
1.932 0.701 -5.534 -10.916
Africa Dummy - - - -
(0.385) (0.761) (0.017) (0.000)
-15.750 -17.863
OECD Dummy - - - - - -
(0.000) (0.000)
-9.855 -6.860
OPEC Dummy - - - - - -
(0.000) (0.000)
Year Effects No No No No No Yes Yes Yes
Included Observations 2738 2737 1082 1082 1082 1082 1082 1082
R-squared 0.103 0.265 0.473 0.473 0.509 0.517 0.546 0.573
Adjusted R-squared 0.102 0.263 0.468 0.467 0.502 0.499 0.528 0.556
S.E. of Regression 22.447 20.335 17.198 17.206 16.643 16.688 16.199 15.716

The results of these regressions show that, on average, countries with a fixed

exchange rate regime can be associated with higher imports as a share of GDP; whereas

countries with a floating exchange rate produced the lowest percentage of imports as a

share of GDP. These results can be indicative of a fixed exchange rate country. These

19
 countries tend to have smaller economies, and therefore, need to import more goods and

services.

The results of the third set of OLS regressions are shown below in Table 4:

Table 4: OLS Regression Results

Dependent Variable: Current Account (share of GDP)

Parameter 1 2 3 4 5 6 7 8
Inconclusive Exchange -2.284 -1.485 -6.610 -5.694 -5.332 -6.852 -7.694 -5.444
Rate Dummy (0.003) (0.199) (0.000) (0.000) (0.000) (0.000) (0.002) (0.032)
Floating Exchange Rate -2.785 -2.192 -7.262 -6.056 -5.988 -8.538 -8.971 -7.167
Dummy (0.000) (0.024) (0.000) (0.000) (0.000) (0.000) (0.000) (0.002)
Dirty Float Exchange Rate -3.361 -2.434 -3.095 -5.180 -5.536 -6.353 -6.594 -6.147
Dummy (0.000) (0.015) (0.000) (0.000) (0.000) (0.000) (0.005) (0.012)
Crawling Peg Exchange -4.208 -2.347 -5.604 -5.657 -6.666 -7.689 -8.158 -7.574
Rate Dummy (0.000) (0.017) (0.000) (0.000) (0.000) (0.000) (0.000) (0.002)
Fixed Exchange Rate -3.882 -3.058 -6.729 -7.000 -7.774 -8.406 -7.613 -8.071
Dummy (0.000) (0.001) (0.000) (0.000) (0.000) (0.000) (0.001) (0.001)
2.595 1.842 2.516 3.143 3.186 1.342
Real Exchange Rate - -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.174)
0.001 0.002
Inflation - - - - - -
(0.650) (0.134)
0.808
Population Change - - - - - - -
(0.007)
0.002 0.002 0.002 0.002
Population Density - - - -
(0.000) (0.000) (0.000) (0.000)
0.024 0.026 0.069 0.552 0.037
Square Kilometers - - -
(0.000) (0.000) (0.000) (0.000) (0.000)
-8.999 -6.534 -0.087
Landlocked Dummy - - - - -
(0.000) (0.000) (0.880)
9.21E-08
Real Money Market Rate - - - - - - -
(0.761)
Government Surplus 0.002 0.290
- - - - - -
(Share of GDP) (0.106) (0.000)
-4.042 -2.361 -0.175
North America Dummy - - - - -
(0.001) (0.060) (0.872)
3.017 3.920 5.164
South America Dummy - - - - -
(0.023) (0.003) (0.000)
-1.677 0.006 5.176
Asia Dummy - - - - -
(0.203) (0.996) (0.000)
-0.181 1.554 6.010
Europe Dummy - - - - -
(0.871) (0.164) (0.000)
-4.744 -1.901 2.902
Africa Dummy - - - - -
(0.001) (0.172) (0.034)
5.780 3.593 4.860 4.528 3.694
OECD Dummy - - -
(0.000) (0.000) (0.000) (0.000) (0.000)
9.015 14.713 12.581 8.623
OPEC Dummy - - - -
(0.000) (0.000) (0.000) (0.000)
Country Effects No Yes No No No No No No
Year Effects No No No No No No Yes Yes

20
 Included Observations 3344 3344 2603 3009 3009 2602 2046 1100
R-squared 0.002 0.559 0.096 0.069 0.110 0.162 0.209 0.364
Adjusted R-squared 0.001 0.535 0.094 0.067 0.108 0.158 0.193 0.338
S.E. of Regression 12.518 8.537 13.622 9.120 8.915 13.130 11.630 5.846

The results of these regressions show that, on average, none of the fixed exchange

regime types are consistently correlated with the current account as a share of GDP.

Depending on the other variables added to the model, the fixed exchange rate dummy and

flexible exchange rate dummy coefficients switch positions. This indicates that no

specific exchange rate regime necessarily yields a higher current account as a share of

GDP.

The results of the fourth set of OLS regressions are shown below in Table 5:

Table 5: OLS Regression Results

Dependent Variable: Real GDP per Capita % Change

Parameter 1 2 3 4 5 6 7 8
Inconclusive Exchange Rate 3.012 4.514 6.620 8.254 6.336 5.356 6.275 5.322
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.016) (0.004) (0.005)
Floating Exchange Rate 2.552 4.834 6.906 8.512 6.949 5.763 7.083 5.901
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.007) (0.001) (0.001)
Dirty Float Exchange Rate 1.453 4.572 6.228 7.589 5.991 5.138 6.156 4.917
Dummy (0.036) (0.000) (0.000) (0.000) (0.000) (0.018) (0.004) (0.008)
Crawling Peg Exchange 1.193 4.480 5.716 7.368 5.451 4.440 5.693 4.457
Rate Dummy (0.020) (0.000) (0.000) (0.000) (0.000) (0.056) (0.011) (0.026)
Fixed Exchange Rate 1.762 4.812 6.759 8.252 6.615 5.379 6.560 5.652
Dummy (0.000) (0.000) (0.000) (0.000) (0.000) (0.008) (0.001) (0.001)
1.211 1.005 0.907
Real Exchange Rate - - - - -
(0.365) (0.437) (0.487)
Current Account (Share of 0.064 0.131 0.117 0.118 0.163 0.116
- -
GDP (0.152) (0.009) (0.019) (0.025) (0.011) (0.025)
0.003 0.003 0.003
Inflation - - - - -
(0.439) (0.504) (0.457)
-1.082 -1.385 -1.428 -1.491 -1.348 -1.473 -1.473
Population Change -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
-0.001 -0.001 -0.001 -0.001 -0.001 -0.001 -0.001
Population Density -
(0.143) (0.002) (0.005) (0.000) (0.000) (0.000) (0.000)
-0.001 0.006 -0.001 -0.003
Square Kilometers - - - -
(0.899) (0.533) (0.950) (0.762)
0.821 1.176 1.268 0.824 0.817 1.753
Landlocked Dummy - -
(0.183) (0.060) (0.042) (0.147) (0.173) (0.011)
-1.71E-06 -1.87E-06 -1.82E-06 -1.62E-06 -2.18E-06 -2.20E-06 -2.24E-06
Real Money Market Rate -
(0.000) (0.000) (0.000) (0.000) (0.015) (0.018) (0.015)

21
Government Surplus (Share 0.296 0.280 0.277 0.290 0.285 0.285
- -
of GDP) (0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
2.106 1.778 1.792 2.113
North America Dummy - - - -
(0.009) (0.018) (0.029) (0.009)
0.182 0.713 -0.151 -0.041
South America Dummy - - - -
(0.902) (0.620) (0.922) (0.978)
3.788 4.405 3.529 3.793
Asia Dummy - - - -
(0.000) (0.000) (0.001) (0.000)
0.891 1.531 0.539 0.877
Europe Dummy - - - -
(0.325) (0.059) (0.579) (0.331)
0.818 1.296 0.791 0.814
Africa Dummy - - - -
(0.468) (0.229) (0.512) (0.469)
-2.981 -3.069 -2.397 -1.582 -2.202 -2.479
OECD Dummy - -
(0.000) (0.000) (0.000) (0.006) (0.001) (0.000)
-2.506 -2.391 -2.857 -1.530 -2.945 -2.738
OPEC Dummy - -
(0.060) (0.066) (0.023) (0.255) (0.020) (0.032)
Year Effects No No No Yes Yes Yes Yes No
Included Observations 2775 1080 1080 1080 1080 1111 1098 1098
R-squared 0.003 0.106 0.141 0.198 0.227 0.230 0.226 0.169
Adjusted R-squared 0.001 0.098 0.131 0.171 0.196 0.178 0.194 0.158
S.E. of Regression 8.621 6.277 6.161 6.019 5.926 6.017 5.967 6.021

The results of these regressions show that, on average, countries with a fixed

exchange rate regime yield a lower Real GDP per capita percentage than countries with a

floating exchange rate. The corresponding results imply that the flexible exchange rate

regime produces higher growth rates; whereas, the fixed exchange rate regime users have

slower or even negative growth rates in some instances.

4. Conclusions

The results indicate that fixed exchange rate regimes can be associated with higher

percentages of exports and imports as a percentage of their GDP. Furthermore, the

regressions show that flexible exchange rates yield a higher growth rate; whereas, fixed

exchange rates yield a lower growth rate. Regarding the current account, the coefficients

of each exchange rate varied so greatly, indicating that no one specific regime is

necessarily indicative of effects in a country’s current account as a share of their GDP.

22
Even though the fixed exchange rates yield higher percentages of international trade in

GDP, they consistently produced lower growth rates in GDP per capita than flexible

exchange rates. This indicates that, in China’s situation, restricting their exchange rates

to increase exports can have negative effects as well. With a more flexible and open

economy that is complimented with a flexible exchange rate, the results show that these

countries are able to grow at a faster pace than those that peg their exchange rate against

a trading partner’s currency.

5. Economic Implications of Results

This research has economic implications in the area of economic policy reform. When

choosing an exchange rate regime, the results of this analysis should be considered

because each exchange rate regime has effects that echo throughout an entire economy;

the decision affects the domestic business, consumers, trading partners, and overall social

welfare.

6. Suggestions for Future Research

The analysis in this paper leads to many avenues for further research. Future research

should explore the role of capital controls in deciding which exchange rate regime is

appropriate for a specific economy. Typically countries with strict capital controls find it

difficult to adapt to a freely floating exchange rate. Extended research built upon this

analysis should also examine the long-term effects of exchange rate regimes on the

growth of exports and imports as a percentage of total GDP.

23
 Scholars should also explore other ways of quantifying and classifying exchange

rate types, with respect to its fixedness versus flexibility, to provide for additional testing

of potential impacts an exchange rate regime has on an economy’s trade and welfare.

24
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25
 Appendix A: Included Countries

Afghanistan Djibouti Liberia Seychelles

Albania Dominica Libya Sierra Leone
Algeria Dominican Republic Lithuania Singapore
Angola Ecuador Luxembourg Slovak Republic
Antigua and Barbuda Egypt Macedonia, FYR Slovenia
Argentina El Salvador Madagascar Solomon Islands
Armenia Equatorial Guinea Malawi South Africa
Australia Estonia Malaysia Spain
Austria Ethiopia Maldives Sri Lanka
Azerbaijan Fiji Mali Sudan
Bahamas, The Finland Mauritania Suriname
Bahrain France Mauritius Swaziland
Bangladesh Gabon Mexico Sweden
Barbados Gambia, The Moldova Switzerland
Belarus Georgia Mongolia Syrian Arab Republic
Belgium Germany Morocco Tajikistan
Belize Ghana Mozambique Tanzania
Benin Greece Myanmar Thailand
Bhutan Grenada Namibia Togo
Bolivia Guatemala Nepal Tonga
Bosnia and Herzegovina Guinea Netherlands Trinidad & Tobago
Botswana Guinea-Bissau New Zealand Tunisia
Brazil Guyana Nicaragua Turkey
Brunei Darussalam Haiti Niger Uganda
Bulgaria Honduras Nigeria Ukraine
Burkina Faso Hungary Norway United Arab Emirates
Burundi Iceland Oman United Kingdom
Cambodia India Pakistan United States
Cameroon Indonesia Panama Uruguay
Canada Iran, I.R. of Papua New Guinea Venezuela
Cape Verde Ireland Paraguay Vietnam
Central African Republic Israel Peru Yemen, Republic of
Chad Italy Philippines Zambia
Chile Jamaica Poland Zimbabwe
China, P.R.: Hong Kong Japan Portugal
China, P.R.: Mainland Jordan Qatar
Colombia Kazakhstan Romania
Comoros Kenya Russia
Congo, Dem. Republic of Kiribati Rwanda
Congo, Republic of Korea St. Kitts & Nevis
Costa Rica Kuwait St. Lucia
Côte d’Ivoire Kyrgyz Republic St. Vincent & Grens.
Croatia Lao People’s Dem. Rep. Samoa
Cyprus Latvia Sao Tome & Principe
Czech Republic Lebanon Saudi Arabia
Denmark Lesotho Senegal

26