NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Flexible Exchange Rates as Shock Absorbers

Sebastian Edwards, Eduardo Levy Yeyati

NBER Working Paper No. 9867
Issued in July 2003
NBER Program(s):   EFG   IFM   ITI

In this paper we analyze empirically the effect of terms of trade shocks on economic performance under alternative exchange rate regimes. We are particularly interested in investigating whether terms of trade disturbances have a smaller effect on growth in countries with a flexible exchange rate regime, than in countries with a more rigid exchange rate arrangement. We also analyze whether negative and positive terms of trade shocks have asymmetric effects on growth, and whether the magnitude of these asymmetries depends on the exchange rate regime. We find evidence suggesting that terms of trade shocks get amplified in countries that have more rigid exchange rate regimes. We also find evidence of an asymmetric response to terms of trade shocks: the output response is larger for negative than for positive shocks. Finally, we find evidence supporting the view that, after controlling for other factors, countries with more flexible exchange rate regimes grow faster than countries with fixed exchange rates.

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Document Object Identifier (DOI): 10.3386/w9867

Published: Edwards, Sebastian and Eduardo Levy Yeyati. "Flexible Exchange Rates As Shock Absorbers," European Economic Review, 2005, v49(8,Nov), 2079-2105.

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