Exchange Rates, Exports, Inflation, and International Monetary Cooperation

University dissertation from Uppsala : Department of Economics

Abstract: This thesis consists of three self-contained essays. Essay I: Exchange rate movements often cause anxiety among policy-makers, given the strong link between currency movements and export competitiveness, which may, in turn, affect economic growth. In this paper, I examine the strength of the effect of exchange rate movements on exports combining firm-level export data with an industry-level competitiveness index. The data span a broad sample of countries, comprising 21 advanced and 21 emerging market economies over the period 1989-2013. My findings suggest an economically and statistically significant negative effect of real appreciation on real exports. The effect is significantly larger for emerging markets as compared to advanced economies. ​Additionally, the results suggest that larger firms are particularly affected by exchange rate movements.Essay II: Simulations of a small open economy model à la Gali and Monacelli (2005) suggest that inflation should display similar levels, but higher volatility and higher persistence under a fixed exchange rate regime compared to a regime with a flexible exchange rate and some form of inflation targeting. I test these predictions using data for two clearly defined exchange rate regimes. One regime is the membership in the Economic and Monetary Union (EMU), which implies an irrevocably fixed exchange rate. The other is a flexible exchange rate with inflation targeting. The empirical analysis confirms the theoretical implications of the model in terms of persistence: inflation displays a higher degree of persistence in countries with a fixed exchange rate regime.Essay III (with Beatrice Scheubel): While the consequences and effectiveness of IMF conditionality have long constituted the focus of research, the possible negative impact of IMF conditionality on countries' willingness to start an IMF program has mainly focused on a country's own past experience. However, the recent policy debate has highlighted the existence of regional effects, unrelated to a country's own experience. In this paper, we investigate how past experience with IMF conditionality – own and peers' – affects countries' likelihood of signing an IMF arrangement again. Our results indicate strong learning from own experience, but hardly any learning from peers, except for members of the Association of Southeast Asian Nations (ASEAN). We conjecture that a negative effect associated with IMF conditionality may exist for individual country cases or specific regions, but that a more general effect cannot be related to observing how the IMF treats peers.

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